DECRANE HOLDINGS CO - 10-K Annual Report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

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

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2003

COMMISSION FILE NUMBER 333-70363

DECRANE HOLDINGS CO.

(Exact name of registrant as specified in its charter)

Delaware		13-4019703
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)

c/o Credit Suisse First Boston / DLJ Merchant Banking Partners II, L.P.
Eleven Madison Avenue
New York, NY 10010
(212) 325-2000

(Address and Telephone Number of Principal Executive Offices)

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

None.

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) 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. ý YES o NO

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

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

State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter: Nil

The number of shares of Common Stock outstanding on March 25, 2004 was 4,009,297.

DOCUMENTS INCORPORATED BY REFERENCE:

None.

Table of Contents

Part I
Item 1.	Business
Item 2.	Properties
Item 3.	Legal Proceedings
Item 4.	Submission of Matters to a Vote of Security Holders

Part II
Item 5.	Market for Registrant’s Common Equity and Related Stockholder Matters
Item 6.	Selected Financial Data
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk
Item 8.	Financial Statements and Supplementary Data
Item 9.	Changes In and Disagreements With Accountants On Accounting and Financial Disclosure
Item 9A.	Controls and Procedures

Part III
Item 10.	Directors and Executive Officers of the Registrant
Item 11.	Executive Compensation
Item 12.	Security Ownership of Certain Beneficial Owners and Management
Item 13.	Certain Relationships and Related Transactions
Item 14.	Principal Accounting Fees and Services

Part IV
Item 15.	Exhibits, Financial Statement Schedules, and Reports on Form 8-K

Signatures

Index to Financial Statements and Financial Statement Schedules

All statements other than statements of historical facts included in this report are considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to known and unknown risks, uncertainties and other factors, which are difficult to predict. Changes in such factors could cause actual results to differ materially from those contemplated in such forward-looking statements as we describe in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Forward-Looking Statements and Risk Factors.” Although we believe that the expectations reflected in such forward-looking statements are reasonable, we can give no assurance that such expectations will prove to be correct. We undertake no obligation to release publicly any revisions to these forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.

PART I

ITEM 1. BUSINESS

Company Overview

DeCrane Holdings Co., a Delaware corporation founded in 1998, is a holding company and does not have any material operations or assets other than its ownership of all of the common stock of DeCrane Aircraft Holdings, Inc. As used in this report, unless the context indicates otherwise, “DeCrane” and “we,” “us,” “our,” and similar terms collectively refer to the combined businesses of DeCrane Holdings, DeCrane Aircraft and all of DeCrane Aircraft’s subsidiaries.

DeCrane Aircraft Holdings, Inc., a Delaware corporation founded in 1989, is a provider of integrated assemblies, sub-assemblies and component parts to the aerospace industry. Since our founding in 1989, we have experienced both internal growth and external growth by identifying fragmented, high-growth niche segments within the aerospace industry and acquiring market-leading companies in those niches. Today, we have product capability within two specific segments of the aerospace industry: cabin interiors for business, VIP and head-of-state aircraft and systems integration services, including auxiliary fuel tanks, retrofit and aircraft completion services. Within these markets, our customers include original manufacturers of business, VIP and head-of-state aircraft, commonly referred to as OEM’s, and aircraft repair and modification centers.

Our Operating Groups

We are organized into two operating groups, consistent with the segments in which we operate: Cabin Management and Systems Integration. Through our operating groups, we offer a complete line of cabinetry, galleys, seating and cabin management systems for business, VIP and head-of-state aircraft, as well as systems integration services.

During the first five months of 2003, we also had a third strategic business, the Specialty Avionics Group. As described in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and related notes included in this report, we sold our equity interests in the companies comprising this group on May 23, 2003. As a result of the sale, the Specialty Avionics Group is presented as a discontinued operation in our consolidated financial statements for all periods and our discussion below reflects only our continuing operations.

Cabin Management Group

DeCrane’s Cabin Management Group contributed approximately 70% of our revenues from continuing operations for the year ended December 31, 2003.

Business Description

Our Cabin Management Group is a leading independent provider of cabin products, with a primary focus on serving the business, VIP and head-of-state aircraft market. Since 1997, our Cabin Management Group has acquired nine companies involved in the engineering, manufacturing and assembly of the key components for the interior of a business, VIP and head-of-state aircraft, including cabin interior furnishings, veneer, cabin management systems, seating and composite components. Our Cabin Management Group serves major manufacturers of business, VIP and head-of-state aircraft, including Boeing Business Jet, Bombardier, Cessna, Dassault, Gulfstream and Raytheon.

The Cabin Management Group introduced the concept of modularity to the business, VIP and head-of-state aircraft market by offering totally integrated interior products. In our view, one of the greatest challenges facing the industry’s aircraft manufacturers is minimizing the production cycle time necessary to complete an unfinished “green” aircraft. We believe our distinctive approach of delivering integrated assemblies and sub-assemblies addresses this challenge by providing our customers with entire pre-engineered, pre-wired and pre-plumbed modular cabin interiors and management systems ready for final integration into the aircraft. We believe our totally integrated interior products enable our customers to reduce their lead times, supplier base and overall costs.

The Cabin Management Group is guided by our overall strategy to gain market leadership positions in high-growth segments of the aerospace industry by building more related product capabilities than any other company in the industry. To that end, our Cabin Management Group has focused on pursuing two, closely related, strategic imperatives:

• Building Critical Mass in Cabin Interior Furnishings, Cabin Management Systems and Seating for the Business, VIP and Head-of-State Aircraft Markets. Our Cabin Management Group is aggressively focused on broadening and deepening its product offerings to the business, VIP and head-of-state aircraft markets. As a result of this strategy, we have increased revenue content per plane with our existing customer base and have successfully attracted new customers.

• Developing Capabilities to Provide Modular “Total Cabin Solutions” to the Business, VIP and Head-of-State Aircraft Market. Consistent with our overall corporate strategy to build integrated system solutions, the Cabin Management Group is focused on aggregating its capabilities to provide partial or fully assembled modular business, VIP and head-of-state aircraft cabin interiors to its customers.

In order to meet these strategic objectives, we have aggressively pursued growth in our Cabin Management Group through selective acquisitions.

Products and Services

Our Cabin Management Group designs, engineers and manufactures a full line of customized, pre-fit products and provides related services. Approximately 39% of our Cabin Management Group’s revenues in 2003 were from two customers, Textron and Bombardier. Our products and services are in four broad categories, as summarized below.

Interior Furnishings

• entertainment and refreshment centers

• conference tables

• hi-low dining and coffee tables

• end tables

• cabinets

• arm and side ledges

• galleys

• lavatories

• vanities

• room enclosures

• cabinetry refurbishment services

• veneers

Seating

• executive track and swivel seats

• jump-seats

• divans, including models that convert to beds or contain storable tables

• upholstery services

Cabin Management Systems

• in-flight entertainment systems

• in-flight data network and communication systems

• cabin controls

• switches, controls and lighting

Composite Components

• sound-dampening side walls and headliners

• passenger service units

• environmental (HVAC) ducting

• closets

Our interior furnishings products and services provided approximately 36% of our consolidated revenues during 2003 and 47% of our consolidated revenues during 2002 and 2001. Seating provided approximately 13% of our consolidated revenues during 2003 and 10% of our consolidated revenues during 2002 and 2001. The decrease in interior furnishings products and services is primarily caused by lower revenues from our major customers, Textron and Bombardier, as described in “—Customers” below.

Competition

The markets served by our Cabin Management Group are fragmented, with several competitors offering similar products and services. Due to the global nature of the aerospace industry, competition comes from both U.S. and foreign companies. Our Cabin Management Group generally faces competition from a group of smaller companies and enterprises, except for the business, VIP and head-of-state aircraft manufacturers and independent completion centers. We believe that the principal competitive factors in the markets we serve are quality, price, timely deliveries and overall customer service. Our principal competitors are summarized below.

Interior Furnishings

• BE Aerospace

• C & D Interiors

• Global Technology

• Hiller Aircraft

• The Nordam Group

• Independent completion centers

• Business, VIP and head-of-state aircraft manufacturers and completion centers

Seating

• BE Aerospace

• Fisher (Germany)

• IPECO

Cabin Management Systems

• DPI Labs

• Honeywell Cabin Management Systems and Services

• IEC, International

• Rockwell Collins / Airshow

Composite Components

• AAR

• Fibre Art

• Plastic Fab

• Scale Composite Works

• The Nordam Group

Systems Integration Group

DeCrane’s Systems Integration Group contributed approximately 30% of our revenues from continuing operations for the year ended December 31, 2003.

Business Description

Our Systems Integration Group provides a range of aircraft retrofit, completion and refurbishment services, from conceptual design to Federal Aviation Administration certification, including engineering, manufacturing and installation. One of our largest businesses in this group is the design, production and installation of auxiliary fuel systems, which extend the range of an aircraft. We are presently the sole-source provider of auxiliary fuel systems to Boeing Business Jet (“BBJ”) for its BBJ, a Boeing 737-700IGW, and the BBJ2, a Boeing 737-800, and are one of only four world-wide approved BBJ/BBJ2 service centers. During 2003, we delivered our second aircraft interior completion on a BBJ aircraft.

We also focus on regulatory authority safety mandates and believe we are the major supplier of integration kits for smoke detection and fire suppression in the cargo hold, and perform structural, avionics and mechanical systems modifications, including FAA certification of those modifications before returning an aircraft to service.

The aerospace industry is highly regulated in the United States by the FAA and similar regulatory agencies abroad, such as the European Joint Aviation Authorities (commonly referred to as the JAA), to ensure that aviation products and services meet stringent safety and performance standards. There are approximately 35 companies world-wide that have the necessary Designated Alteration Station authorization to offer aircraft certification on behalf of the FAA. Two companies within our Systems Integration Group are authorized to provide the full spectrum of services, from design to FAA certification, needed for timely retrofitting of an aircraft, thus providing a significant competitive advantage.

Our Systems Integration Group has adopted a two-pronged strategic approach to managing its operations:

• Develop the Most Comprehensive Integrated Retrofit Offering. For the last thirteen years, our Systems Integration Group has focused on developing the capabilities necessary to provide a fully integrated offering with respect to aircraft refurbishing and aircraft retrofitting with FAA mandated changes and technological innovations. Through several related acquisitions and aggressive internal product development, our Systems Integration Group has become one of the few non-OEM related operations with the authority to provide alteration services and to offer FAA certification of aircraft that undergo overhaul. This certification ability represents a significant competitive advantage, as we can offer all the products and services required to re-commission an aircraft in a timely and cost efficient manner. We believe we have developed the most comprehensive offering in retrofitting aircraft with auxiliary fuel systems in the industry.

• Target Development of Specialty Products and Services Relating to Regulatory Authority Mandates. Consistent with its first strategic imperative, our Systems Integration Group is also growing its capabilities in providing solution “kits” in response to FAA and JAA mandated aircraft upgrades. Our Systems Integration Group has demonstrated the ability to identify and quickly respond to probable new regulatory authority mandates. For example:

• Many domestic commercial airlines believe the FAA will issue a safety mandate requiring cockpit door video surveillance on every commercial aircraft traveling in U.S. domestic airspace by no later than a specific compliance date. In response, we consulted with commercial airlines and developed what we believe to be a low-cost, high quality cockpit

door video surveillance system. Our Sentry One™ system is based on an in-house developed camera control unit with integral power supplies and is combined with state-of-the-art extreme low light cameras and 5.6” video monitors. Some airlines are voluntarily electing to install surveillance systems on their aircraft prior to the expected FAA mandate. We have received FAA approval for our Sentry One™ system on Boeing 737-NG and Embraer EMB 135, 140 and 145 aircraft. We believe we will also receive FAA approval on Boeing 737-400 and 747-400 aircraft in May 2004. We are also working on approval for Boeing 737-400, 747-400 and 747-Classics model aircraft as well as several models of 767 and 777 aircraft. We believe we will be successful in obtaining FAA approval for our system on these and other types of aircraft as well.

• We believe the JAA will mandate new fire safety measures for all aircraft in Europe, similar to the FAA mandate in the United States. We expect to develop a stand-alone kit, similar to our FAA approved kit, which can be quickly incorporated into an aircraft to ensure compliance with the JAA ruling with minimal downtime.

Products and Services

Our Systems Integration Group provides auxiliary fuel systems, auxiliary power units and system integration services, including engineering, kit manufacturing, installation and certification. Customers include Boeing (Boeing Business Jet, Boeing’s Commercial Airplane Group and Boeing Integrated Defense Systems), Bombardier, Cessna, Gulfstream, Honeywell, Raytheon and Rockwell Collins. Approximately 50% of our Systems Integration Group’s revenues in 2003 were from Boeing. The products and services we provide are described below.

Auxiliary Fuel Systems and Power Units. We design, engineer, manufacture and install auxiliary fuel systems for business, VIP, head-of-state and commercial aircraft. Our unique design and construction have made us a leader in the auxiliary fuel system market. We also manufacture auxiliary power units, which provide ground power to corporate jets made by Bombardier, Cessna, Gulfstream, Learjet and Raytheon. These products and services provided approximately 16% of our consolidated revenues during 2003, 15% during 2002 and 14% during 2001.

Cabin and Flight Deck Systems Integration. We have designed and patented avionics support structures we sell under the Box-Mount™ name. These structures are used to support and environmentally cool avionics equipment, including navigation, communication and flight control equipment. These support structures are sold to aircraft and related electronics manufacturers, airlines and major modification centers. In addition, these products are essential components of the installation kits used in our systems integration operations.

Aircraft Completion and Modification Services. We are one of only four world-wide approved Boeing Business Jet Service Centers providing extensive completion, modification and integration services to the business, VIP and head-of-state aircraft market.

Retrofit and Refurbishment Services. We also provide retrofit and refurbishment services, including engineering, kit manufacturing, installation and certification, to both commercial and business, VIP and head-of-state aircraft customers.

Competition

The markets served by our Systems Integration Group are fragmented with several competitors offering similar products and services. Due to the global nature of the aerospace industry, competition comes from both U.S. and foreign companies. Our Systems Integration Group generally faces competition from a group of smaller companies and enterprises, except for the business, VIP and head-of-state aircraft manufacturers and independent completion centers. We believe that the principal competitive factors in the markets we serve are quality, price, timely deliveries and overall customer service. Our principal competitors are summarized below.

Auxiliary Fuel Systems and Power Units

• Marshalls (United Kingdom)

• Pfalz Flugewerke (Germany)

Auxiliary Power Units (Integration Only)

• Honeywell

• Sundstrand

Aircraft Modification Services

• Associated Air Center

• Jet Aviation (United States and Switzerland)

• Lufthansa Technik (Germany)

Cabin and Flight Deck Systems Integration and Retrofit and Refurbishment Services

• ARINC

• Aviation Sales

• Boeing Aircraft Services

• Flight Structures

• In-house engineering departments of commercial airlines

• Numerous independent airframe maintenance and modification companies

Other Information

Acquisitions and Dispositions

Disposition of the Specialty Avionics Group

On May 23, 2003, we consummated the sale of our equity interests in the companies comprising the Specialty Avionics Group to Wings Holdings, Inc., an affiliate of Odyssey Investment Partners, LLC. for $140.0 million in cash. We used $130.7 million of the proceeds from the sale to repay borrowings under our first-lien credit facility, as amended. The Specialty Avionics Group consisted of Avtech Corporation of Seattle, Washington, Aerospace Display Systems, LLC of Hatfield, Pennsylvania, and Tri-Star Electronics International, Inc. of El Segundo, California.

The sale of the Specialty Avionics Group is not expected to affect the operations of our remaining operating groups and is reflected as a discontinued operation in this report. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” for additional information.

Companies Acquired by DeCrane Aircraft

During the five years ended December 31, 2003, DeCrane Aircraft has acquired the stock or assets of seven significant businesses, as such term is defined by Securities and Exchange Commission rules, as follows:

Cabin Management Group

• all of the common stock of Precision Pattern, Inc., a Kansas-based designer and manufacturer of interior furniture components for business, VIP and head-of-state aircraft, on April 23, 1999;

• substantially all of the assets of Custom Woodwork & Plastics, Inc., a Georgia-based designer and manufacturer of interior furniture components for business, VIP and head-of-state aircraft, on August 5, 1999;

• substantially all of the assets of PCI NewCo, Inc., a Kansas-based manufacturer of composite material and components for business, VIP and head-of-state aircraft, on October 6, 1999;

• substantially all of the assets of The Infinity Partners, Ltd., a Texas-based designer and manufacturer of interior furniture components for middle- and high-end business, VIP and head-of-state aircraft, on December 17, 1999;

• substantially all of the assets of Carl F. Booth & Co., an Indiana-based manufacturer of wood veneer panels primarily used in aircraft interior cabinetry, on May 11, 2000;

• all of the common stock of ERDA, Inc. (subsequently renamed DeCrane Aircraft Seating Co., Inc.), a Wisconsin-based designer and manufacturer of aircraft seating, on June 30, 2000; and

Systems Integration Group

• all of the common stock of PATS, Inc., a Maryland-based designer, manufacturer and installer of auxiliary fuel systems for business, VIP and head-of-state aircraft and a manufacturer of aircraft auxiliary power units, on January 22, 1999.

All of the acquisitions were accounted for as purchases. We have used the acquired assets to manufacture products similar to those previously manufactured by the companies prior to their acquisition. Our financial statements reflect the acquired companies subsequent to their respective acquisition dates.

Customers

We estimate that our Cabin Management Group currently sells its products and services to approximately 800 customers and our Systems Integration Group sells its products and services to approximately 200 customers. Our primary customers include manufacturers of business, VIP and head-of-state aircraft, airlines and aircraft repair and modification companies.

The following customers accounted for 10% or more of our consolidated revenues from continuing operations for the year ended December 31, 2003. Historical data for the three years ended December 31, 2003 is presented in Note 17 accompanying our consolidated financial statements included in this report.

Significant Customers	Cabin Management Group		Systems Integration Group		Consolidated Total

Percent of consolidated revenues:
Year ended December 31, 2003:
Boeing (1)	2.4	%	15.1	%	17.5	%
Textron (2)	16.2		0.1		16.3
Bombardier	11.0		1.6		12.6
Consolidated revenues	29.6	%	16.8	%	46.4	%

Year ended December 31, 2002:
Boeing (1)	1.4	%	14.0	%	15.4	%
Textron (2)	23.5		—		23.5
Bombardier	16.0		1.4		17.4
Consolidated revenues	40.9	%	15.4	%	56.3	%

Significant Customers	Cabin Management Group		Systems Integration Group

Percent of group revenues (3):
Year ended December 31, 2003:
Boeing (1)	3.4	%	50.1	%
Textron (2)	23.2		0.1
Bombardier	15.7		5.3
Group revenues	42.3	%	55.5	%

Year ended December 31, 2002:
Boeing (1)	1.9	%	56.0	%
Textron (2)	31.3		—
Bombardier	21.4		5.4
Group revenues	54.6	%	61.4	%

(1) Reflects only our direct revenues from Boeing. Our Systems Integration Group’s revenues from Boeing result from auxiliary fuel systems for the Boeing Business Jet.

(2) Includes Cessna.

(3) Inter-group revenues are eliminated against the group originating the sale.

Revenues from Textron and Bombardier, as a percentage of total consolidated revenues, decreased during the year ended December 31, 2003 compared to our revenues from these customers during the prior year. The decrease is caused by both companies temporarily suspending production of various models of aircraft for several weeks during fiscal 2003 in response to their low order backlog resulting from the weak demand for new aircraft as described in “—Backlog” below. Complete loss of any of the customers identified above could have a significant adverse impact on our results of operations expected in future periods.

Significant portions of our revenues from our major customers are pursuant to contracts that may include a variety of terms favorable to the customer. Such terms may include our agreement to one or more of the following:

• the customer is not required to make purchases, and may terminate such contract at any time;

• we make substantial expenditures to develop products for customers that we may not recoup if we do not receive sufficient orders;

• on a prospective basis, we must extend to the customers any reductions in prices or lead times that we provide to other customers;

• we must match other suppliers’ price reductions or delete the affected products from the contract; and

• we must grant irrevocable non-exclusive worldwide licenses to use our designs, tooling and other intellectual property rights to products sold to a customer if we default, or suffer a bankruptcy filing, or transfer our manufacturing rights to a third party.

Backlog

As of December 31, 2003, we had an aggregate sales order backlog of $58.0 million compared to $66.8 million as of December 31, 2002, as follows:

	December 31,
(In thousands)	2003		2002

Cabin Management	$	33,679	$	31,679
Systems Integration	24,323		35,126
Consolidated totals	$	58,002	$	66,805

Orders are usually filled within twelve months; however, backlog totaling $2.5 million as of December 31, 2003 is scheduled for delivery in 2005 and beyond as follows: Cabin Management — $1.4 million; and Systems Integration — $1.1 million. Orders may be subject to cancellation by the customer prior to shipment. The level of unfilled orders at any given date will be materially affected by when we receive orders and how fast we fill them. Period-to-period comparisons of backlog figures may not be meaningful. For that reason, our backlogs do not necessarily accurately predict actual shipments or sales for any future period.

As described in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Industry Overview and Trends,” the acts and ongoing threats of global terrorism, the current military conflicts, health epidemics and weak global economic conditions are all adversely impacting the aerospace industry. We are not able to predict the continuing impact these events will have in future periods. However, given the magnitude of these events, the adverse impact could be material.

Employees

As of December 31, 2003, we had 1,296 employees: 1,018 in our Cabin Management Group; 266 in our Systems Integration Group; and 12 in our corporate office. None of our employees is subject to a collective bargaining agreement, and we have not experienced any material business interruption as a result of labor disputes. We believe that we generally have a good relationship with our employees.

Research and Development

We continually evaluate opportunities to improve our product offerings and develop new products that incorporate new technologies to meet the demands of our customers and the FAA. Total research and development expense was $10.4 million for the year ended December 31, 2003, $0.1 million for the year ended December 31, 2002 and $0.7 million during the year ended December 31, 2001.

Commencing January 1, 2003, we elected to change our accounting policy and discontinued the use of program accounting, which resulted in product development costs being expensed as incurred. Prior to January 1, 2003, such costs were deferred and charged to cost of sales over the expected production cycle of the program. Product development costs are now reflected as research and development expenses. If the new accounting policy was in effect during the prior years, total research and development expense would have been $5.0 million for the year ended December 31, 2002 and $11.7 million during the year ended December 31, 2001.

Financial Information About Geographic Areas

Financial information about our revenues and assets by geographic area are included in Note 17 accompanying our financial statements included in this report.

Seasonality

Our businesses generally are not seasonal in nature.

Sales and Marketing

Our Cabin Management Group has designated relationship managers who are responsible for maintaining and cultivating relationships with customers. In addition, a dedicated sales force is utilized for some of our products and services.

Our Systems Integration Group has a dedicated sales force that handles most of its sales activities.

We are continuously seeking opportunities to combine our sales efforts across all of our operating groups in order to ensure that all sales opportunities are explored and that we maximize our revenue content per plane. We may also assign marketing and sales responsibilities for key customers to one of our senior corporate executives.

Raw Materials and Component Parts

The components we manufacture require the use of various raw materials including aluminum, hardwoods and plastics. The availability and prices of these materials may fluctuate. The cost of such raw materials is a significant component in, and part of, the sales price of many of our products. Although some of our contracts have prices tied to raw materials prices, we cannot always recover raw material price increases in our product sale price. We also purchase a variety of manufactured sub-component parts from various suppliers. Raw materials and component parts are generally available from multiple suppliers at competitive prices. However, any delay in our ability to obtain necessary raw materials and component parts may affect our ability to meet customer production needs.

Intellectual Property and Proprietary Information

We have various trade secrets, proprietary information, trademarks, tradenames, patents, copyrights and other intellectual property rights we believe are important to our business in the aggregate, but not individually.

Government Regulation

Federal Aviation Administration

The aerospace industry is highly regulated in the United States by the Federal Aviation Administration and in other countries by similar agencies to ensure that aviation products and services meet stringent safety and performance standards. In addition, many of our customers impose their own compliance and quality requirements on us. The FAA prescribes standards and licensing requirements for aircraft components, issues designated alteration station authorizations, and licenses private repair stations. We hold various FAA approvals and licenses, which may only be used by our subsidiary obtaining such approval. If material FAA or customer authorizations or approvals were revoked or suspended, our operations could be adversely affected.

The FAA can authorize or deny authorization of many of the services and products we provide. Any such denial would preclude our ability to provide the pertinent service or product. If we failed to comply with applicable FAA standards or regulations, the FAA could exercise a wide range of remedies, including a warning letter, a letter of correction, a civil penalty action, and emergency or non-emergency suspension or revocation of a certificate or approval.

Each type of aircraft operated by airlines in the United States must possess an FAA type certificate, generally held by the aircraft manufacturer, indicating that the type design meets applicable airworthiness standards. When someone else develops a major modification to an aircraft already type-certificated, that person must obtain an FAA-issued Supplemental Type Certificate for the modification. Historically, we have obtained several hundred of these Supplemental Type Certificates, most of which we obtained on behalf of our customers as part of our systems integration services. Some of these certificates we obtain were or eventually will be transferred to our customers. As of December 31, 2003, we own and/or manage on behalf of our customers approximately 300 Supplemental Type Certificates. Many are multi-aircraft certificates, which apply to all of the aircraft of a single type. We foresee the need to obtain additional Supplemental Type Certificates so that we can expand the services we provide and the customers we serve and believe we will be able to obtain such certificates as the need arises.

Supplemental Type Certificates can be issued for proposed aircraft modifications directly by the FAA, or on behalf of the FAA by a Designated Alteration Station. The FAA designates what types of Supplemental Type Certificates can be issued by each Designated Alteration Station. Two subsidiaries within our Systems Integration Group are FAA-authorized Designated Alteration Stations and can directly issue many of the Supplemental Type Certificates our customers and we require for our systems integration operations.

After obtaining a Supplemental Type Certificate, a manufacturer must apply for a Parts Manufacturer Approval from the FAA, or a supplement to an existing Parts Manufacturer Approval, which permits the holder to manufacture and sell installation kits according to the approved design and data package. We have six Parts Manufacturer Approvals and approximately 160 supplements to those approvals. In general, each initial Parts Manufacturer Approval is an approval of a manufacturing or modification facility’s production quality control system. Each Parts Manufacturer Approval supplement authorizes the manufacture of a particular part in accordance with the requirements of the corresponding Supplemental Type Certificate. We routinely apply for and receive such Parts Manufacturer Approval supplements. In order to perform the actual installations of a modification, we are also required to have FAA approval. This authority is contained either in our Parts Manufacturer Approvals and related supplements, or in our repair station certificates. In order for a company to perform most kinds of repair, engineering, installation or other services on aircraft, its facility must be designated as an FAA-authorized repair station. As of December 31, 2003, we had seven authorized repair stations and employed approximately 100 FAA certified representatives.

Occupational Safety and Health Administration

Our manufacturing operations in the United States are subject to a variety of worker and community safety laws. The Occupational Safety and Health Act of 1970 mandates general requirements for safe workplaces for all employees. In addition, OSHA provides special procedures and measures for the handling of hazardous and toxic substances and has established specific safety standards for workplaces engaged in the treatment, disposal or storage of hazardous waste. We believe that our operations are in material compliance with OSHA’s health and safety requirements.

Environmental Matters

Our facilities and operations are subject to various federal, state, local, and foreign environmental laws and regulations, including those relating to discharges to air, water, and land, the handling and disposal of solid and hazardous waste, and the cleanup of properties affected by hazardous substances. In addition, some environmental laws, such as the federal Comprehensive Environmental Response, Compensation and Liability Act, as amended (“CERCLA”) and similar state laws, impose strict liability upon persons responsible for releases or potential releases of hazardous substances. That liability generally is retroactive, and may create “joint and several” liability among multiple parties who have

some relationship to a site or a source of waste, such as a current or former owner or operator of real property or a party who arranges to transport wastes to a third-party site. We have sent waste to treatment, storage, or disposal facilities that have been designated as National Priority List sites under CERCLA or equivalent listings under state laws. We have received CERCLA requests for information or allegations of potential responsibility from the Environmental Protection Agency regarding our use of several of those sites. In addition, some of our operations are located on properties that may be contaminated to varying degrees.

We have not incurred, nor do we expect to incur, liabilities in any significant amount as a result of the foregoing matters because in most of these cases other entities have been held primarily responsible, the levels of contamination are sufficiently low so as not to require remediation, or we are indemnified against such costs. However, in a few cases, we do not have sufficient information to assess our potential liability, if any. In addition, it is possible, given the potentially retroactive nature of environmental liability, that we will receive additional notices of potential liability relating to current or former activities.

We believe that we have no liabilities under environmental laws and regulations, except for liabilities which we do not expect would likely have a material adverse effect on our business, financial position, results of operations or cash flows. However, some risk of environmental liability is inherent in the nature of our business, and we might in the future incur material costs to meet current or more stringent compliance, cleanup, or other obligations pursuant to environmental laws and regulations.

In connection with the sale of the Specialty Avionics Group, we have agreed to indemnify the buyer for all pre-closing releases of hazardous materials at any of Avtech’s facilities up to a maximum amount of $5.0 million.

ITEM 2. PROPERTIES

We operate in a number of manufacturing, engineering and office facilities in the United States and abroad. At December 31, 2003, we utilized approximately 0.9 million square feet of floor space, approximately 96% of which is located in the United States. We believe that our facilities are in good condition and are adequate to support our operations for the foreseeable future. Our operating groups’ facilities at December 31, 2003 are summarized below.

(In thousands of square feet)	Leased	Owned	Total

Cabin Management	441	204	645
Systems Integration	136	150	286
Corporate	8	—	8
Total in use	585	354	939

Not in use, subleased to others	88	—	88
Total	673	354	1,027

ITEM 3. LEGAL PROCEEDINGS

As part of its investigation of the crash of Swissair Flight 111 off the Canadian coast on September 2, 1998, the Canadian Transportation Safety Board (the “CTSB”) initially notified us that it recovered burned wire that was attached to the in-flight entertainment system installed on some of Swissair’s aircraft by one of our subsidiaries. Our subsidiary has worked vigorously over the last five years with the CTSB investigators in the fact-finding investigation of this catastrophic incident. On March 27, 2003, the CTSB released its final report on its investigation. This report indicated that the CTSB was unable to conclusively determine the cause of the fire which led to the crash of the aircraft.

We were a defendant in most, but not all, of the actions brought by the estates of the 229 victims of the crash. The actions, which sought damages and costs in unstated amounts, claimed negligence, strict liability, and breach of warranty. Virtually all of the cases have been settled by Boeing and Swissair’s insurers and both assignment of the claims against, and releases in favor, of us have been obtained by the Boeing and Swissair insurers.

On September 22, 2003, the Company and our insurers entered into an agreement with Boeing, Swissair and each of their respective insurers, in which the Company received a release from those parties and an indemnification by Boeing and Swissair’s insurers against claims asserted on behalf of passengers for compensatory damage and by others for contribution and/or indemnity claims. We believe the agreement adequately protects the Company from all existing litigation pending against the Company arising from this catastrophic incident. Punitive damages are not subject to the indemnity; however, while some of the passenger actions originally asserted punitive damages, by virtue of a court order, claims for punitive damages may not be prosecuted. The aforementioned agreement did not result in the Company incurring a loss and, accordingly, no charge to operations was required.

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

None.

PART II

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

Market Information

There is no established public trading market for our shares.

Holders

As of March 29, 2004 there are 31 holders of record of our common stock.

Dividends

We have not paid dividends to date on our common stock and do not anticipate paying any cash dividends in the foreseeable future. The terms of our first-lien credit facility, second-lien term notes and subordinated note indenture restrict our ability to pay dividends if we do not meet certain financial criteria.

Recent Sale of Unregistered Securities

None.

ITEM 6. SELECTED FINANCIAL DATA

	Year Ended December 31, (1)
(In thousands)	2003			2002			2001			2000			1999

Statement of Operations Data:
Revenues	$	170,109		$	229,841		$	272,112		$	236,501		$	131,547
Cost of sales (2)	134,953			170,485			196,866			155,134			90,103

Gross profit	35,156			59,356			75,246			81,367			41,444

Selling, general and administrative expenses (3)	24,896			40,262			44,731			31,730			23,465
Research and development expenses (4)	10,440			56			698			1,615			3,347
Impairment of goodwill (5)	34,000			—			8,583			—			—
Amortization of intangible assets (6)	3,651			3,540			12,436			10,628			5,938

Operating income (loss)	(37,831		)	15,498			8,798			37,394			8,694

Interest expense (7)	26,219			25,376			29,645			27,181			15,874
Minority interest in preferred stock of subsidiary (8)	6,754			5,841			5,061			2,274			—
Loss on extinguishment of debt (9)	1,439			—			—			—			—
Other expenses, net	945			505			634			277			855

Income (loss) from continuing operations before income taxes	(73,188		)	(16,224		)	(26,542		)	7,662			(8,035		)
Provision for income taxes (benefit) (10)	(13,496		)	(3,621		)	(3,933		)	4,607			(2,102		)

Income (loss) from continuing operations	(59,692		)	(12,603		)	(22,609		)	3,055			(5,933		)

Income (loss) from discontinued operations, net of tax (11)	(6,621		)	(41,396		)	3,546			(1,727		)	1,578
Cumulative effect of changes in accounting principles (12)	(13,764		)	(17,828		)	—			—			—

Net income (loss)	$	(80,077	)	$	(71,827	)	$	(19,063	)	$	1,328		$	(4,355	)

Net income (loss) applicable to common stockholders	$	(89,257	)	$	(79,826	)	$	(26,034	)	$	(4,746	)	$	(9,649	)

Other Financial Data:
Restructuring, asset impairment and other related
charges (13)	$	41,889		$	17,255		$	25,834		$	—		$	9,935
Depreciation and amortization (14)	9,781			10,612			20,364			15,086			8,315
Capital expenditures:
Paid in cash	4,797			4,356			10,191			20,193			4,077
Financed with capital lease obligations	14			67			4,376			105			1,012

Other Operating Data:
Bookings (15)	$	161,306		$	197,132		$	252,800		$	238,546		$	170,547
Backlog at end of period (16)	58,002			66,805			99,518			118,830			107,634

	As of December 31, (1)
(In thousands)	2003			2002			2001		2000		1999

Balance Sheet Data:
Cash and cash equivalents	$	6,936		$	12,421		$	9,478	$	7,706	$	7,899
Working capital (17)	37,904			196,176			81,656		61,398		32,412
Total assets (17)	303,876			548,967			645,711		664,254		531,842
Total debt (18)	269,406			381,017			399,268		381,513		314,936
Mandatorily redeemable securities (19)	112,237			96,303			82,463		70,431		41,178
Stockholders’ equity (deficit)	(116,583		)	(27,271		)	48,167		74,190		66,595

See accompanying Notes to Selected Financial Data.

Notes to Selected Financial Data:

(1) Reflects historical selected consolidated financial data derived from the audited consolidated financial statements and related notes for the periods, reclassified to reflect the Specialty Avionics Group as a discontinued operation.

Also reflects the results of operations and financial position of companies we acquired for all periods subsequent to their respective acquisition dates as follows:

Company Acquired			Date Acquired
•	DeCrane Aircraft Seating Co. (formerly ERDA)	June 30, 2000
•	Carl F. Booth & Co.	May 11, 2000
•	Infinity	December 17, 1999
•	International Custom Interiors	October 8, 1999
•	PCI NewCo	October 6, 1999
•	Custom Woodwork	August 5, 1999
•	Precision Pattern	April 23, 1999
•	PATS	January 22, 1999

(2) Includes charges to reflect:

• our restructuring activities as follows:

• a $4.2 million charge related to lease termination and related expenses and a $3.1 non-cash inventory write-down during the twelve months ended December 31, 2003;

• a $6.9 million noncash inventory write-down, a $2.6 million charge for estimated losses on uncompleted long-term contracts and $1.2 million of other charges during the twelve months ended December 31, 2002;

• a $1.8 million noncash inventory write-down, a noncash write-off of $7.9 million of curtailed product development costs and charges totaling $3.9 million for the realignment of production programs between facilities during the twelve months ended December 31, 2001; and

• a $6.0 million noncash inventory write-down during the twelve months ended December 31, 1999; and

• cost of sales based on the purchase accounting write-up to fair value of inventory acquired of $1.6 million during the twelve months ended December 31, 1999 in connection with the Precision Pattern and Custom Woodworks acquisitions.

(3) Includes charges to reflect our restructuring activities as follows:

• $0.6 million during the year ended December 31, 2003;

• $6.5 million during the year ended December 31, 2002, $3.9 million of which was a noncash asset impairment write-down;

• $3.7 million during the year ended December 31, 2001, $1.3 million of which was a noncash asset impairment write-down; and

• $3.9 million during the year ended December 31, 1999, $1.3 million of which was a noncash asset impairment write-down.

(4) Reflects research and development expenses and, commencing January 1, 2003, includes product development costs. In 2003, we elected to change our accounting policy and discontinue the use of program accounting, which resulted in product development costs being expensed as incurred. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” for additional information.

(5) Reflects noncash goodwill impairment charges, including charges resulting from our restructuring activities.

(6) For the five years ended December 31, 2003, reflects the amortization of identifiable intangible assets. For periods prior to January 1, 2002, also reflects the amortization of goodwill as follows: 2001 –$9.1 million; 2000 –$7.8 million; and 1999 –$3.8 million. Starting January 1, 2002, goodwill is no longer amortized but instead subject to annual impairment testing with a loss charged to operations in the period in which impairment occurs, as required by SFAS No. 142, “Goodwill and Other Intangible Assets.”

(7) Excludes interest expense attributable to the Specialty Avionics Group, which is classified as a component of the income or loss from discontinued operations, as described in Note 11 below.

(8) Reflects accrued dividends and redemption value accretion on DeCrane Aircraft’s 16% mandatorily redeemable preferred stock.

(9) Reflects the write-off of deferred financing costs associated with debt repaid during the year ended December 31, 2003.

(10) For the year ended December 31, 2003, includes a $19.5 million charge resulting from establishing a net deferred tax asset valuation allowance. Excluding the effect of the valuation allowances, the provision for income taxes differs from the amount determined by applying the applicable U.S. statutory federal rate to the income before income taxes primarily due to the effects of state income taxes and non-deductible expenses, principally goodwill impairment charges and amortization (for periods prior to January 1, 2002) and minority interest in preferred stock of subsidiary. The difference in the effective tax rates between periods is mostly a result of the relationship of non-deductible expenses to the loss before income taxes.

(11) Reflects the net income or loss of the Specialty Avionics Group, which was sold on May 23, 2003 and therefore classified as a discontinued operation during the periods. Includes charges to reflect:

• a $39.3 million noncash charge during the year ended December 31, 2002 to reflect the cumulative effect of the change in accounting principle for the impairment of goodwill upon adoption of SFAS No. 142 on January 1, 2002; and

• interest expense attributable to the Specialty Avionics Group as follows:

	Year Ended December 31,
(In thousands)	2003		2002		2001		2000		1999

Interest expense associated with:
First-lien credit facility debt required to be repaid	$	3,297	$	7,720	$	8,439	$	13,337	$	10,875
Debt obligations assumed by the buyer	270		798		917		1,105		1,154
Interest expense attributable to discontinued operations	$	3,567	$	8,518	$	9,356	$	14,442	$	12,029

Interest expense on first-lien credit facility debt required to be repaid reflects allocated interest expense attributable to the debt which was required to be repaid with the proceeds from the sale. The allocation is based upon $130.7 million of debt repaid and the historical interest rates charged during each of the periods. Interest expense for 2003 is through May 23, 2003, the date of sale.

(12) Reflects:

• a $13.8 million noncash charge to reflect the cumulative effect on prior years of changing our accounting policy and discontinuing the use of program accounting. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” for additional information.

• a $17.8 million noncash charge, net of $0.9 million tax benefit, for the impairment of goodwill upon adoption of SFAS No. 142 on January 1, 2002.

(13) Reflects the total restructuring, asset impairment and other related charges incurred during the periods related to our restructuring activities.

(14) Reflects depreciation and amortization of plant and equipment, goodwill (for periods prior to the January 1, 2002 adoption of SFAS No. 142) and other intangible assets. Excludes amortization of deferred financing costs, which are classified as a component of interest expense.

(15) Bookings represent the total invoice value of purchase orders received during the period.

(16) Backlog represents the total invoice value of unfilled purchase orders at the end of the period. Orders may be subject to cancellation by the customer prior to shipment. The level of unfilled orders at any given date during the year will be materially affected by the timing of our receipt of orders and the speed with which those orders are filled.

(17) Includes amounts attributable to the Specialty Avionics Group, which is reflected as a discontinued operation, as follows:

	As of December 31,
(In thousands)	2003		2002		2001		2000		1999

Working capital:
Continuing operations	$	37,904	$	55,363	$	39,862	$	20,480	$	(1,992	)
Discontinued operations	—		140,813		41,794		40,918		34,404
Total working capital	$	37,904	$	196,176	$	81,656	$	61,398	$	32,412

Total assets:
Continuing operations	$	303,876	$	388,226	$	423,272	$	429,812	$	305,685
Discontinued operations	—		160,741		222,439		234,442		226,157
Total assets	$	303,876	$	548,967	$	645,711	$	664,254	$	531,842

(18) Total debt is defined as long-term debt, including current portion.

(19) Reflects DeCrane Holdings mandatorily redeemable 14% preferred stock and includes DeCrane Aircraft’s 16% mandatorily redeemable preferred stock for all periods except December 31, 1999. DeCrane Aircraft’s preferred stock, which was issued during 2000, is reflected as minority interest in preferred stock of subsidiary in our consolidated financial statements.

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

The following discussions should be read in conjunction with our financial statements and accompanying notes included in this report.

Industry Overview and Trends

We compete in the aircraft products and services market of the aerospace industry. The market for our products and services is largely driven by demand in the three civil aircraft markets: (1) business, VIP and head-of-state aircraft and, to a lesser extent, (2) commercial and (3) regional aircraft. Weak global economic conditions, which were exacerbated by the September 11, 2001 terrorist attack on the United States, ongoing concerns about global terrorism and health epidemics, and the current Middle Eastern military conflicts are all adversely impacting the aerospace industry and have led to a decrease in demand for business, VIP and head-of-state aircraft. In response to certain of these adverse conditions, we have announced and implemented a series of restructuring activities designed to reduce expenses and conserve working capital. See “—Restructuring, Asset Impairment and Other Related Charges” below for additional information.

The business, VIP and head-of-state aircraft portion of our business experienced weakness during 2003 as evidenced by various manufacturers’ decision to temporarily suspend production at various times throughout 2003 in response to the weak demand for new aircraft. While global economic conditions appeared to improve during the second half of 2003, the improvement did not affect the markets we serve, which we believe lag trends in the general economy by six to twelve months. As a result, we believe orders for business, VIP and head-of-state aircraft may experience a modest recovery in 2004 and reflect continuing strengthening thereafter. The commercial aircraft portion of our business, which subsequent to the sale of the Specialty Avionics Group accounts for less than 5% of consolidated revenues, also experienced significant weakness in 2003 and we believe this condition will continue into 2004, with potential recovery not expected to occur until at least 2005. Our beliefs are based on the assumptions that we will experience economic recovery and there are no further negative geo-political developments affecting our industry.

Results of Operations

Performance Measures

The following discussion of our results of operations includes discussions of financial measures and operating statistics we use to evaluate the performance of, and trends in, our businesses. We believe the presentation of these measures and statistics are relevant and useful to investors because it allows them to view performance and trends in a manner similar to the methods we use. These measures and statistics, and why they are important to us and could be of interest to you, are described below.

Adjusted EBITDA. Our discussion of the results of operations includes discussions of financial measures determined in accordance with accounting principles generally accepted in the United States of America (“GAAP”) as well as the financial measure Adjusted EBITDA, which excludes certain charges reflected in our GAAP basis financial statements. Our presentation of Adjusted EBITDA is in accordance with the GAAP requirements of SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information,” which requires us to report the primary measure of segment performance we use to evaluate and manage our businesses.

We utilize more than one measurement to evaluate segment performance and allocate resources among our operating segments; however, we consider Adjusted EBITDA, as defined below, to be the primary measurement of overall operating segment core economic performance and return on invested

capital. We also use Adjusted EBITDA in the annual budgeting and planning for future periods, as one of the decision-making criteria for funding discretionary capital expenditure and product development programs and as the measure for determining the value of acquisitions and dispositions. Our board of directors uses Adjusted EBITDA as one of the performance metrics for determining the amount of bonuses awarded to pursuant to the cash incentive bonus plan and as an indicator of enterprise value used in determining the exercise price of stock options granted and the acceleration of stock option vesting pursuant the incentive stock option plan.

We define Adjusted EBITDA as earnings before interest, income taxes, depreciation and amortization, restructuring, asset impairment and other related charges, acquisition related charges not capitalized and other noncash and nonoperating charges. We believe the presentation of this measure is relevant and useful to investors because it allows investors and analysts to view segment performance in a manner similar to the method we use, helps improve their ability to understand our core segment performance, adjusted for items we believe are unusual, and makes it easier to compare our results with other companies that have different financing, capital structures and tax rates. In addition, we believe these measures are consistent with the manner in which our lenders and investors measure our overall performance and liquidity, including our ability to service debt and fund discretionary capital expenditure and product development programs.

Our method of calculating Adjusted EBITDA may not be consistent with that of other companies and should be viewed in conjunction with measurements that are computed in accordance GAAP, such as net income (loss), the nearest comparable GAAP financial measure. Adjusted EBITDA should not be viewed as substitutes for or superior to net income (loss), cash flow from operations or other data prepared in accordance with GAAP as a measure of our profitability or liquidity. The notes to our financial statements include information about our operating segments, including Adjusted EBITDA, and should be read in conjunction with the discussions presented herein. The notes to our financial statements also include a reconciliation of Adjusted EBITDA to net income (loss) to clarify the differences between these financial measures.

Bookings and Backlog. Bookings and backlog are operating statistics we use as leading trend indicators of future demand for our products and services. Bookings and backlog are based upon the value of purchase orders received from our customers, which will result in revenues, if and when such orders are filled.

Bookings represent the total invoice value of purchase orders received during the period and backlog represents the total invoice value of unfilled purchase orders as of the end of a period. Orders may be subject to change or cancellation by the customer prior to shipment. The level of unfilled orders at any given date during the year will be materially affected by the timing of our receipt of orders and the speed with which those orders are filled.

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

Restructuring, Asset Impairment and Other Charges. Our results of operations have been affected by restructuring, impairment and other related charges relating to a series of restructuring activities. These charges, which affect the comparability of our reported results of operations between periods, are more fully described in “—Restructuring, Asset Impairment and Other Related Charges” and “—Goodwill Impairment Charges” below.

Change in Accounting Principle. Inventories are stated at the lower of cost or market. Costs include materials, labor, including direct engineering labor, tooling costs and manufacturing overhead. As described below, measurement of the costs of inventories associated with products manufactured for delivery under production-type contracts in prior periods was made pursuant to the use of program accounting. As such, the cost of inventories included certain deferred program costs, which were principally comprised of engineering costs.

The events of September 11, 2001 and its aftermath have impacted the predictability of demand for our business, VIP and head-of-state aircraft products. The ability to make reliable estimates of future demand for these products is critical to the use of program accounting and the deferral of engineering and production costs. Under program accounting, certain product development costs incurred in connection with specific contracted programs were deferred and charged to cost of sales when revenues from the sale of products related to the program were recorded. Because of the changing economic conditions affecting the markets we serve, demand for our products has exhibited an increased degree of volatility not seen in the past. In order to improve the reliability of our financial reporting, we decided to discontinue the use of program accounting which requires us to make long-term estimates of future sales for each program. Therefore, product development costs not specifically reimbursable through contractual terms or recoverable through firm orders will no longer be deferred and included in program inventory.

We concluded that the new method of accounting for program costs is preferable based, in part, on the aforementioned improvement in the reliability of our financial reporting. This new accounting method will also have the advantage of enhancing investor understanding of our performance since cash flows from operations will now more closely align with Adjusted EBITDA, our primary measurement of overall economic performance and return on invested capital.

This change in accounting policy was made after concluding the 2003 fiscal year but has been applied retroactively to the beginning of the year, January 1, 2003, as required by generally accepted accounting principles. As a result of the change, program-related product development costs are now classified as a component of research and development expenses in the consolidated financial statements for 2003 rather than classified as a component of inventory cost. The effect of this accounting change was to increase the Company’s net loss by $17,942,000 through a charge for the cumulative effect of a change in accounting principle in 2003 of $13,764,000 and increase by $4,178,000 the reported loss from continuing operations.

As a result of the change, we have restated the quarterly results of operations for 2003. Restated condensed quarterly data is in Note 19 accompanying our financial statements included in this report. The following pro forma data summarizes the results of operations for the years ended December 31, 2002 and 2001 as if the new accounting policy had been in effect during those years.

	Year Ended December 31,
(In millions)	2002			2001

As reported:
Loss from continuing operations	$	(12.6	)	$	(22.6	)
Net loss	(71.8		)	(19.1		)

Pro forma:
Loss from continuing operations	$	(15.6	)	$	(24.5	)
Net loss	(74.8		)	(20.9		)

Revenues. Revenues decreased $59.7 million, or 26.0%, to $170.1 million for the year ended December 31, 2003 from $229.8 million for the year ended December 31, 2002. By segment, revenues changed as follows:

	Increase (Decrease) From 2002
(In millions)	Amount			Percent

Cabin Management	$	(53.8	)	(31.1	)%
Systems Integration	(6.4		)	(11.0	)
Inter-group elimination	0.5
Total	$	(59.7	)

Cabin Management. Revenues decreased by $53.8 million, or 31.1% compared to the prior year. The decrease, which is across substantially all of our product and services categories, is caused by the ongoing adverse impact of weak global economic conditions which reduces the affordability of business, VIP and head-of-state aircraft and therefore demand for the products and services we provide. As a result, the manufacturers of these aircraft have experienced a decrease in orders for new aircraft which, in turn, reduces the orders our customers place with us. The 2003 decrease consists of:

• a $50.9 million decrease in aircraft furniture and related products revenues;

• a $3.4 million decrease in cabin management and entertainment systems revenues; and

• a $0.5 million decrease in seating products revenues; offset by

• a $1.0 million increase in other product and services revenues.

The revenue decrease was caused by lower order volume (as described above) from our customers as opposed to a loss of customers or price reductions.

Revenues from Textron and Bombardier, our principal customers, decreased $44.6 million compared to the prior year as a result of the decrease in orders and resulting lower production of aircraft they are experiencing during the economic downturn. Both companies temporarily suspended production of various aircraft models for several weeks during fiscal 2003 in response to their low order backlog. We also experienced similar volume decreases from our other customers during the period.

Systems Integration. Revenues decreased by $6.4 million, or 11.0% compared to the prior year, due to:

• a $8.6 million decrease resulting from reduced demand for almost all of our products and services as a result of reduced production and delivery of business, VIP and head-of-state aircraft; offset by

• a $0.1 million increase in the commercial aircraft systems integration engineering services; and

• a $2.1 million increase resulting from revenue pursuant to the “take-or-pay” provisions of a major supply contract.

Gross profit. Gross profit decreased $24.2 million, or 40.8%, to $35.2 million for the year ended December 31, 2003 from $59.4 million for the same period in the prior year. By segment, gross profit changed as follows:

	Increase (Decrease) From 2002
(In millions)	Amount			Percent

Cabin Management	$	(20.2	)	(52.2	)%
Systems Integration	(4.0		)	(19.7	)
Total	$	(24.2	)

Cabin Management. Gross profit decreased by $20.2 million, or 52.2% compared to the prior year, primarily due to:

• a $20.1 million decrease resulting from lower volume for our business, VIP and head-of-state aircraft furniture and seating products; and

• a $1.2 million decrease in gross profit related to lower volume for our cabin management and entertainment systems; offset by

• a $1.1 million increase from our other products and services.

Systems Integration. Gross profit decreased by $4.0 million, or 19.7% compared to the prior year, primarily due to:

• a $7.0 million decrease resulting from lower revenues and unfavorable overhead absorption as a result of lower production and a change in product delivery mix; and

• a $0.3 million decrease in the commercial aircraft systems integration engineering services provided; offset by

• a $3.3 million decrease in restructuring charges incurred in 2003 as compared to those recorded in 2002 related to our restructuring activities.

Selling, general and administrative expenses. Selling, general and administrative expenses decreased $15.4 million, or 38.2%, to $24.9 million for the year ended December 31, 2003, from $40.3 million for the same period in the prior year. By segment, SG&A expenses changed as follows:

	Increase (Decrease) From 2002
(In millions)	Amount			Percent

Cabin Management	$	(11.2	)	(46.2	)%
Systems Integration	(2.8		)	(36.6	)
Corporate	(1.4		)
Total	$	(15.4	)

Cabin Management. SG&A expenses decreased by $11.2 million, or 46.2% compared to the prior year, due to:

• a $6.0 million decrease in restructuring charges incurred in 2003 as compared to those recorded in 2002 related to our restructuring activities; and

• a $5.2 million decrease in expenses resulting from cost reduction measures implemented in response to lower sales volume resulting from the weak demand for our products and services.

Systems Integration. SG&A expenses decreased by $2.8 million, or 36.6% compared to the prior year, due to lower labor and employee benefit costs resulting from workforce reductions in 2003.

Research and development expenses. Research and development expenses were $10.4 million for the year ended December 31, 2003 compared to $0.1 million in the prior year. As more fully described in “—Change in Accounting Principle,” we elected to change our accounting policy for product development costs incurred for long-term programs after concluding the 2003 fiscal year but retroactively applied the change to the beginning of the year, January 1, 2003. Commencing January 1, 2003, such costs are classified as a component of research and development expenses. Expenses would have been $5.0 million in 2002 if the new accounting policy had been in effect during that year.

Cabin Management. R&D expenses were $8.1 million for the year ended December 31, 2003, principally incurred for the development our new single-design seat technology and new interior furnishing components for a major customer’s new model of aircraft they recently introduced.

Systems Integration. R&D expenses were $2.3 million for the year ended December 31, 2003, principally for development of several new products.

Impairment of goodwill. During the year ended December 31, 2003, a $34.0 million charge was recorded to reflect the additional impairment of goodwill in connection with the impairment testing provision of SFAS No. 142, “Goodwill and Other Intangible Assets.” The additional impairment results from continuing weak global economic conditions which reduces the affordability of business, VIP and head-of-state aircraft and therefore demand for the products and services we provide. The impairment

charge pertains to our furniture manufacturing reporting unit within our Cabin Management Group. See “—Goodwill Impairment Charges” below for additional information.

Depreciation and amortization of intangibles. Depreciation and amortization expense decreased $0.8 million to $9.8 million for the year ended December 31, 2003 from $10.6 million for the same period in the prior year, primarily resulting from reduced capital expenditures and a lower depreciable base resulting from impairment charges recorded during 2002 as follows.

	Increase (Decrease) From 2002
(In millions)	Amount			Percent

Depreciation charged to:
Cost of sales	$	(0.3	)	(6.6	)%
Selling, general and administrative expense	(0.6		)	(26.2	)
Amortization of intangible assets	0.1			3.1
Total	$	(0.8	)

Adjusted EBITDA. As described above in “—Performance Measures—Adjusted EBITDA,” we use this financial measure to evaluate the core economic performance of our operating segments. The notes to our financial statements include additional information about Adjusted EBITDA, and should be read in conjunction with the discussions presented herein. The notes to our financial statements also include a reconciliation of Adjusted EBITDA to net income (loss), a GAAP financial measure, to clarify the differences between these two measures.

Cabin Management. Adjusted EBITDA decreased by $23.6 million, or 72.5%, to $9.0 million for the year ended December 31, 2003 compared to $32.6 million for the same period in the prior year primarily due to:

• a $13.6 million decrease in gross profit related to our business, VIP and head-of-state aircraft furniture and seating operations;

• an $8.1 million increase in research and development expenses;

• a $1.1 million decrease in gross profit related our cabin management and entertainment systems; and

• a $0.8 million decrease in gross profit related to our other products and services.

Systems Integration. Adjusted EBITDA decreased by $7.1 million, or 39.1%, to $11.0 million for the year ended December 31, 2003 compared to $18.1 million for the same period in the prior year due to lower sales volume and a $2.3 million increase in research and development expenses, partially offset by reduced SG&A spending resulting from workforce reductions.

Operating income (loss). Operating income decreased $53.3 million to a loss of $37.8 million for the year ended December 31, 2003, from operating income of $15.5 million for the same period in the prior year. By segment, operating income changed as follows:

	Increase (Decrease) From 2002
(In millions)	Amount			Percent

Cabin Management	$	(51.2	)	(401.8	)%
Systems Integration	(3.6		)	(32.3	)
Corporate	1.5
Total	$	(53.3	)

Cabin Management. Operating income decreased by $51.2 million, or 401.8% compared to the prior year, due to:

• a $34.0 million goodwill impairment charge in 2003;

• a $20.1 million decrease in gross profit, primarily due to lower revenues related to our furniture and seating operations; and

• an $8.1 million increase in research and development expenses; offset by

• a $6.0 million decrease in restructuring charges incurred in 2003 as compared to those recorded in 2002 related to our restructuring activities; and

• a $5.0 million decrease in expenses resulting from cost reduction measures implemented in response to lower sales volume resulting from the weak global economic conditions.

Systems Integration. Operating income decreased by $3.6 million, or 32.3% compared to the prior year, due to:

• a $7.0 million decrease in gross profit resulting from lower revenues and unfavorable overhead absorption as a result of lower production and a change in product delivery mix;

• a $2.3 million increase in research and development expenses; and

• a $0.3 million decrease in gross profit in the commercial aircraft systems integration engineering services provided; offset by

• a $3.0 million decrease in restructuring charges incurred in 2003 as compared to those recorded in 2002 related to our restructuring activities; and

• a $3.0 million decrease in expenses resulting from cost reduction measures implemented in response to lower sales volume resulting from the weak global economic conditions.

Interest expense. Interest expense increased $0.8 million, or 3.3%, to $26.2 million for the year ended December 31, 2003 compared to $25.4 million for the same period in the prior year. The increase is attributable to a 1.5% increase in interest rate margins charged by our lenders pursuant to the March 28, 2003 first-lien bank credit facility amendment, partially offset by lower principal balances outstanding during 2003 compared to the prior year.

Minority interest in preferred stock of subsidiary. Minority interest increased $0.8 million to $6.8 million for the year ended December 31, 2003 compared to $5.8 million for the same period in the prior year. Minority interest reflects accrued dividends, which are compounded quarterly, and redemption value accretion during the periods on DeCrane Aircrafts’ 16% preferred stock.

Loss on extinguishment of debt. Loss on extinguishment of debt was $1.4 million for the year ended December 31, 2003 and reflects the write-off of deferred financing costs attributable to debt repaid during the year.

Provision for income tax benefit. The provision for income taxes is comprised of the following:

	Year Ended December 31,
(In millions)	2003			2002

Income tax benefit based on reported pre-tax loss	$	33.0		$	2.9
Net deferred tax asset valuation allowance	(19.5		)	—
Net income tax benefit	$	13.5		$	3.6

The provision for income taxes, based on the reported consolidated pre-tax loss, differs from the amount determined by applying the applicable U.S. statutory federal rate to the pre-tax loss primarily due to the effects of state and foreign income taxes and non-deductible expenses, principally the non-deductible portion of goodwill impairment charges and minority interest in preferred stock of subsidiary.

As of December 31, 2003, we had net deferred tax assets of $19.5 million, prior to recording a valuation allowance; net deferred tax liabilities existed in prior periods. The change to a net asset position was primarily caused by the $34.0 million goodwill impairment charge recorded during fiscal 2003. SFAS No. 109, “Accounting for Income Taxes,” requires the recognition of a deferred tax asset for the future income tax benefit of goodwill deductions that will be taken for income tax purposes (i.e. the goodwill that has been written off in the financial statements for book purposes will continue to be amortized and deducted for tax purposes and, accordingly, represents a new deferred tax asset).

As required by SFAS No. 109, we evaluated our deferred assets for expected recoverability based on the nature of the item, the associated taxing jurisdictions, the applicable expiration dates and future taxable income forecasts that would impact utilization. Since there is no loss carry back potential and we do not have any tax planning strategies to assure recoverability, the only possibility for recovery of the net deferred assets is future taxable income. Since there have been prior year losses, we believe it is not prudent to rely on future income as the means to support the carrying value of the net assets. As a result of our evaluation, we recorded a $19.5 million valuation allowance, eliminating the net deferred asset, as of December 31, 2002.

We had net deferred tax liability of $16.6 million as of December 31, 2002. The full realization of the deferred assets was achieved through the reversal of the deferred tax liabilities in future periods. As a result, a valuation allowance was not required for periods ending on or prior to December 31, 2003.

Loss from continuing operations. The loss from continuing operations increased $47.1 million to a loss of $59.7 million for the year ended December 31, 2003 compared to a loss of $12.6 million for the same period in the prior year, primarily due to:

• a $53.3 million decrease in operating income resulting, in part, from a $34.0 million goodwill impairment charge;

• a $2.3 million increase in interest and other expenses (net); and

• a $1.4 million increase in loss on extinguishment of debt; offset by

• a $9.9 million increase in income tax benefit.

Loss from discontinued operations. Loss from discontinued operations decreased $34.8 million, to a loss of $6.6 million for the year ended December 31, 2003 compared to a loss of $41.4 million for the same period in the prior year. The decrease is primarily due to:

• a $39.4 million charge in 2002 to reflect the cumulative effect on discontinued operations of the change in accounting principle associated with initial adoption of SFAS No. 142, “Goodwill and Other Intangible Assets” as described below; offset by

• the result of operations of the Specialty Avionics Group through May 22, 2003 compared to a full year of operating results included in the prior year.

Cumulative effect of change in accounting principle. The $13.8 million charge during the year ended December 31, 2003 was to reflect the cumulative effect on continuing operations of the change in accounting for product development costs. See “—Change in Accounting for Product Development Costs” for additional information.

The $17.8 million charge in 2002 to reflect the cumulative effect on continuing operations of the change in accounting principle was a result of transitional goodwill impairment charges recognized upon initial adoption of SFAS No. 142, “Goodwill and Other Intangible Assets.” Including the $39.4 million charged to discontinued operations, the total charge to reflect the cumulative effect of the change in accounting principle was $57.2 million.

Net loss. Net loss increased $8.3 million to a net loss of $80.1 million for the year ended December 31, 2003 compared to a net loss of $71.8 million for the same period in the prior year. The decrease is attributable to:

• an increase in loss from continuing operations of $47.1 million; offset by

• a decrease in loss from discontinued operations of $34.8 million; and

• a decrease in cumulative effect of change in accounting principle of $4.0 million.

Net loss applicable to common stockholders. Net loss applicable to our common stockholders increased $9.5 million to a net loss of $89.3 million for the year ended December 31, 2003 compared to a net loss of $79.8 million for the same period in the prior year. The increase in the net loss applicable to our common stockholder is attributable to:

• a $8.3 million increase in our net loss;

• a $1.2 million increase in noncash preferred stock dividend accretion on our 14% mandatorily redeemable preferred stock.

Bookings. Bookings decreased $35.8 million, or 18.2%, to $161.3 million for the year ended December 31, 2003 compared to $197.1 million for the same period in the prior year. The decrease in bookings for 2003 is due to decreases in orders for all of our business segments.

Backlog at end of period. Backlog decreased $8.8 million to $58.0 million as of December 31, 2003 compared to $66.8 million as of December 31, 2002.

As described in “—Industry Overview and Trends,” the acts and ongoing threats of global terrorism, the current military conflicts, health epidemics and weak global economic conditions are having an adverse impact on our business, resulting in the decrease in bookings during 2003. In addition, we believe that some of our customers have substantially reduced their order lead times which may have adversely affected bookings during the period.

We are not able to predict the continuing impact these events will have on bookings and backlog in future periods. However, given the magnitude of these events, the adverse impact could be material.

Year Ended December 31, 2002 Compared to Year Ended December 31, 2001

Our results of operations have been affected by restructuring, asset impairment and other related charges relating to a series of restructuring activities and goodwill impairment charges. These charges, which affect the comparability of our reported results of operations between periods, are more fully described in “—Restructuring, Asset Impairment and Other Related Charges” and “—Goodwill Impairment Charges” below.

Revenues. Revenues decreased $42.3 million, or 15.5%, to $229.8 million for the year ended December 31, 2002 from $272.1 million for the year ended December 31, 2001. By segment, revenues changed as follows:

	Increase (Decrease) From 2001
(In millions)	Amount			Percent

Cabin Management	$	(33.2	)	(16.1	)%
Systems Integration	(9.5		)	(14.0	)
Inter-group elimination	0.4
Total	$	(42.3	)

Cabin Management. Revenues decreased by $33.2 million, or 16.1% compared to the prior year. The decrease, which is across most of our product and services categories, is caused by the ongoing adverse impact of weak global economic conditions which reduces the affordability of business, VIP and head-of-state aircraft and therefore demand for the products and services we provide. The 2002 decrease consists of:

• a $22.4 million decrease in aircraft furniture and related products revenues;

• a $9.8 million decrease in cabin management and entertainment systems revenues; and

• a $6.1 million decrease in seating products revenues; offset by

• a $5.1 million increase in other product and services revenues.

The revenue decrease was caused by lower order volume from our customers as opposed to a loss of customers or price reductions. The decrease in order volume is attributable to weak global economic conditions and the impact these conditions are having on manufacturers of business, VIP and head-of-state aircraft and therefore demand for the products and services we provide to them. Weak global economic conditions have reduced the amount of discretionary income available to purchase and operate these types of aircraft. As a result, the manufacturers of these aircraft have experienced a decrease in orders for new aircraft which, in turn, reduces the orders our customers place with us.

Revenues from Textron and Bombardier, our principal customers, decreased $15.0 million compared to the prior year as a result of the decrease in orders and resulting production of aircraft they are experiencing due to the economic downturn. We also experienced similar volume decreases from our other customers during the period.

Systems Integration. Revenues decreased by $9.5 million, or 14.0% compared to the prior year, due to:

• a $7.5 million decrease in the commercial aircraft systems integration and engineering services we provide resulting from the aftermath of September 11^th,and resulting down-turn in the commercial airline industry; the airline industry’s corresponding reduction in the size of its operating fleet and the delay or postponement retrofit and refurbishment programs for the remaining operational fleet reduced demand for our integration and engineering services; and

• a $2.0 million decrease resulting from reduced demand for our business, VIP and head-of-state aircraft products and services due to the adverse impact weak global economic conditions are having on the demand for those types of aircraft as follows:

• a $5.6 million decrease in BBJ auxiliary fuel systems revenues; offset by

• a $3.6 million increase in our aircraft completion and modification revenues, principally resulting for our first aircraft interior completion during 2002.

Gross profit. Gross profit decreased $15.9 million, or 21.1%, to $59.3 million for the year ended December 31, 2002 from $75.2 million for the same period in the prior year. By segment, gross profit changed as follows:

	Increase (Decrease) From 2001
(In millions)	Amount			Percent

Cabin Management	$	(10.7	)	(21.7	)%
Systems Integration	(5.3		)	(20.3	)
Inter-group elimination	0.1
Total	$	(15.9	)

Cabin Management. Gross profit decreased by $10.7 million, or 21.7% compared to the prior year, primarily due to:

• a $6.6 million net decrease caused by charges related to our 2001 and 2002 restructuring activities;

• a $3.8 million decrease in profit margins due to lower volume for our business, VIP and head-of-state aircraft furniture and seating products, and

• a $0.3 million decrease in gross profit related to lower volume for our cabin management and entertainment systems.

Systems Integration. Gross profit decreased by $5.3 million, or 20.3% compared to the prior year, primarily due to $4.1 million of other asset impairment related charges and lower sales volume.

Selling, general and administrative expenses. Selling, general and administrative expenses decreased $4.4 million, or 10.0%, to $40.3 million for the year ended December 31, 2002, from $44.7 million for the same period in the prior year. By segment, SG&A expenses changed as follows:

	Increase (Decrease) From 2001
(In millions)	Amount			Percent

Cabin Management	$	(1.2	)	(7.3	)%
Systems Integration	(2.1		)	(22.0	)
Corporate	(1.1		)
Total	$	(4.4	)

Cabin Management. SG&A expenses decreased by $1.2 million, or 7.3% compared to the prior year, due to:

• a $4.0 million decrease in expenses as a result of cost reduction measures implemented in 2001 and 2002 in response to lower sales volume resulting from the weak global economic conditions; offset by

• a $2.8 million increase caused by charges relating to our 2001 and 2002 restructuring activities.

Systems Integration. SG&A expenses decreased by $2.1 million, or 22.0% compared to the prior year, due to lower labor and employee benefit costs resulting from workforce reductions implemented during the fourth quarter of fiscal 2001.

Corporate. SG&A expenses decreased by $1.1 million compared to the prior year, primarily due to workforce and travel expense reductions offset by increases in insurance and employee benefit costs.

Research and development expenses. Research and development expenses were $0.1 million for the year ended December 31, 2002 compared to $0.7 million in the prior year. As more fully described in “—Change in Accounting Principle,” we elected to change our accounting policy for product development costs incurred for long-term programs. Commencing January 1, 2003, such costs are classified as a component of result, research and development expenses. Expenses would have been $5.0 million in 2002 and $11.7 million in 2001 if the new accounting policy had been in effect during those years.

Impairment of goodwill. In 2001, an $8.6 million impairment charge was recognized pursuant to the provisions of SFAS No. 121, “Accounting for Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of,” to reflect the impairment resulting from our restructuring activities. See “—Goodwill Impairment Charges” below for additional information.

Depreciation and amortization of intangibles. Depreciation and amortization expense decreased $9.8 million to $10.6 million for the year ended December 31, 2002 compared to $20.4 million for the same period in the prior year, primarily resulting from the adoption of new accounting standards, as follows:

	Increase (Decrease) From 2001
(In millions)	Amount			Percent

Depreciation charged to:
Cost of sales	$	(0.7	)	(14.2	)%
Selling, general and administrative expense	(0.2		)	(5.1	)
Amortization of intangible assets:
Goodwill	(9.1		)	(100.0	)
Identifiable intangible assets	0.2			5.0
Total	$	(9.8	)

Effective January 1, 2002, we adopted SFAS No. 142, “Goodwill and Other Intangible Assets” and the provisions of SFAS No. 141, “Business Combinations,” which were required to be adopted concurrent with the adoption of SFAS No. 142. Under these new standards, goodwill is deemed to be an indefinite-lived asset and, as a result, the recording of periodic goodwill amortization charges was discontinued effective January 1, 2002. In addition, SFAS No. 141 requires that intangible assets relating to acquired assembled workforce intangibles not meeting the criteria for recognition apart from goodwill be reclassified to goodwill. Goodwill amortization was $9.1 million for the year ended December 31, 2001, which includes $1.1 million of assembled workforce amortization, now deemed part of goodwill. See “—Goodwill Impairment Charges” below for additional information.

Excluding the effect of the accounting change, depreciation and amortization decreased $0.9 million as a result of lower depreciable costs resulting from the impairment of long-lived assets recorded during the fourth quarter of fiscal 2001 and 2002, partially offset by additional depreciation resulting from capital expenditures during the period.

Cabin Management. Adjusted EBITDA decreased by $12.9 million, or 28.3% compared to the prior year, primarily due to:

• a $9.3 million decrease related principally to lower revenues in our business, VIP and head-of-state aircraft furniture and seating operations; and

• a $3.6 million decrease resulting from lower sales volume for our cabin management and entertainment systems.

Systems Integration. Adjusted EBITDA increased by $0.9 million, or 5.4% compared to the prior year, primarily the result of reduced SG&A spending resulting from workforce reductions.

Operating income. Operating income increased $6.7 million to $15.5 million for the year ended December 31, 2002, from $8.8 million for the same period in the prior year. Operating income changed as follows:

	Increase (Decrease) From 2001
(In millions)	Amount		Percent

Cabin Management	$	2.7	55.9	%
Systems Integration	1.4		18.1
Corporate	2.5
Inter-group elimination	0.1
Total	$	6.7

Cabin Management. Operating income increased by $2.7 million, or 55.9% compared to the prior year, primarily due to:

• a $10.7 million decrease in gross profit primarily caused by charges related to our restructuring activities and due to lower volume for our business, VIP and head-of-state aircraft furniture and seating products; offset by

• a $1.9 million decrease in SG&A resulting from cost reduction measures and restructuring charges;

• a $5.0 million decrease in goodwill impairment; and

• a $6.7 million decrease in amortization of intangibles.

Systems Integration. Operating income increased by $1.4 million, or 18.1% compared to the prior year, primarily due to:

• a $5.2 million decrease in gross profit due to other asset impairment related charges and lower sales volumes; offset by

• a $2.2 million decrease in SG&A resulting from lower labor and employee benefit costs;

• a $3.5 million decrease in goodwill impairment; and

• a $0.9 million decrease in amortization of intangibles.

Corporate. Operating income increased $2.5 million compared to the prior year, due to principally to reduced SG&A spending.

Interest expense. Interest expense decreased $4.3 million, or 14.4%, to $25.4 million for the year ended December 31, 2002 compared to $29.7 million for the same period in the prior year due almost entirely to lower average interest rates charged by our lenders.

Minority interest in preferred stock of subsidiary. Minority interest increased $0.8 million to $5.8 million for the year ended December 31, 2002 compared to $5.0 million for the same period in the prior year. Minority interest reflects accrued dividends, which are compounded quarterly, and redemption value accretion during the periods on DeCrane Aircrafts’ 16% preferred stock.

Provision for income taxes. The provision for income taxes differs from the amount determined by applying the applicable U.S. statutory federal rate to the income before income taxes primarily due to the effects of state and foreign income taxes and non-deductible expenses, principally goodwill impairment charges and amortization (for periods prior to the January 1, 2002 adoption of SFAS No. 142). The difference in the effective tax rates between periods is mostly the result of the adoption of SFAS No. 142.

Loss from continuing operations. Loss from continuing operations decreased $10.0 million to a loss of $12.6 million for the year ended December 31, 2002, compared to a loss of $22.6 million for the same period in the prior year. The decrease in loss from continuing operations is attributable to:

• an $8.9 million decrease in amortization of goodwill and intangible assets resulting from the adoption of SFAS No. 142, “Goodwill and Other Intangible Assets,” on January 1, 2002;

• an $8.6 million decrease in goodwill impairment charges; and

• a $4.3 million decrease in interest expense; offset by

• an $11.0 million loss increase principally resulting from reduced profits caused by lower revenues; and

• a $0.8 million increase in minority interest in preferred stock of subsidiary.

Income (loss) from discontinued operations. Income from discontinued operations decreased $44.9 million to a loss of $41.4 million for the year ended December 31, 2002 compared to income of $3.5 million for the same period in the prior year. The change in income (loss) from discontinued operations is attributable to:

• a $7.7 million charge in 2002 to reflect the additional impairment of goodwill in connection with the annual impairment testing provisions of SFAS No. 142; and

• a $3.1 million loss increase principally resulting from reduced profits caused by lower revenues; offset by

• a $5.3 million reduction in goodwill amortization expense resulting from discontinuance of periodic amortization charges pursuant to SFAS No. 142.

The $39.4 million and $7.7 million charges in 2002 are attributable to the goodwill impairment of one of the three reporting units within the Specialty Avionics Group. Aggregate goodwill was $126.5 million as of December 31, 2001 and $80.7 million as of December 31, 2002, after the $47.1 million 2002 impairment charges and a $1.3 million reclassification of intangible assets in connection with the adoption of SFAS No. 142. See “—Goodwill Impairment Charges” below for additional information.

Cumulative effect of change in accounting principle. The $17.8 million charge to reflect the cumulative effect of change in accounting principle for the year ended December 31, 2002 was a result of transitional goodwill impairment charges recognized upon initial adoption of SFAS No. 142, “Goodwill and Other Intangible Assets.” See “—Goodwill Impairment Charges” below for additional information.

Net income (loss). Net loss increased $52.7 million to a net loss of $71.8 million for the year ended December 31, 2002 compared to a net loss of $19.0 million for the same period in the prior year. The increase over the prior year is a result of a $10.0 million decrease in loss from continuing operations offset by an increase in loss from discontinued operations of $44.9 million and the cumulative effect of change in accounting principle of $17.8 million.

Net loss applicable to common stockholders. Net loss applicable to common stockholders increased $53.8 million to a net loss of $79.8 million for the year ended December 31, 2002 compared to a net loss of $26.0 million for the same period in the prior year. The increase in the net loss applicable to our common stockholders is attributable to:

• a $52.8 million net loss increase; and

• a $1.0 million increase in noncash preferred stock dividend accretion on our 14% mandatorily redeemable preferred stock resulting from the quarterly compounding of the dividends accreted.

Bookings. Bookings decreased $55.7 million, or 22.0%, to $197.1 million for the year ended December 31, 2002 compared to $252.8 million for the same period in the prior year. The decrease in bookings for 2002 is due to decreases in orders for all of our business segments.

Backlog at end of period. Backlog decreased $32.7 million to $66.8 million as of December 31, 2002 compared to $99.5 million as of December 31, 2001.

Restructuring, Asset Impairment and Other Related Charges

The following discussion should be read in conjunction with Note 3 accompanying our financial statements included in this report.

During the three years ended December 31, 2003, we recorded restructuring, asset impairment and other related pre-tax charges, principally relating to our restructuring activities. These charges are summarized below.

	Year Ended December 31,
(In millions)	2003		2002		2001

Nature of charges:
Seating Product Line and Furniture Manufacturing Facilities Restructuring	$	7.1	$	—	$	—
Asset Realignment Restructuring	—		6.9		20.1
Seat Manufacturing Facilities Restructuring	—		6.3		—
Adjustment of Previous Restructuring Charge	0.8		—		—
Goodwill impairment charges	41.5		7.7		8.6
Other asset impairment related charges	—		4.3		—
Total pre-tax charges	$	49.4	$	25.2	$	28.7

Business segment recording the charges:
Cabin Management	$	41.1	$	13.2	$	22.4
Systems Integration	0.8		4.0		3.5
Total charged to continuing operations	41.9		17.2		25.9
Discontinued operations (Specialty Avionics)	7.5		8.0		2.8
Total pre-tax charges	$	49.4	$	25.2	$	28.7

Charged to operations:
Cost of sales	$	7.3	$	10.7	$	13.6
Selling, general and administrative expenses	0.6		6.5		3.7
Impairment of goodwill	34.0		—		8.6
Total charged to operations	41.9		17.2		25.9
Charged to discontinued operations (Specialty Avionics)	7.5		8.0		2.8
Total pre-tax charges	$	49.4	$	25.2	$	28.7

Components of charges:
Noncash charges	$	37.7	$	11.4	$	19.6
Cash charges	4.2		5.8		6.3
Total charged to continuing operations	41.9		17.2		25.9
Charged to discontinued operations	7.5		8.0		2.8
Total pre-tax charges	$	49.4	$	25.2	$	28.7

Seating Product Line and Furniture Manufacturing Facilities Restructuring

During the second quarter of fiscal 2003, we consolidated our seating product line offerings and adopted a restructuring plan to down-size a furniture manufacturing facility in response to continuing

weakness in the business, VIP and head-of-state aircraft market. These actions were designed to reduce engineering, production and inventory carrying costs by supporting fewer product offerings and achieve profitability at the furniture manufacturing facility based on its lower production levels. In connection with these actions, we recorded pre-tax charges to operations totaling $7.1 million during the second quarter of fiscal 2003, of which $3.6 million were noncash charges. The charges are comprised of the write-off of excess and obsolete inventory costs related to the discontinued product offerings, lease termination and related charges, and severance and other compensation costs. These restructuring activities were completed by the end of fiscal 2003.

Asset Realignment Restructuring

During the second quarter of fiscal 2001, we adopted a restructuring program to realign aircraft furniture production programs among our manufacturing facilities. In addition, and in response to the adverse impact on the aerospace industry resulting from the September 11^th terrorist attack and its aftermath, as well as the weakening of global economic conditions, we announced and implemented a further restructuring program in December 2001 designed to reduce costs and conserve working capital. This program included permanently closing one manufacturing facility and idling a second facility for an indefinite period, curtailing several product development programs and instituting workforce reductions. This program primarily affected our Cabin Management and Specialty Avionics Groups.

In connection with these restructuring activities, we recorded pre-tax charges to operations of $28.7 million in fiscal 2001, of which $22.1 million were noncash charges, for the impairment of long-lived assets and restructuring costs related to write-downs and write-offs of inventoried costs, costs associated with the realignment of aircraft furniture production programs among facilities, severance, lease termination and other related costs. During 2001, we paid $5.0 million of costs related to this restructuring in cash and a $1.6 million restructuring reserve remained as of December 31, 2001 solely for severance, lease termination and other related costs.

Due to the ongoing weakness of the business, VIP and head-of-state aircraft market, we decided during the second quarter of fiscal 2002 to permanently close the temporarily idled manufacturing facility. In connection with this decision, we recorded additional pre-tax charges to operations totaling $6.9 million during the year ended December 31, 2002, of which $3.8 million were noncash charges, for restructuring, asset impairment charges and other related expenses. During 2002 and 2003, we paid $4.7 million of costs related to this restructuring in cash. No future cash payment obligations related to these restructuring activities remains as of December 31, 2003.

Seat Manufacturing Facilities Restructuring

In 2002, we announced we would consolidate the production of four seating and related manufacturing facilities into two, resulting in the permanent closure of two facilities. This program was designed to improve manufacturing efficiencies and to further reduce costs and conserve working capital. In connection with these restructuring activities, we recorded pre-tax charges to operations totaling $6.3 million during the year ended December 31, 2002, of which $3.6 million were noncash charges, for restructuring, asset impairment and other related restructuring charges.

The restructuring, asset impairment and other related expenses are comprised of charges for current asset write-downs, the impairment of long-lived assets, severance and lease termination costs and other restructuring-related expenses pertaining to FAA retesting and recertification, moving, transportation and travel costs and shutdown and startup costs. These restructuring activities were substantially completed during the second quarter of fiscal 2002.

Adjustment of Previous Restructuring Charge

In December 1999, we initiated a plan to reorganize and restructure the operations of two of our subsidiaries within the Systems Integration Group. The restructuring was a result of a management decision to exit the manufacturing business at these subsidiaries and consolidate and relocate operations into one facility to more efficiently and effectively manage the business and be more competitive.

In connection with these restructuring activities, we provided for lease termination costs expected to be incurred over the remaining term of the existing long-term lease at the facility being vacated following the restructuring. The expected costs were reduced by estimated sublease income which was based on estimated future market rates and anticipated sublease rental periods.

During 2003, the initial sublease was canceled and we entered into a new sublease agreement. Due to the deterioration in market rates since 1999, the terms of the new sublease were less favorable than the initial lease. As a result, we determined that the remaining accrual for lease termination costs was insufficient to cover the net costs expected to be incurred over the remaining lease term. Consequently, an additional $0.8 million was charged to operations during 2003 for these additional costs. A payment obligation totaling $0.7 million remains as of December 31, 2003. The future cash payments will be funded from internally generated cash for operations.

Goodwill Impairment Charges

During 2003, we recorded $41.5 million of goodwill impairment charges. Impairment charges totaling $34.0 million pertained to goodwill impairment testing pursuant to SFAS No. 142 for our Cabin Management Group and were charged to continuing operations. The remaining $7.5 million pertained to the sale of the Specialty Avionics Group and was charged to discontinued operations.

During 2002, we recorded a pre-tax charge of $7.7 million related to our annual goodwill impairment testing pursuant to SFAS No. 142. The charged pertained to discontinued operations.

Prior to adoption of SFAS No. 142, impairment testing was in accordance with SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of.” In 2001, we recorded an $8.6 million pre-tax charge to operations to reflect the impairment loss resulting from our restructuring activities. The impairment charge pertained to our Cabin Management and Systems Integration Groups.

See “—Goodwill Impairment Charges” below for additional information on all of the impairment charges.

Other Asset Impairment Related Charges

Due to continued weakness in the commercial aircraft portion of our business, in the fourth quarter of fiscal 2002 we recorded a pre-tax charge to cost of goods sold of $4.3 million related to inventories. Of this amount, charges totaling $0.3 million pertained to discontinued operations.

Goodwill Impairment Charges

The following discussion should be read in conjunction with Notes 3 and 7 accompanying our financial statements included in this report.

Our results of operations have been affected by the adoption of SFAS No. 142, “Goodwill and Other Intangible Assets,” and goodwill impairment charges. The table below summarizes the changes in goodwill during the three years ended December 31, 2003.

	Continuing Operations												Discontinued Operations
(In millions)	Cabin Management Group			Systems Integration Group			Corporate			Total			Specialty Avionics Group

Balance, December 31, 2000	$	187.8		$	33.0		$	4.1		$	224.9		$	131.5
Contingent consideration earned	3.8			—			—			3.8			—
Amortization during the period	(6.6		)	(1.2		)	(0.2		)	(8.0		)	(4.7		)
Impairment charge (a)	(5.1		)	(3.5		)	—			(8.6		)	—
Cash received upon settlement of asserted claims	(1.2		)	—			—			(1.2		)	—
Foreign currency translation	—			—			—			—			(0.3		)
Balance, December 31, 2001	178.7			28.3			3.9			210.9			126.5

Adoption of SFAS 141 and 142:
Reclassification of intangible assets	3.1			0.4			0.1			3.6			1.3
Transitional impairment charge (b)	(8.5		)	(7.9		)	(2.3		)	(18.7		)	(39.4		)
Contingent consideration earned	0.6			—			—			0.6			—
Impairment charge (a)	—			—			—			—			(7.7		)
Balance, December 31, 2002	173.9			20.8			1.7			196.4			80.7

Impairment charge (a)	(34.0		)	—			—			(34.0		)	(7.5		)
Sale of Specialty Avionics Group	—			—			—			—			(73.2		)
Balance, December 31, 2003	$	139.9		$	20.8		$	1.7		$	162.4		$	—

(a) Reflects a goodwill impairment charge to operations and reflected as a component of our restructuring, asset impairment and other related charges. See “—Restructuring, Asset Impairment and Other Related Charges” above.

(b) Reflects a goodwill impairment charge recorded (before $0.9 million of income tax benefit) during the year ended December 31, 2002 as the cumulative effect of change in accounting principle in accordance with the transitional provisions of adopting SFAS No. 142, “Goodwill and Other Intangible Assets.”

• Reclassification of Intangible Assets. Intangible assets relating to acquired assembled workforce intangibles not meeting the criteria for recognition apart from goodwill were reclassified to goodwill, net of deferred income taxes.

• Discontinuance of Goodwill Amortization. Goodwill is deemed to be an indefinite-lived asset. As a result, and in accordance with SFAS No. 142, the recording of periodic goodwill amortization charges was discontinued effective January 1, 2002.

• Annual Testing for Goodwill Impairment. In lieu of periodic goodwill amortization charges, SFAS No. 142 requires goodwill to be tested annual for impairment, or when events or changes in circumstances indicate the carrying value may not be recoverable.

During 2002, we completed the transitional impairment testing of goodwill recorded as of January 1, 2002 as required under SFAS No. 142. Fair value of each reporting unit was determined using a discounted cash flow approach taking into consideration projections based on the individual characteristics of the reporting units, historical trends, market multiples for comparable businesses and independent appraisals. Our Cabin Management Group consists of three reporting units, our Systems Integration Group consists of two and the Specialty Avionics consists of three. Unallocated goodwill was allocated to the reporting units for impairment testing purposes. The results indicated that the carrying value of goodwill was impaired at one of the reporting units within each of our operating groups. The resulting impairment was primarily attributable to a change in the evaluation criteria for goodwill utilized under previous accounting guidance to the fair value approach stipulated in SFAS No. 142. In accordance with the transitional provision of SFAS No. 142, we recorded a $17.8 million noncash write-down of goodwill (net of $0.9 million income tax benefit) as of January 1, 2002 as a cumulative effect of a change in accounting principle. An additional $39.4 million noncash write-down of goodwill pertained to the Specialty Avionics Group and is included in the loss from discontinued operations.

During the fourth quarter of fiscal 2002, we performed our annual impairment testing and recorded an additional $7.7 million impairment charge related to one of the reporting units within the Specialty Avionics Group. The charge was primarily the result of a decrease in fair value caused by using lower cash flow forecasts for the commercial aircraft portion of our business, which experienced further weakness during 2002. This charge is included as a component of income (loss) from discontinued operations.

As a result of the continuing weakness in the business, VIP and head-of-state aircraft market and our decision to down-size a furniture manufacturing facility in the second quarter of fiscal 2003, we determined that we should reevaluate the carrying value of goodwill prior to the annual October 31^st testing date. Accordingly, we performed an impairment test of the goodwill associated with the furniture manufacturing reporting unit for recoverability and found the goodwill to be impaired. As a result, we recorded a pre-tax charge to operations of $34.0 million during the three months ended June 30, 2003. The charge was primarily a result of a decrease in fair value caused by using lower cash flow forecasts based on the most recently reduced industry estimates of aircraft deliveries resulting from overall industry weakness. The annual impairment test on October 31^st indicated that no additional impairment had occurred.

Liquidity and Capital Resources

We are a holding company and have no direct material operations. Our only asset is our ownership of all of the common stock of DeCrane Aircraft, and our only material liability is our guarantee of the DeCrane Aircraft first-lien credit facility and second-lien term debt. Our principal liquidity needs are for income taxes and, beginning in 2005, the payment cash dividends on our preferred stock, if declared.

Our only source of cash is dividends from DeCrane Aircraft. The first-lien credit facility, second-lien term debt and subordinated notes described below are obligations of DeCrane Aircraft and impose limitations on its ability to pay dividends to us. We believe that DeCrane Aircraft’s debt instruments will permit it to supply us with sufficient cash to meet the cash needs referred to above for the next twelve months. However, if that is not the case, we would not be able to satisfy those needs, because we have no other source of cash other than dividends from DeCrane Aircraft. We would then be required to secure alternate financing, which may not be available on acceptable terms, or at all.

DeCrane Aircraft’s principal cash needs are for debt service, working capital, capital expenditures and strategic acquisitions, as well as to provide us with cash to finance our needs. Its principal sources of liquidity are expected to be cash flow from operations, potential capital market transactions and third party borrowings, principally under its first-lien credit facility.

Cash Flows During the Year Ended December 31, 2003

Net cash used by operating activities was $19.1 million for the year ended December 31, 2003 and consisted of $12.4 million of cash used by operations after adding back depreciation, amortization, the noncash portion of our restructuring and asset impairment charges and other noncash items and $7.5 million used for working capital, offset by a $0.8 million increase in other liabilities. The following factors contributed to the $7.5 million working capital increase:

• a $13.5 million decrease in accrued expenses, primarily resulting from:

• a $2.5 million decrease in accrued interest due to lower debt levels;

• a $1.5 million decrease in customer deposits due to lower order activity;

• a $5.2 million decrease in accrued salaries, wages and payroll related taxes due to cost reduction measures; and

• a $4.3 million decrease in other accrued liabilities;

• a $1.1 million decrease in income taxes payable due to lower levels of taxable income; and

• a $0.3 million net increase in other working capital items; offset by

• a $4.9 million decrease in accounts receivables due to lower revenues; and

• a $2.5 million decrease in accounts payable commensurate with lower purchasing volume.

Net cash provided by investing activities was $130.0 million for the year ended and consisted of:

• net proceeds of $132.2 million from the sale of the Specialty Avionics Group; and

• net proceeds of $3.2 million from the sale of property and equipment, principally from the sale of facilities vacated pursuant to our restructuring activities; offset by

• capital expenditures of $4.8 million; and

• payment of $0.6 million of contingent acquisition consideration.

We anticipate spending approximately $3.0 to $5.0 million for capital expenditures in 2004. There are no other remaining contingent acquisition payment obligations remaining as of December 31, 2003.

Net cash used for financing activities was $118.2 million for the year ended December 31, 2003. During the year, we used the net proceeds of $130.7 million from the sale of the Specialty Avionics Group and $80.0 million of second-lien term loan proceeds to:

• repay $183.7 million first-line term debt;

• repay $6.0 million of revolving line of credit borrowings;

• repay $1.9 million of secured long-term debt; and

• pay $6.6 million of debt issuance costs.

In December 2003, we received second-lien term loans in the aggregate amount of $80.0 million from a syndicate of lenders and used the net proceeds to repay first-lien credit facility indebtedness. The second-lien debt, which is comprised of $70.0 million of fixed rate debt and $10.0 million of floating rate debt, matures on June 30, 2008. On both the fixed and floating rate debt, 3% of the interest is pay-in-kind or “accreted” interest, payable at maturity. The debt is secured by a second lien on substantially all of the Company’s assets.

Debt Obligations and Capital Resources as of December 31, 2003

As of December 31, 2003, first-lien credit facility borrowings and second-lien term debt totaling $90.5 million are at variable interest rates based on defined margins over the current prime rate or LIBOR. We also had $100.0 million of 12% subordinated notes, $70.1 million of 15% second-lien term debt and other secured indebtedness totaling $8.8 million outstanding as of the end of the year. The total annual maturities of all of our indebtedness outstanding as of December 31, 2003 are as follows: 2004 – $1.2 million; 2005 – $4.0 million; 2006 – $13.6 million; 2007 – $66.3 million; 2008 – $180.5 million; and 2009 and thereafter – $3.8 million.

As of December 31, 2003, we had $37.9 million of working capital and $23.8 million of borrowings available under our revolving line of credit, which expires in March 2006.

Financial Condition and Liquidity

As more fully described in “—Industry Overview and Trends,” the acts and ongoing threats of global terrorism, the current military conflicts, health epidemics and weak global economic conditions are all adversely impacting our business. In response, we have implemented a series of restructuring activities as described in “—Restructuring, Asset Impairment and Other Related Charges,” designed to reduce costs and conserve working capital.

During the fourth quarter of fiscal 2002, we further assessed our long-term business strategies in light of current aerospace industry conditions. In addition, we subsequently determined that we would likely not be in compliance with our first-lien credit facility’s financial covenants in 2003. We believe that when the aerospace industry recovers, the demand for our Cabin Management and Systems Integration groups’ products and services for business, VIP and head-of-state aircraft will reflect substantial improvement and, accordingly, we decided to focus our resources in these market segments. To accomplish this objective, we embarked on a plan to sell the Specialty Avionics Group, which is highly dependent on the commercial airline industry.

In March 2003, we amended the first-lien credit facility to permit the sale Specialty Avionics Group and we consummated the sale on May 23, 2003. As required by the amendment, we used $130.7 million of the proceeds from the sale to repay first-lien credit facility borrowings. The amendment also relaxed

various financial covenants for 2003 and beyond, decreased by $10.0 million the revolving line of credit commitment, increased the prime rate and LIBOR interest margins by 1.5% and permits the issuance of specified types of additional indebtedness and the repurchase of up to $20.0 million aggregate principal amount of our 12% subordinated notes with the proceeds from the sale of junior securities. Junior securities means: (i) subordinated notes issued by us that are unsecured and do not provide for any scheduled redemptions or prepayments or any sinking fund installment payments or maturities prior to the termination of the first-lien credit facility, or other indebtedness subordinated in right of payment to our obligations under the first-lien credit facility, and whose material terms are satisfactory to the lenders; and (ii) equity securities issued by us.

In December 2003, we further amended the first-lien credit facility to permit the incurrence of $80.0 million of second-lien term debt to refinance a substantial portion of our first-lien indebtedness. This amendment further revised various financial covenants to permit the second-lien debt, extended the scheduled repayment dates of the remaining first-lien debt by 12 to 18 months, reduced the revolving commitment by an additional $16.0 million and extended the commitment by 18 months. Interest rates charged on the first-lien debt remained unchanged. We were in compliance with all debt financial covenants during 2003 and are in compliance through the date of this report.

As a result of the foregoing amendments and transactions, the future maturities of our long-term indebtedness have been significantly reduced and extended compared to the end of prior year. The table below reflects the total annual maturities of our long-debt outstanding as of December 31, 2002 and 2003.

	Aggregate Maturities of Long-Term Debt
(In millions)	As of December 31, 2002		Net Increase (Decrease)			As of December 31, 2003

Total maturities during the year ending December 31,
2003	$	16.3	$	(16.3	)	$	—
2004	54.0		(52.8		)	1.2
2005	97.7		(93.7		)	4.0
2006	107.0		(93.4		)	13.6
2007	0.7		65.6			66.3
2008	100.7		79.8			180.5
2009 and thereafter	4.6		(0.8		)	3.8
Total aggregate maturities	$	381.0	$	(111.6	)	$	269.4

We believe the relaxed maturity schedule through 2006 will coincide with our expectations of the recovery period for the business, VIP and head-of state aircraft market and resulting demand for our products and services. As a result, we believe our expected operating cash flows, together with borrowings under our first-lien credit facility ($23.8 million of which was available as of December 31, 2003, the commitment for which expires in March 2006), will be sufficient to meet our operating expenses, working capital requirements, capital expenditures and debt service obligations for the next twelve months. However, our ability to comply with our debt financial covenants, pay principal or interest and satisfy our other debt obligations will depend on our future operating performance as well as competitive, legislative, regulatory, business and other factors beyond our control. Although we cannot be certain, we expect to be in compliance with the revised financial covenants through the end of the year based on our current operating plan.

We continue to explore the possible restructuring of our other debt and equity instruments that would improve our liquidity and reduce our cash needs. We have not entered into any commitments to do so and cannot assure you that we will be able to do so in the future.

Disclosure of Contractual Obligations and Commitments

The following table summarizes our known contractual obligations to make future cash payments as of December 31, 2003, as well an estimate of the periods during which these payments are expected to be made.

	Years Ending December 31,
(In millions)	Total		2004		2005 and 2006		2007 and 2008		2009 and Beyond

Long-term debt (a):
First-lien term debt (b)	$	80.5	$	—	$	15.0	$	65.5	$	—
Second-lien term debt (c)	80.1		—		—		80.1		—
12% subordinated notes (d)	100.0		—		—		100.0		—
Capital lease obligations (e)	3.4		0.5		0.9		0.6		1.4
Other indebtedness (e)	5.4		0.7		1.7		0.6		2.4
Total long-term debt	269.4		1.2		17.6		246.8		3.8

Other long-term liabilities	5.5		—		3.8		1.7		—
Operating lease obligations	14.7		2.9		5.0		2.4		4.4
Mandatorily redeemable preferred stock redemption obligations:
DeCrane Aircraft preferred stock (f)	43.3		—		—		—		43.3
DeCrane Holdings preferred stock (g)	71.4		—		—		—		71.4
Total obligations as of December 31, 2003	$	404.3	$	4.1	$	26.4	$	250.9	$	122.9

(a) Excludes interest payments.

(b) The first-lien term debt bears interest at variable rates and therefore the amount of future interest payments are uncertain. The debt bears interest based on a margin over, at our option, the prime rate or LIBOR. The margins applicable to portions of amounts borrowed vary depending on our consolidated debt leverage ratio. Currently, the applicable margins are 4.00 to 4.75 for prime rate borrowings and 5.25% to 6.0% for LIBOR borrowings. The weighted-average interest rate on all first-lien debt was 6.85% as of December 31, 2003.

(c) The second-lien term debt is comprised of $70.0 million of fixed rate debt and $10.0 million of variable rate debt. The fixed rate debt bears interest at 15%; 12% payable quarterly in cash and 3% pay-in-kind or “accreted” interest, payable at maturity. The variable rate debt bears cash interest, at our option, at the prime rate plus 7.5% or LIBOR plus 8.5%, plus 3% pay-in-kind interest payable at maturity. The weighted-average interest rate on all second-lien debt was 14.71% as of December 31, 2003. All of the second-lien debt matures on June 30, 2008, at which time the cash payment obligation will be $91.7 million, including the 3% pay-in-kind interest obligation.

(d) Interest on the 12% subordinated notes is payable semiannually.

(e) Interest is generally payable monthly.

(f) Dividends accrue quarterly at a 16% annual rate. Prior to June 30, 2005, we may, at our option, pay dividends either in cash or by the issuance of additional shares of preferred stock. Since the issuance of the preferred stock in June 2000, we have elected to issue additional shares in lieu of cash dividend payments and may continue to do so until June 2005, after which time we are required to pay quarterly dividends in cash, if declared. If we elect to continue issuing additional shares until June 2005, our mandatory redemption obligation on March 31, 2009, the mandatory redemption date, will be $54.8 million and our annual cash dividend payment obligation will be $8.8 million, payable quarterly, commencing September 2005, if declared.

(g) Dividends accrue quarterly at a 14% annual rate. Prior to September 30, 2005, dividends are not paid in cash but instead accrete to the liquidation value of the preferred stock. Our annual cash dividend payment obligation will be $12.7 million, payable quarterly, commencing December 31, 2005, if declared, and our mandatory redemption obligation on September 30, 2009, the mandatory redemption date, will be $90.8 million.

Disclosure About Off-Balance Sheet Commitments and Indemnities

During our normal course of business, we have entered into agreements containing indemnities pursuant to which we may be required to make payments in the future. These indemnities are in connection with facility leases and liabilities for specified claims arising from investment banking services our financial advisors provide to us. The duration of these indemnities, commitments and guarantees varies, and in certain cases, is indefinite. Substantially all of these indemnities provide no limitation on the maximum potential future payments we could be obligated to make and is not quantifiable. We have not recorded any liability for these indemnities since no claims have been asserted to date.

In connection with the sale of the Specialty Avionics Group, we made indemnities to the buyer with respect to a number of customary, and certain other specific, representations and warranties. Our indemnities with respect to some of these matters are limited in terms of duration with the maximum of potential future payments capped at $14.0 million and our indemnities with respect to specified environmental matters will expire not later than October 2010 and provides for a maximum liability of $5.0 million, while others will have no limitations.

As of December 31, 2003, we also had an irrevocable standby letter of credit in the amount of $0.2 million issued and outstanding under our first-lien credit facility.

Critical Accounting Policies and Estimates

Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which are prepared in accordance with accounting principles generally accepted in the United States of America. Our preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities.

We evaluate our estimates on an on-going basis. We base our estimates on historical experience and on various assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ from these estimates under different assumptions or conditions. We believe the following critical accounting policies affect our more significant estimates and judgments used in the preparation of our financial statements.

Allowance for uncollectible accounts receivable. Accounts receivable are reduced by an allowance for amounts that are deemed uncollectible. The estimated allowance for uncollectible amounts is based primarily on our evaluation of the financial condition of each of our customers and their payment history. We also provide an allowance based on the age of all receivables for which we have not established a customer-specific allowance. Generally, we do not require collateral or other security to support accounts receivable, however, under certain circumstances, we require deposits or cash-on-delivery terms. While our losses have been within our expectations, a deterioration of our customers’ financial condition may require that we provide additional allowances, reducing our operating income in future periods. Our customers operate in the business, VIP and head-of-state and commercial aircraft industry throughout the world and are being adversely impacted by the acts and ongoing threats of global terrorism, the current military conflicts, health epidemics and weak global economic conditions.

Accounts receivable of $22.7 million is reduced by an allowance for uncollectible accounts of $1.3 million as of December 31, 2003.

Allowance for excess and obsolete inventory. Inventories are reduced by an allowance for estimated excess and obsolete inventory. The allowance is the difference between the cost of the inventory and its estimated market value. Our market value estimates are based upon existing order backlog, our assumptions about market conditions, including future orders and market pricing. While our products are not subject to rapid technological obsolescence, we also consider this factor in determining our market value estimates. If our customers cancel existing orders or actual market conditions, including future orders, are less favorable than we projected, we may provide additional allowances, reducing our gross profit in future periods. Inventories of $48.2 million were reduced by an allowance for excess and obsolete inventory of $5.2 million as of December 31, 2003.

Goodwill impairment. On January 1, 2002, we began accounting for goodwill under Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets.” SFAS No. 142 requires an impairment-only approach to accounting for goodwill. Because of our history of acquisitions, goodwill constitutes a significant portion of our long-term assets.

The SFAS No. 142 goodwill impairment model is a two-step process. First, it requires a comparison of the book value of net assets to the fair value of the reporting units that have goodwill assigned to them. If the fair value is determined to be less than book value, a second step is performed to compute the amount of the impairment. In this process, a fair value for goodwill is estimated, based in part on the fair value of the reporting unit used in the first step, and is compared to its carrying value. The amount by which carrying value exceeds fair value represents the amount of goodwill impairment. SFAS No. 142 requires goodwill to be tested for impairment annually at the same time every year, and when an event occurs or circumstances change such that it is reasonably possible that impairment may exist. We have selected October 31^st as our annual testing date.

We estimate the fair values of our reporting units using a discounted cash flow approach, taking into consideration projections based on the individual characteristics of the reporting units, historical trends, market multiples for comparable businesses and independent appraisals. The forecasts of future cash flows are based on our best estimate of future revenues and operating costs, based primarily on existing backlog, expected future bookings based on our estimate of aircraft deliveries and general market conditions. Changes in these forecasts could cause a particular reporting unit to either pass or fail the first step in the goodwill impairment mode, which could significantly change the amount of impairment recorded. Since we began testing goodwill for impairment in 2002, we have recorded impairment charges totaling $107.3 million, which includes $41.5 million recorded during 2003.

Goodwill with an aggregate book value of $162.4 million remains as of December 31, 2003 and will be subject impairment testing in October 2004, or sooner, if additional events occur or circumstances change such that it is reasonably possible that further impairment may exist.

Valuation of long-lived assets and other intangible assets. In accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” we review long-lived assets and other identifiable intangible assets for impairment when events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. Factors we consider important, which could trigger an impairment review, include significant:

• underperformance relative to expected future operating results;

• changes in the manner of our use of the acquired assets;

• changes in our business strategy; or

• negative aerospace industry or global economic conditions.

Our impairment review consists of comparing the sum of the expected undiscounted future cash flows resulting from the use of the asset to the carrying value of the assets. When we determine that the carrying value may not be recoverable, we record an impairment loss equal to the excess of the asset’s carrying value over its fair value. We measure fair value based on a projected discounted cash flow method using a discount rate we believe to be commensurate with the risk inherent in our current business model. Net long-lived assets and intangible assets, excluding goodwill, amounted to $56.4 million as of December 31, 2003.

Accounting for income taxes. As part of the process of preparing our financial statements, we are required to estimate our income taxes in each of the jurisdictions in which we operate. This process involves estimating our actual current tax exposure together with assessing permanent and temporary differences resulting from differing treatment of items, such as amortization of assets and other nondeductible expenses, for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included within our statement of financial position. We must then assess the likelihood that our deferred tax assets will be recovered from future taxable income and, to the extent we believe that recovery is not likely, we must establish a valuation allowance which increases our provision for income taxes in our statement of operations.

We have $19.5 million net deferred tax asset as of December 31, 2003 compared to net deferred tax liabilities in prior years. The change to a net asset position was primarily caused by the $34.0 million goodwill impairment charge recorded during fiscal 2003. As required by SFAS No. 109, we evaluated each deferred assets for expected recoverability based on the nature of the item, the associated taxing jurisdictions, the applicable expiration dates and future taxable income forecasts that would impact utilization. Since there is no loss carry back potential and we do not have any tax planning strategies to assure recoverability, the only possibility for recovery of the net deferred assets is future taxable income. Since there have been prior year losses, we believe it was not prudent to rely on future income as the means to support the carrying value of the net asset. As a result of the evaluation, we recorded a $19.5 million valuation allowance, eliminating the net deferred asset, as of December 31, 2003.

In the event actual results differ from our estimates or we adjust these estimates in future periods, we would need to establish an additional valuation allowance in the period such determination is made, which would increase our provision for income taxes.

Revenue and profit recognition under long-term contracts. Because of relatively long production cycles, a portion of our revenues and profits are recognized under percentage-of-completion method of accounting using total contract price, actual costs incurred to date and an estimate of the completion costs for each contract. We use this method because reasonably accurate estimates of the revenue and costs applicable to the various stages of a contract can be made. Recognized revenues and profits on each contract are subject to revisions as the contract progresses towards completion. Revisions to revenue and profit estimates are made in the period in which the facts that give rise to the revision become known. Provisions for estimated losses on uncompleted contracts are fully recognized in the period in which such losses are determined. Approximately 16.7% of our revenues and 41.4% of our gross profit during the year ended December 31, 2003 was recognized under the percentage-of-completion method of accounting.

Litigation. We evaluate contingencies in accordance with SFAS No. 5, “Accounting for Contingencies.” We establish reserves for estimated loss contingencies when it is our assessment that a loss is probable and the amount of the loss can be reasonably estimated. Revisions to contingent liabilities are charged against income in the period in which different facts or information becomes known or circumstances change that affect the previous assumptions with respect to the likelihood or amount of loss. Reserves for contingent liabilities are based upon our assumptions and estimates, advice of legal counsel or other third parties regarding the probable outcomes of the matter. Should the outcome differ

from the assumptions and estimates, revisions to the estimated reserves for contingent liabilities would be required.

As described in “Item 3. Legal Proceedings” and Note 13 accompanying our financial statements included in this report, we are involved in legal proceedings for which no reserves for estimated loss contingencies have been established. Our current evaluation of these matters is that it is probable we will prevail and therefore are not required to accrue estimated losses in accordance with SFAS No. 5. However, there is a possibility that we may ultimately be required to pay all or a portion of the contingent liabilities related to these matters, which may have an adverse impact on our business, financial position, results of operations or cash flows in future periods.

Restructuring of our businesses. As described in “—Restructuring, Asset Impairment and Other Related Charges,” we recorded charges totaling $17.2 million during 2002 and $25.9 million during 2001 in response to the adverse aerospace industry impact the acts, and ongoing threats, of global terrorism and the current weak global economic conditions are having on our businesses. These charges are based on our present estimates of the impact these events are having on our businesses and the future recovery of the aerospace industry. Actual results and future recovery could differ from these estimates, potentially resulting in further restructuring, asset impairment and other related charges.

Recently Issued Accounting Pronouncements

SFAS No. 150

In May 2003, the Financial Accounting Standards Board issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.” SFAS No. 150 establishes standards for the classification and measurement of certain financial instruments with characteristics of both liabilities and equity. SFAS No. 150 requires classification of financial instruments within its scope as a liability, including financial instruments issued in the form of shares that are mandatorily redeemable, because those financial instruments are deemed to be, in essence, obligations of the issuer. We will be required to reclassify all of mandatorily redeemable preferred stock as a liability commencing January 1, 2004 and reflect quarterly dividend accretion on the 14% preferred stock as a charge against pre-tax income in future periods.

Forward-Looking Statements and Risk Factors

Special Note Regarding Forward-Looking Statements

All statements other than statements of historical facts included in this report, including statements about our future performance and liquidity and future industry performance, are considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are subject to known and unknown risks, uncertainties and other factors, which are difficult to predict. Some of those risks are specifically described below, but we are also vulnerable to a variety of elements that affect many businesses, such as:

• fuel prices and general economic conditions that affect demand for aircraft and air travel, which in turn affect demand for our products and services;

• acts, and ongoing threats, of global terrorism, military conflicts and health epidemics that affect demand for aircraft and air travel, which in turn affect demand for our products and services;

• inflation, and other general changes in costs of goods and services;

• price and availability of raw materials, component parts and electrical energy;

• liability and other claims asserted against us that exceeds our insurance coverage;

• the ability to attract and retain qualified personnel;

• labor disturbances;

• changes in operating strategy, or our acquisition and capital expenditure plans; and

• the risks described below.

Changes in such factors could cause our actual results to differ materially from those expressed or implied in this report. Although we believe that the expectations reflected in such statements are reasonable, we can give no assurance that such expectations will prove to be correct. We undertake no obligation to release publicly any revisions to these forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. You should not rely on our forward-looking statements as if they were certainties.

Risk Factors

Substantial Leverage. Our substantial levels of debt could adversely affect our financial health and prevent us from fulfilling our obligations under the debt agreements.

As of December 31, 2003, we had total consolidated indebtedness of approximately $269.4 million and we had $23.8 million of additional revolving line of credit borrowings available under our first-lien credit facility, subject to customary funding conditions. We also had $114.7 million of mandatorily redeemable preferred stock as of December 31, 2003. The first-lien credit facility, second-lien term debt and the indenture under which our subordinated notes are issued each also permit us to incur significant amounts of additional debt and to secure that debt with some of our assets.

The amount of debt we carry could have important consequences:

• It may limit the cash flow available for general corporate purposes and acquisitions. Interest payments on our debt were $26.0 million for the year ended December 31, 2003. Earnings from continuing operations were insufficient to cover fixed charges by $73.2 million for the year ended December 31, 2003.

• It may limit our ability to obtain additional debt financing in the future for working capital, capital expenditures or acquisitions.

• It may limit our flexibility in reacting to competitive and other changes in the industry and economic conditions generally.

• It may expose us to increased interest expenses, when interest rates fluctuate, because some of our borrowing may be, and in recent years most of it has been, at variable “floating” rates.

• It may limit our ability to respond to changes in our markets or exploit business opportunities.

Restrictive Covenants. Our operations and those of our subsidiaries are restricted by the terms of our first-lien credit facility, second-lien term debt and subordinated notes indenture.

Our first-lien credit facility and the indenture under which our subordinated notes are issued limit our flexibility in operating our businesses, including our ability and the ability of our subsidiaries to:

• incur debt;

• issue preferred stock;

• repurchase capital stock or subordinated debt;

• enter into transactions with affiliates;

• enter into sale and leaseback transactions;

• create liens or allow them to exist;

• pay dividends or other distributions;

• make investments;

• sell assets; and

• enter into mergers and consolidations.

In addition, our first-lien credit facility requires that we satisfy several tests of financial condition, including minimum levels of EBITDA and interest and fixed charges coverage and maximum permitted levels of leverage and senior debt. Our ability to do so can be affected by events beyond our control, and we cannot be sure that we will meet those tests. Our failure to do so could result in a default under our loan agreements, which would permit the lenders to terminate their commitments and accelerate all debt including the subordinated notes indenture. Although we were in compliance with these covenants as of December 31, 2003, we have required amendments on several occasions in recent years to avoid potential defaults and we may not be able to comply with these tests in the future.

The first-lien credit facility second-lien term loans are secured by substantially all our material assets. If we default under our debt agreements, the lenders could choose to declare all outstanding amounts immediately due and payable, and seek foreclosure of the assets we granted to them as collateral.

Potential Inability to Service Debt. We will require a significant amount of cash to service our debt and to fund our operations and planned capital expenditures. Our ability to generate cash depends on cash flows from our subsidiaries and many factors beyond our control.

We will be required to repay $18.8 million of debt through 2006 and substantial amounts thereafter. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources and —Disclosure of Contractual Obligations and Commitments” for additional information. Our ability to satisfy our debt obligations and to fund our operations and planned capital expenditures will depend on our ability to generate cash in the future and access to our revolving credit facility, which will terminate in March 2006. During 2003, we used $19.1 million of cash for operations. This, to an extent, is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control.

We cannot assure you that we will generate operating cash flow at all, or that our operating cash flow will be sufficient to meet our anticipated future operating and capital expenditures and debt payments as they become due or that future borrowings will be available to us for such purposes. If our cash flow in future periods is lower than we expect, we might be forced to reduce or delay acquisitions or capital expenditures, sell assets and/or reduce operating expenses in order to make all required debt service payments. A reduction in our operating expenses might reduce important efforts, such as selling and marketing programs, management information system upgrades and new product development. Also, it is likely we will need to refinance all or a portion of our debt on or before maturity. At that time, we may not be able to refinance our debt on commercially reasonable terms or at all.

We reported a net loss of $80.1 million for the year ended December 31, 2003 and $71.2 million for the same period in 2002. The 2003 loss includes $13.8 million as a result of a cumulative effect of change in accounting principle, a $6.6 million loss attributable to discontinued operations and $49.4 million of pre-tax restructuring and long-lived asset impairment charges we recorded resulting from our restructuring activities. The 2002 loss includes $17.8 million as a result of a cumulative effect of change in accounting principle, a $41.4 million loss attributable to discontinued operations and $17.2 million of pre-tax restructuring and long-lived asset impairment charges we recorded resulting from our

restructuring activities. Our restructuring activities were implemented in response to the adverse impact the events described in “—Aerospace Industry Risks” below are having on our business.

Aerospace Industry Risks. The aerospace industry is cyclical and affected by many factors beyond our control, including geo-political and global economic conditions.

We compete in the aircraft products and services market of the aerospace industry. The market for our products and services is largely driven by demand in the civil aircraft markets, principally for business, VIP and head-of-state aircraft and, to a lesser extent, commercial and regional aircraft. The September 11, 2001 terrorist attack on the United States, ongoing concerns about global terrorism, the current Middle-Eastern military conflicts, health epidemics and weak global economic conditions are all adversely impacting the aerospace industry and our business.

The business, VIP and head-of-state aircraft portion of our business experienced weakness throughout 2003 as evidenced by various manufacturers’ temporarily suspension of production at various times throughout the year in response to the weak demand for new aircraft. We believe aircraft deliveries may reflect a modest recovery in 2004 and show continuing recovery thereafter. We also believe the commercial aircraft portion of our business will experience significant weakness 2004, with potential recovery not expected to occur until at least 2005. Our beliefs are based on the assumptions we will experience economic recovery and there are no further negative geo-political developments affecting our industry.

Further or prolonged decreases in demand for new business, VIP and head-of-state and commercial aircraft, as well as related component parts (which occur for a variety of reasons, including those described above), would result in additional decreases in demand for our products and services, and, correspondingly, our revenues, thereby adversely affecting our financial condition. In addition, further deterioration or prolonged decreases in demand could result in further restructurings of our business.

Concentration of Key Customers. We receive a significant portion of our revenues from a small group of key customers, and we are vulnerable to changes in their economic condition and purchasing plans.

A significant decline in business from any one of our key customers could have a material adverse effect on our business. Our three largest customers accounted for 46.4% of our consolidated revenues for the year ended December 31, 2003 as follows: Boeing – 17.5%; Textron (which includes Cessna) – 16.3%; and Bombardier – 12.6%. Some of our customers also have the in-house capabilities to perform the services and provide many of the products we offer and, accordingly, could discontinue outsourcing their business to us.

In addition, significant portions of our revenues from our major customers are pursuant to contracts that may include a variety of terms favorable to the customer. Such terms may include our agreement to one or more of the following:

• the customer is not required to make purchases, and may terminate such contracts at any time;

• we make substantial expenditures to develop products for customers that we may not recoup if we do not receive sufficient orders;

• on a prospective basis, we must extend to the customers any reductions in prices or lead times that we provide to other customers;

• we must match other suppliers’ price reductions or delete the affected products from the contract; and

Intangible Asset Impairment. Our total assets include a substantial amount of intangible assets. The write-off of a significant portion of intangible assets would negatively affect our results of operations.

As of December 31, 2003, goodwill and other intangible assets represented approximately 61.8% of our total assets. Intangible assets consist of goodwill and other identifiable intangible assets associated with our acquisitions, representing the excess of cost over the fair value of tangible assets we have acquired. We may not be able to realize the value of these assets. Since our January 1, 2002 adoption of SFAS No. 142, “Goodwill and Other Intangible Assets,” goodwill is not amortized but is instead subject to annual testing for impairment. Identifiable intangible assets with finite lives are amortized over their individual useful lives and are also subject to annual impairment testing. Simply stated, if the carrying value of the asset exceeds the estimated undiscounted future cash flows from the operating activities of the related business, impairment is deemed to have occurred. In this event, the amount is written down accordingly. Under current accounting rules, this would result in a charge against income from operations. Since we began testing goodwill for impairment in 2002, we have recorded impairment charges totaling $107.3 million, which includes $41.5 million recorded during 2003.

Any future impairment testing resulting in the write-off of a significant portion of goodwill or identifiable intangible assets will have an adverse impact on our results of operations and total capitalization, the effect of which could be material.

Competition. We operate in a highly competitive industry and compete against a number of companies, some of which have significantly greater financial, technological and marketing resources than we do.

We operate in highly competitive markets within the aerospace industry. Our competitors include business aircraft manufacturers, independent completion and modification companies and other independent service organizations, including some of our customers, many of whom may have significantly greater financial, technological, manufacturing and marketing resources than we do. The niche markets within the aerospace industry that we serve are relatively fragmented, with several competitors offering the same products and services we provide. Due to the global nature of the aerospace industry, competition comes from both U.S. and foreign companies.

We believe our ability to compete depends on high product performance, short lead-time and timely delivery, competitive pricing, superior customer service and support and continued certification under customer quality requirements and assurance programs. There can be no assurance that we will be able to compete successfully with respect to these factors in the future.

Growth Strategy. Our acquisition of other companies may pose certain risks.

We consider and take advantage of selected opportunities to grow by acquiring other businesses whose operations or product lines complement our existing businesses. Our ability to implement this growth strategy will depend on finding suitable acquisition candidates at acceptable prices and obtaining the required financing. Any acquisition we may make in the future could be subject to a number of risks, including:

• our ability to integrate the operations and personnel of the acquired company;

• our failure to identify liabilities of the acquired company for which we may be responsible as a successor owner or operator;

• the loss of key personnel in the acquired company; and

• the impact on our financial position, results of operations and cash flows resulting from additional acquisition indebtedness.

Our inability to adequately manage these or other risks could have an adverse effect on our business.

Regulation. The FAA closely regulates many of our operations. If we fail to comply with its many standards, or if those standards change, we could lose installation or certification capabilities, which are important to our business.

The aerospace industry is highly regulated in the United States by the Federal Aviation Administration to ensure that aviation products and services meet stringent safety and performance standards. The FAA prescribes standards and licensing requirements for aircraft components, issues designated alteration station authorizations, and licenses private repair stations. We hold various FAA authorizations and licenses, including a Designated Alteration Station authorization, which gives one of our subsidiaries the authority to certify some aircraft design modifications on behalf of the FAA. Our business depends on our continuing access to, or use of, these FAA authorizations and licenses, and our employment of, or access to, FAA-certified individual engineering professionals.

We cannot assure you that we will continue to have adequate access to those authorizations, licenses and certified professionals, the loss or unavailability of which could adversely affect our operations. The FAA could also change its policies regarding the delegation of inspection and certification responsibilities to private companies, which could adversely affect our business.

Environmental Risks and Regulation. Some of our operations and facilities generate waste or have done so in the past, which may result in unknown future liabilities for environmental remediation.

Environmental laws, particularly the federal Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA”), may impose strict, retroactive and joint and several liability upon persons responsible for releases or potential releases of hazardous substances and other parties who have some relationship to a site or a source of waste, such as a current or former owner or operator of real property or a party who arranges to transport wastes to a third-party site. We have sent waste to treatment, storage or disposal facilities that have been designated as National Priority List (more commonly known as Superfund) sites under CERCLA or equivalent listings under state laws. We have received requests for information or allegations of potential responsibility from the U.S. Environmental Protection Agency regarding our use of several of these sites. Given the potentially retroactive nature of environmental liability, it is possible that we will receive additional notices of potential liability relating to current or former activities. We may incur costs in the future for prior waste disposal by us or former owners of our subsidiaries or our facilities. Some of our operations are also located on properties that may be contaminated to varying degrees. We may incur costs in the future to address existing or future contamination. If we incur significant costs in connection with these or other environmental issues, our business and financial condition could be adversely affected.

Excess Loss Risks. We could sustain losses in excess of our insurance for liability claims.

Our business exposes us to possible claims for damages resulting from the manufacture, installation and use of our products. Many factors beyond our control could lead to such claims, such as the failure of an aircraft on which our products have been installed, the reliability and skill of the operators of such aircraft and the maintenance performed on such aircraft. We carry aircraft products and grounding liability insurance for this purpose, but we cannot assure you that our insurance coverage will be adequate

to cover claims that may arise or that we will be able to renew our coverage in the future at commercially reasonable rates.

Industry and Market Data. We cannot guarantee the accuracy and completeness of the industry and market data and trends we describe in this report and rely upon in preparing our operating forecasts.

The industry and market data we use in this report is based on the good faith estimates of our management, which estimates are based primarily upon internal management information and, to the extent available, independent industry publications and other publicly available information. However, the nature of the aerospace industry and competition in our markets results in limited availability of reliable, independent data. Although we believe that the sources we have used are reliable, we do not guarantee, and have not independently verified, the accuracy and completeness of the information.

Dependence on Key Personnel. We need to retain the services of our key employees.

Our success and growth depends in large part on the skills and efforts of our management team and on our ability to attract and retain qualified personnel experienced in the various operations of our business. The loss of key personnel, including our founder, R. Jack DeCrane, combined with the failure to attract additional qualified personnel for whatever reason, could delay implementation of our business plan or otherwise adversely affect our operations. We do not have employment contracts with our key personnel, other than Mr. DeCrane. We do not carry key man life insurance on any members of our management team.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to various market risks, including interest rates and changes in foreign currency exchange rates. Market risk is the potential loss arising from adverse changes in prevailing market rates and prices. From time to time, we use derivative financial instruments to manage and reduce risks associated with these factors. We do not enter into derivatives or other financial instruments for trading or speculative purposes.

Interest Rate Risk. A significant portion of our capital structure is comprised of long-term variable and fixed-rate debt.

Market risk related to our variable-rate debt is estimated as the potential decrease in pre-tax earnings resulting from an increase in interest rates. The interest rates applicable to variable-rate debt are, at our option, based on defined margins over the current prime rate or LIBOR. As of December 31, 2003, the current prime rate was 4.00% and the current LIBOR was 1.16%. Based on $90.5 million of variable-rate debt outstanding as of December 31, 2003, a hypothetical one percent rise in interest rates, to 5.00% for prime rate borrowings and 2.12% for LIBOR borrowings, would reduce our pre-tax earnings by $0.9 million annually. As of December 31, 2002, the current prime rate was 4.75% and the current LIBOR was 1.95%. Based on $270.2 million of variable-rate debt outstanding as of December 31, 2002, a hypothetical one percent rise in interest rates, to 5.75% for prime rate borrowings and 2.95% for LIBOR borrowings, would reduce our pre-tax earnings by $2.7 million annually.

To limit a portion of our exposure related to rising interest rates, we have entered into an interest rate swap contract to effectively convert our variable-rate industrial revenue bonds to 4.2% fixed-rate debt until maturity in 2008. The contract is considered to be a hedge against changes in the amount of future cash flows associated with interest payments on this portion of our variable-rate debt. Market risk related to this interest rate swap contract is estimated as the potential higher interest expense we will incur if the variable interest rate decreases below the 4.2% fixed rate. Based on the $3.1 million of variable-rate debt

converted to fixed-rate debt outstanding as of December 31 2003, a hypothetical one percent decrease in the variable interest rate to 3.2%, would reduce our pre-tax earnings by less than $0.1 million annually.

The estimated fair value of our $100.0 million fixed-rate long-term debt increased $5.0 million, or 12.5%, to approximately $45.0 million as of December 31, 2003 from $40.0 million as of December 31, 2002. Although we cannot be certain, we believe the increase may have been a result of the sale of the Specialty Avionics Group. Market risk related to our fixed-rate debt is deemed to be the potential increase in fair value resulting from a decrease in interest rates. For example, a hypothetical ten percent decrease in the interest rates, from 12.0% to 10.8%, would increase the fair value of our fixed-rate debt by approximately $7.0 million.

Foreign Currency Exchange Rate Risk. Our foreign customers are located in various parts of the world, primarily Canada, the Far and Middle East and Western Europe, and we have a subsidiary with manufacturing facilities in Mexico. To limit our foreign currency exchange rate risk related to sales to our customers, orders are almost always valued and sold in U.S. dollars. We have entered into forward foreign exchange contracts in the past, primarily to limit the Specialty Avionics Group’s exposure related to foreign inventory procurement and operating costs. While we have not entered into any such contracts since 1998, we may do so in the future depending on the volume of non-U.S. dollar denominated transactions and our assessment of future foreign exchange rate trends.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Our consolidated financial statements, supplementary financial information and financial statement schedules are included in a separate section at the end of this report. The financial statements, supplementary information and schedules are listed in the index on page F-1 of this report and are incorporated herein by reference.

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

None.

ITEM 9A. CONTROLS AND PROCEDURES

The management of DeCrane Holdings Co. (the “Company”), under the supervision and with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the Company’s “disclosure controls and procedures” (as defined in Exchange Act Rules 13a-15(e) or 15d-15(e)) as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of the end of the period covered by this report.

There was no change in the Company’s internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Exchange Act Rules 13a-15 or 15d-15 that occurred during the Company’s last fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Directors and Executive Officers

The following table sets forth certain information concerning each person who is currently a director or executive officer of DeCrane Aircraft and its parent company, DeCrane Holdings.

Name	Age	DeCrane Holdings	DeCrane Aircraft

R. Jack DeCrane (1) (2)	57	Vice Chairman of the Board of Directors and Chief Executive Officer	Director and Chief Executive Officer

Richard J. Kaplan (2)	61	Director, Chief Financial Officer and Assistant Secretary	Director, Senior Vice President, Chief Financial Officer, Secretary and Treasurer

James E. Mann	51	—	Vice President, Tax and SEC Compliance

Robert G. Martin	66	—	Senior Vice President and Group President

Jeffrey A. Nerland	46	—	Senior Vice President and Group President

Thompson Dean (2)	45	Chairman of the Board of Directors	Chairman of the Board of Directors

Susan C. Schnabel (1) (2)	42	Director	Director

Albert E. Suter (1) (2)	68	Director	Director

(1) Member of the Compensation Committee; Ms. Schnabel serves as the committee’s chairperson.

(2) Member of the Audit Committee; the entire board of directors acts as the audit committee.

R. Jack DeCrane is the founder of DeCrane Aircraft. Mr. DeCrane served as President from the time DeCrane Aircraft was founded in December 1989 until April 1993, when he was elected to the newly created office of Chief Executive Officer. In August 2002, Mr. DeCrane was also appointed Chief Executive Officer of DeCrane Holdings. He has served on the board of directors of DeCrane Aircraft and DeCrane Holdings since their inceptions.

Richard J. Kaplan has been the Senior Vice President, Chief Financial Officer, Secretary and Treasurer of DeCrane Aircraft and Assistant Treasurer and Assistant Secretary (principal accounting officer) of DeCrane Holdings since March 1999. In August 2002, Mr. Kaplan was appointed Chief Financial Officer and Assistant Secretary of DeCrane Holdings. From April 1998 to March 1999, he served as Executive Vice President and Chief Operating Officer of Developers Diversified Realty Corporation. From 1977 to 1998, he was a partner with Price Waterhouse LLP, having joined the firm in 1964. He became a director of DeCrane Aircraft and DeCrane Holdings in 2000.

James E. Mann has been our Vice President, Tax and SEC Compliance since January 2000. During 1999, Mr. Mann was an independent consultant engaged by DeCrane Aircraft to assist with various tax and SEC compliance matters. From 1992 through 1998, Mr. Mann severed in various capacities with DeCrane Aircraft, most recently as Vice President, Corporate Controller.

Robert G. Martin has been our Senior Vice President and President of the Systems Integration Group since October 1999. Mr. Martin also served as President of PATS since we acquired it in January 1999 through December 2002 and as President of Aerospace Display Systems from September 1992 until October 1999.

Jeffrey A. Nerland has been our Senior Vice President and President of the Cabin Management Group since December 2001. From January 1999 until December 2001, Mr. Nerland served as Vice President, Business Development, and was appointed Senior Vice President in March 2001. Mr. Nerland also served as President of the Cabin Management Group’s Seating Division from June 2000 through December 2001. From July 1994 through December 1998, he was President of The Nerland Group and a partner with Budetti, Harrison, Nerland and Associates, a consulting and interim management firm.

Thompson Dean has been a director of DeCrane Aircraft and DeCrane Holdings since 1998. Mr. Dean also served as President of DeCrane Holdings from its inception in 1998 through August 2002. Mr. Dean has also been the Managing Partner of DLJ Merchant Banking, Inc. since November 1995. In November 2000, Credit Suisse First Boston, Inc. acquired Donaldson, Lufkin & Jenrette, Inc. As a result, DLJ Merchant Banking, Inc. became an indirect affiliate of Credit Suisse First Boston, Inc. and Credit Suisse Group. Mr. Dean serves as a director of AKI Holding Corp., Amatek Holdings S.A., Arcade Holding Corporation, Manufacturers’ Services Limited, Mueller Holdings, Inc., and Von Hoffman Holdings, Inc.

Susan C. Schnabel has been a director of DeCrane Aircraft and DeCrane Holdings since 1998. Ms. Schnabel has also been a Managing Director of DLJ Merchant Banking, Inc. since January 1998. In November 2000, Credit Suisse First Boston, Inc. acquired Donaldson, Lufkin & Jenrette, Inc. As a result, DLJ Merchant Banking, Inc. and Donaldson, Lufkin & Jenrette Securities Corporation became indirect affiliates of Credit Suisse First Boston, Inc. and Credit Suisse Group. Ms. Schnabel serves as a director of Environmental Systems Products Holdings, Inc., Noveon, Inc. and Shoppers Drug Mart, Inc.

Albert E. Suter has been a director of DeCrane Aircraft and DeCrane Holdings since May 2002. Mr. Suter is a Senior Advisor and Retired Vice Chairman and Chief Operating Officer of Emerson Electric Co., a manufacturer of electrical, electromechanical and electronic products and systems. Mr. Suter has served Emerson in various capacities since 1989. Mr. Suter serves as a director of Furniture Brands International, Inc. and TK Aluminum, Ltd.

Audit Committee Financial Expert

The entire board of directors of DeCrane Aircraft and DeCrane Holdings serves as each Company’s audit committee. The board of directors has carefully considered the definition of “audit committee financial expert” adopted by the United States Securities and Exchange Commission and has determined that Mr. Kaplan is an audit committee financial expert. Mr. Kaplan is not independent under Rule 10a-3.

Code of Ethics

DeCrane Aircraft and DeCrane Holdings has adopted a Code of Ethics applicable to its Chief Executive Officer, Chief Financial Officer and all employees performing accounting functions. A copy of the Code of Ethics is available, without charge, upon written request to the Chief Financial Officer of DeCrane Aircraft at 2361 Rosecrans Avenue, Suite 180, El Segundo, CA 90245.

ITEM 11. EXECUTIVE COMPENSATION

Summary Compensation Table

The following table describes all annual compensation awarded to, earned by or paid to our Chief Executive Officer and the four most highly compensated executive officers other than the Chief Executive Officer for the three years ended December 31, 2003. Columns and tables have been omitted, as permitted by Securities and Exchange Commission rules, because there has been no compensation awarded to, earned by or paid to any of the named executive officers required to be reported in the omitted column or table during any of the years in the three year period ended December 31, 2003.

						All Other Compensation
		Annual Compensation				Securities Underlying
Name	Year	Salary		Bonus		Options (1)	Other (2)

R. Jack DeCrane (3)	2003	$	355,144	$	—	—	$	13,533
Chief Executive Officer and	2002	355,144		750,000		—	19,477
Director	2001	352,906		1,290,000		—	15,741

Richard J. Kaplan (4)	2003	212,200		—		—	4,649
Senior Vice President and Director	2002	212,200		330,000		—	9,029
	2001	212,200		470,000		—	5,809

James E. Mann (5)	2003	146,200		20,000		—	671
Vice President, Tax and SEC	2002	146,200		33,000		—	4,583
Compliance	2001	146,200		40,000		—	3,961

Robert G. Martin (6)	2003	222,789		—		—	9,434
Senior Vice President	2002	222,789		300,000		—	6,500
	2001	222,789		403,639		—	6,275

Jeffrey A. Nerland (7)	2003	210,000		—		—	1,044
Senior Vice President	2002	210,000		250,000		—	6,507
	2001	191,794		290,000		—	5,541

(1) Number of shares of common stock of DeCrane Holdings issuable upon exercise of options granted pursuant to our management incentive plan during the applicable fiscal year.

(2) Comprised of life insurance premiums and matching contributions to the Company’s 401(k) Retirement Plan.

(3) Mr. DeCrane also serves as Vice Chairman of the Board of Directors of DeCrane Holdings and was appointed its Chief Executive Officer in August 2002.

(4) Mr. Kaplan also served as Assistant Treasurer and Assistant Secretary (principal accounting officer) of DeCrane Holdings from March 1999 until August 2002 when he was appointed its Chief Financial Officer and Assistant Secretary.

(5) Mr. Mann has served as our Vice President, Tax and SEC Compliance, since January 1, 2000.

(6) Mr. Martin served as President of PATS since we acquired it in January 1999 through December 2002. In December 2001, Mr. Martin became the President of our Systems Integration Group.

(7) Mr. Nerland served as Vice President, Business Development, from January 1999 through December 2001 and was appointed Senior Vice President in March 2001. In December 2001, Mr. Nerland became our President of the Cabin Management Group.

Stock Option Grants in Last Fiscal Year

During the fiscal year ended December 31, 2003, no options to purchase shares of DeCrane Holdings common stock were granted pursuant to the management incentive plan. See “—Employment Agreements and Compensation Arrangements–Incentive Plans.”

Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option Values

No stock options were exercised by our executive officers during the year ended December 31, 2003. The following table sets forth information about the stock options held by the executive officers named below as of December 31, 2003.

Name	Number of Securities Underlying Unexercised Options Exercisable / Unexercisable	Value of Unexercised In the-Money Options at Fiscal Year End (1) Exercisable / Unexercisable

R. Jack DeCrane
Exercisable at $23.00 per share	36,253/73,605	$	— / —
Richard J. Kaplan
Exercisable at $23.00 per share	9,840/19,976		— / —
Exercisable at $35.00 per share	972/1,974		— / —
James E. Mann
Exercisable at $23.00 per share	644/1,306		— / —
Exercisable at $35.00 per share	330/670		— / —
Robert G. Martin
Exercisable at $23.00 per share	5,954/12,088		— / —
Exercisable at $35.00 per share	990/2,010		— / —
Jeffrey A. Nerland
Exercisable at $23.00 per share	3,641/7,391		—/—
Exercisable at $35.00 per share	1,650/3,350		— / —

(1) All unexercised options had an exercise price above fair market value as of December 31, 2003. Since the common stock of DeCrane Holdings is privately-held, there is no established public trading market for its shares. The Board of Directors determines the fair value of stock options granted and the fair value of the common stock as of any given period-end date based on the aggregate enterprise value of DeCrane Holdings. Enterprise value is computed based upon a multiple of Adjusted EBITDA, as reflected in our financial statements, and the multiple is based upon comparable data from other publicly-held companies as well as publicly available information on privately-held companies. The Board of Directors did not determine the specific fair value of the common stock as of December 31, 2003, but did conclude that fair value was below $23.00 per share, the lowest exercise price of any options granted.

Compensation Committee Interlocks and Insider Participation

The Compensation Committee of our Board of Directors makes decisions regarding officer compensation. Jack DeCrane, chief executive officer of DeCrane Aircraft and DeCrane Holdings, participates in those discussions as a member of the Committee.

Employment Agreements and Compensation Arrangements

R. Jack DeCrane

On July 17, 1998, the Compensation Committee of our Board of Directors approved a three-year employment agreement between DeCrane Aircraft and R. Jack DeCrane, replacing his prior employment agreement that was to expire on September 1, 1998. Mr. DeCrane’s employment agreement was amended on May 5, 2000 to provide for a term through June 30, 2001, which term shall automatically extend for additional one year periods unless terminated by either party giving the other party notice of termination prior to April 1^st of the year prior to the year in which the agreement would otherwise terminate and has therefore been extended to June 30, 2005. Mr. DeCrane’s employment agreement provides for various benefits, including an initial salary of $310,000, which is subject to annual review and increase, but not a decrease, and an annual bonus, currently determined pursuant to the performance-based cash incentive bonus plan.

The employment agreement also provides that if specified change-of-control events occur, and Mr. DeCrane’s employment is terminated by us for any reason other than for cause or as a result of his death or disability, or by Mr. DeCrane for “good reason,” as defined in the agreement, then we will pay Mr. DeCrane a lump sum in cash within fifteen days. The amount of that payment will be $1.00 less than three times the sum of Mr. DeCrane’s average base salary plus bonus for the five calendar years preceding his termination date and accrued but unpaid salary and bonus through the termination date. Mr. DeCrane will also receive other specified benefits, including continued coverage under our welfare plans for up to two years; a lump sum payment in cash equal to any unvested portions of our contributions to him under specified savings plans, plus two times the amount of our annual contributions on his behalf to those plans; a lump sum payment in cash equal to our matching contributions under those savings plans that Mr. DeCrane would have received had he continued maximum participation in the plans until the earlier of two years following his termination and December 31 of the year he turns 65, plus the vested and unvested amounts credited to him under any of our deferred compensation plans and the amount required to be credited during the year of his termination; and outplacement consulting services to aid Mr. DeCrane with re-employment. We will reduce these payments to the extent necessary to ensure deductibility for tax purposes.

Change of Control Agreements

In August 2002, we entered into change of control agreements with each of our executive officers, other than Mr. DeCrane, whose above described employment agreement contains provisions concerning change of control, and Mr. Mann. The agreements, which replaced earlier agreements which had expired, provide that, for a term of two years from the effective date, should a change of control, as defined, occur during the term of the agreement and the executive officer’s employment shall be involuntarily terminated for any reason on a date which is less than two years after the date of the change of control, other than for cause, death or disability or terminated by the officer for good reason, DeCrane Aircraft is required to pay such executive a lump sum equal to his then salary plus average annual bonus over the last five years, equal to twenty four months compensation less the number of months elapsed from the date of the change of control to the employment termination date.

401(k) Retirement Plan

Substantially all of our full-time employees are eligible to participate in one of the 401(k) retirement plans we sponsor. The 401(k) plans allow employees as participants to defer, on a pre-tax basis, a portion of their salary and accumulate tax deferred earnings, as a retirement fund. The plans generally provide for a discretionary Company match of a percentage of the employee contribution up to a specified percentage of the employee’s salary. The full amount vested in a participant’s account will be

distributed to a participant following termination of employment, normal retirement or in the event of disability or death.

Incentive Plans

Our management incentive plan provides for the issuance of options to purchase the common stock of DeCrane Holdings as incentive compensation to designated executive personnel and other key employees of DeCrane Aircraft and its subsidiaries. The Compensation Committee of the Board of Directors of DeCrane Holdings administers the management incentive plan. The plan provides for the granting of options to purchase 356,257 common shares and expires in 2009. Substantially all of the options awarded become fully vested and exercisable eight years from the date of grant but vesting and exercise can be accelerated based upon future attainment of defined performance criteria. As of December 31, 2003, 34% of the options granted pursuant to the plan are vested and exercisable. We believe the per share exercise price of the options granted approximated the fair market value of the underlying common stock on each of the grant dates.

From time-to-time, we have permitted designated executive personnel and other key employees to purchase shares of common stock of DeCrane Holdings. Prior to the July 30, 2002 enactment of the Sarbanes-Oxley Act of 2002, a portion of the purchase price was in certain instances, loaned to the participants by DeCrane Aircraft. This arrangement was made available to persons and in amounts determined by the Compensation Committee of the Board of Directors. In December 1999, management purchased 171,295 shares of DeCrane Holdings common stock for $23.00 per share. The total purchase price was $3.9 million, of which one-half was paid in cash and one-half was loaned to management by DeCrane Aircraft with interest at applicable federal rates. During 2000, an additional 19,707 shares of DeCrane Holdings common stock was purchased by employees at $23.00 per share, which was paid in cash. Subsequent to the July 30, 2002 enactment of the Sarbanes-Oxley Act, we have discontinued making new loans to participants as mandated by the Act. Loans originated prior to and outstanding as of the effective date of the Act will be repaid in accordance with their terms, as permitted by the Act.

Upon termination of employment of any purchaser by us without cause, DeCrane Holdings has the right to purchase, and the purchaser has the right to cause DeCrane Holdings to purchase, such purchased stock at its then fair market value or, if we terminate the purchaser with cause or the purchaser terminates employment, the purchase price is the lower of $23.00 per share or its then fair market value.

During the year ended December 31, 2003, several DeCrane Aircraft management members surrendered 107,330 shares. In accordance with the terms of notes evidencing the loans, DeCrane Aircraft canceled the notes.

Our cash incentive bonus plan provides for the allocation of a bonus pool each year for incentive compensation to designated executive personnel and certain other employees of DeCrane Aircraft and its subsidiaries. The bonus pool, which is approved by the compensation committee, is adjusted each year based on the achievement of certain financial measures, including Adjusted EBITDA, as defined, generated by the relevant participant’s operating unit. Bonus payments are generally made in the quarter following the end of the year or period to which they pertain.

Deferred Compensation Plan

From December 1999 through December 2002, we had a deferred compensation plan in which certain designated executive officers and key employees were permitted to defer a portion of their compensation earned. DeCrane Aircraft invested amounts deferred and participants were fully vested in the amounts representing the fair market value of their investment accounts. We made no contributions on behalf of the participants and the invested assets are subject to the claims of our general creditors. The

plan was terminated in January 2003 and the fair market values of the individual investment accounts on the termination date were distributed to the individual participants.

Directors

Selection of Directors and Term of Office

DLJ Merchant Banking Partners II, L.P. is entitled to select all members of the Board of Directors of DeCrane Holdings and DeCrane Aircraft as described in “Certain Relationships and Related Transactions—Investors’ Agreement.” At least one of such directors selected by DLJ Merchant Banking on each board must be an independent director as defined in the agreement. Mr. Suter is an independent director. All directors hold office until their successor is designated and qualified.

Directors’ Compensation

The directors of DeCrane Holdings and DeCrane Aircraft generally do not receive annual fees or fees for attending meetings of the Board of Directors or committees thereof. However, Albert E. Suter, an independent director not affiliated with any investor in DeCrane Holdings, receives a director’s fee of $50,000 per year. In addition, the Board of Directors of DeCrane Holdings authorized the issuance of options to purchase 7,500 shares of DeCrane Holdings common stock to Mr. Suter under the same terms as the management incentive plan. See “Certain Relationships and Related Transactions—Transactions with Management and Others–Recent Transactions” for additional information. Also, Mr. Suter is reimbursed for out-of-pocket expenses. We expect to continue these policies.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Security Ownership of Certain Beneficial Owners and Management

DeCrane Holdings

As of March 15, 2004, DeCrane Holdings has the following securities issued and outstanding:

• 4,009,297 shares of common stock, which is owned by 31 stockholders; and

• 342,417 shares of non-voting 14% Senior Redeemable Exchangeable Preferred Stock Due 2009, which is owned by 18 stockholders.

The following table sets forth the beneficial ownership of DeCrane Holdings’ voting and non-voting securities as of March 15, 2004 by its principal owners and its executive officers and directors.

	Common Stock (2)			14% Senior Redeemable Preferred Stock
	Number of Shares, Partially Diluted	Percentage		14% Senior Redeemable Preferred Stock
Name of Beneficial Owner (1)	Number of Shares, Partially Diluted	Percentage		Number of Shares	Percentage

DLJ Merchant Banking Partners II, L.P. and affiliates (3)	4,179,530	97.7	%	340,000	99.3	%
Eleven Madison Avenue, New York, NY 10010

Thompson Dean (4)	—	—		—	—
c/o Credit Suisse First Boston
Eleven Madison Avenue, New York, NY 10010

Susan C. Schnabel (4)	—	—		—	—
c/o Credit Suisse First Boston
Eleven Madison Avenue, New York, NY 10010

Albert E. Suter (5)	8,704	*		—	—

R. Jack DeCrane (6)	36,253	*		—	—

Richard J. Kaplan (7)	10,812	*		—	—

James E. Mann (8)	974	*		—	—

Robert G. Martin (9)	6,944	*		—	—

Jeffrey A. Nerland (10)	5,291	*		—	—

All directors and named executive officers as a group (eight persons)	68,978	1.7	%	—	—

* Less than 1.0%

(1) Each person who has the power to vote and direct the disposition of shares is deemed to be a beneficial owner of those shares.

(2) The common stock columns reflect the number of shares owned and the total percentage ownership in the manner required by Securities and Exchange Commission rules. The entries for each holder assumes, if applicable, that the particular holder, and no one else, fully exercises all rights under warrants to purchase common stock and common stock which may be acquired upon the exercise of stock options and which are exercisable, or will be exercisable, prior to 60 days from March 15, 2004.

(3) Reflects 3,913,044 shares of common stock, warrants to purchase an additional 266,486 shares of common stock and preferred stock held directly by DLJ Merchant Banking Partners II, L.P. and the following affiliated investors:

• DLJ Diversified Partners, L.P.

• DLJ Diversified Partners-A, L.P.

• DLJ EAB Partners, L.P.

• DLJ ESC II, L.P.

• DLJ First ESC L.P.

• DLJ Investment Partners, L.P.

• DLJ Investment Partners II, L.P.

• DLJ Merchant Banking Partners II-A, L.P.

• DLJ Millennium Partners, L.P.

• DLJ Millennium Partners-A, L.P.

• DLJ Offshore Partners II, C.V.

• DLJIP II Holdings, L.P.

• DLJMB Funding II, Inc.

• MBP II Plan Investors

• UK Investment Plan 1997 Partners, Inc.

The address of each of the investors is Eleven Madison Avenue, New York, New York 10010.

(4) Mr. Dean and Ms. Schnabel are officers of DLJ Merchant Banking, Inc., an affiliate of DLJ Merchant Banking Partners II, L.P. and directors of DeCrane Aircraft. The DLJ entities are affiliates of, and commonly collectively referred to as, Credit Suisse First Boston. See “Item 13. Certain Relationships and Related Transactions—Transactions with Management and Others” for additional information. The share data shown for these individuals excludes shares shown as held by the DLJ affiliates separately listed in this table; Mr. Dean and Ms. Schnabel disclaim beneficial ownership of those shares.

(5) Includes 2,500 shares that may be acquired upon the exercise of stock options that are exercisable or will become exercisable prior to 60 days from March 15, 2004.

(6) Includes 36,253 shares that may be acquired upon the exercise of stock options that are exercisable or will become exercisable prior to 60 days from March 15, 2004.

(7) Includes 10,812 shares that may be acquired upon the exercise of stock options that are exercisable or will become exercisable prior to 60 days from March 15, 2004.

(8) Includes 974 shares that may be acquired upon the exercise of stock options that are exercisable or will become exercisable prior to 60 days from March 15, 2004.

(9) Includes 6,944 shares that may be acquired upon the exercise of stock options that are exercisable or will become exercisable prior to 60 days from March 15, 2004.

(10) Includes 5,291 shares that may be acquired upon the exercise of stock options that are exercisable or will become exercisable prior to 60 days from March 15, 2004.

DeCrane Aircraft

As of March 15, 2004, DeCrane Aircraft has the following securities issued and outstanding:

• 100 shares of common stock, which are owned by one stockholder; and

• 250,000 shares of non-voting 16% Senior Redeemable Exchangeable Preferred Stock Due 2009, which are owned by seven stockholders.

The following table sets forth the beneficial ownership of DeCrane Aircraft’s voting and non-voting securities as of March 15, 2004 by its principal owners and its executive officers and directors.

	Common Stock (2)			16% Senior Redeemable Preferred Stock
	Number of Shares, Partially Diluted			16% Senior Redeemable Preferred Stock
Name of Beneficial Owner (1)	Number of Shares, Partially Diluted	Percentage		Number of Shares	Percentage

DeCrane Holdings Co.	100	100.0	%	—	—
c/o DLJ Merchant Banking Partners II, L.P.
Eleven Madison Avenue, New York, NY 10010

DLJ Merchant Banking Partners II, L.P. affiliates (3) Eleven Madison Avenue, New York, NY 10010	—	—		200,000	80.0	%

Thompson Dean (4)	—	—		—	—
c/o Credit Suisse First Boston
Eleven Madison Avenue, New York, NY 10010

Susan C. Schnabel (4)	—	—		—	—
c/o Credit Suisse First Boston
Eleven Madison Avenue, New York, NY 10010

Putnam Investment Management, Inc. and affiliates (5)	—	—		29,000	11.6	%
One Post Office Square, Boston, MA 02109

Neon Capital Limited.	—	—		21,000	8.4	%
c/o Deutsche Bank (Cayman) Limited
P.O. Box 1984, George Town
Cayman Islands, British West Indies

Albert E. Suter	—	—		—	—

R. Jack DeCrane	—	—		—	—

Richard J. Kaplan	—	—		—	—

James E. Mann	—	—		—	—

Robert G. Martin	—	—		—	—

Jeffrey A. Nerland	—	—		—	—

All directors and named executive officers as a group (eight persons)	—	—		—	—

(1) Each person who has the power to vote and direct the disposition of shares is deemed to be a beneficial owner of those shares.

(3) Reflects preferred stock held by the following investors affiliated with DLJ Merchant Banking Partners II, L.P.:

• DLJ Investment Partners, L.P.

• DLJ Investment Partners II, L.P.

• DLJIP II Holdings, L.P.

The address of each of the investors is Eleven Madison Avenue, New York, New York 10010.

(4) Mr. Dean and Ms. Schnabel are officers of DLJ Merchant Banking, Inc., an affiliate of DLJ Merchant Banking Partners II, L.P. and directors of DeCrane Holdings Co. The DLJ entities are affiliates of, and commonly collectively referred to as, Credit Suisse First Boston. See “Item 13. Certain Relationships and Related Transactions—Transactions with Management and Others” for additional information. The share data shown for these individuals excludes shares shown as held by the DLJ affiliates and DeCrane Holdings Co. separately listed in this table; Mr. Dean and Ms. Schnabel disclaim beneficial ownership of those shares.

(5) Reflects preferred stock held by the following investors related to Putnam Investment Management, Inc.:

• Putnam Fund Trust - Putnam High Yield Trust II

• Putnam High Yield Trust

• Putnam Variable Trust – Putnam VT High Yield Fund

The address of each of the investors is One Post Office Square, Boston, MA 02109.

Securities Authorized for Issuance Under Equity Compensation Plans

We have a Management Incentive Stock Option Plan under which shares of DeCrane Holdings common stock are authorized for issuance to employees and directors in exchange for their services. In 1999, we also granted DeCrane Holdings incentive common stock options to non-employees in exchange for consulting and advisory services. Our Management Incentive Stock Option Plan and the stock options

awarded to non-employees are approved by our security holders. The following table provides aggregate information regarding the shares of DeCrane Holdings common stock that may be issued upon the exercise of the options as of December 31, 2003.

Plan Category	Number of Securities to be Issued Upon Exercise of Outstanding Options, Warrants and Rights	Weighted-Average Exercise Price of Outstanding Options, Warrants and Rights		Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans (Excluding Securities Reflected in Column (1))

Equity compensation plans approved by security holders:
Management Incentive Stock Option Plan	239,515	$	24.15	107,490
Incentive stock options granted to non-employees	44,612	23.00		—
Equity compensation plans not approved by security holders	—	—		—
Total	284,127	23.97		107,490

The provisions of our Management Incentive Stock Option Plan and the terms of the options granted to non-employees are described in Note 15 accompanying our financial statements included in this report.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Acquisition of Donaldson, Lufkin & Jenrette, Inc. by Credit Suisse Group

DLJ Merchant Banking Partners, II, L.P. is an affiliate of Donaldson, Lufkin & Jenrette, Inc. In November 2000, Credit Suisse Group and its Credit Suisse First Boston, Inc. subsidiary acquired Donaldson, Lufkin & Jenrette, Inc. Upon completion of the acquisition, Donaldson, Lufkin & Jenrette, Inc. was renamed Credit Suisse First Boston (USA), Inc. The combined operations are commonly referred to collectively as Credit Suisse First Boston or CSFB.

Transactions with Management and Others

Arrangements with Other CSFB / DLJ Affiliates

Credit Suisse First Boston, as successor to DLJ Capital Funding, Inc., receives customary fees and reimbursement of expenses in connection with the arrangement, syndication and administration of our first-lien credit facility, second-lien debt and as lenders thereunder. Credit Suisse First Boston LLC is the sole market-maker for our subordinated notes. In addition, DeCrane Aircraft is obligated to pay CSFB Corporation an annual advisory fee, currently in the amount of $350,000 per year. We may from time to time enter into other investment banking relationships with CSFB Corporation or one of its affiliates pursuant to which they will receive customary fees and will be entitled to reimbursement for all reasonable disbursements and out-of-pocket expenses incurred in connection therewith. We expect that any such arrangement will include provisions for the indemnification of CSFB Corporation against liabilities, including liabilities under the federal securities laws.

Investors’ Agreement

Investors owing 96.6% of DeCrane Holdings’ issued and outstanding common stock and common stock warrants and options, all of DeCrane Holdings’ preferred stock and all of DeCrane Aircraft’s

preferred and common stock, have entered into an Amended and Restated Investors’ Agreement, dated October 6, 2000, among DeCrane Holdings Co., DLJ Merchant Banking Partners II, L.P. and affiliated funds and entities, Putnam Investment Management, Inc. and affiliated funds and entities and all management investors. Investors who own DeCrane Holdings’ warrants to purchase 159,794 shares of common stock are not parties to the Investors’ Agreement. The agreement provides that:

• The parties to the agreement shall vote their shares to cause DLJ Merchant Banking Partners, II, L.P. to select all members of the Board of Directors of DeCrane Holdings and DeCrane Aircraft and at least one of such directors on each board shall be an independent director.

• Transfers of the shares by the parties to the agreement are restricted.

• Parties to the agreement may participate in some specific kinds of sales of shares by DLJ affiliates.

• DLJ affiliates may require the other parties to the agreement to sell shares of DeCrane Holdings’ common stock in some cases should the DLJ affiliates choose to sell any such shares owned by them.

• The DLJ affiliates may request six demand registrations with respect to all or any of the DeCrane Holdings common stock, preferred stock and Class A warrants to purchase 155,000 common shares held by those affiliates, which are immediately exercisable subject to customary deferral and cutback provisions.

• The holders of Class B warrants to purchase 139,357 shares of DeCrane Holdings common stock may request two demand registrations together with all or any common stock held by them, which are immediately exercisable subject to customary deferral and cutback provisions.

• The parties to the agreement are entitled to unlimited piggyback registration rights, subject to customary cutback provisions, and excluding registrations of shares issuable in connection with any employee stock options, employee benefit plan or an acquisition.

• DeCrane Holdings will indemnify the stockholders against some liabilities and expenses, including liabilities under the Securities Act.

• Any person acquiring shares of common stock or preferred stock who is required by the terms of the Investors’ Agreement or any employment agreement or stock purchase, option, stock option or other compensation plan to become a party thereto shall execute an agreement to become bound by the Investors’ Agreement.

Each DeCrane Holdings’ Class A Warrant entitles the holder to purchase one share of common stock at an exercise price of not less than $0.01 per share subject to customary antidilution provisions and other customary terms. The warrants are exercisable at any time prior to 5:00 p.m. New York City time on August 28, 2009, subject to applicable federal and state securities laws.

Each DeCrane Holdings’ Class B Warrant entitles the holder to purchase one share of common stock at an exercise price of not less than $0.01 per share subject to customary antidilution provisions and other customary terms. The warrants are exercisable at any time prior to 5:00 p.m. New York City time on June 30, 2010, subject to applicable federal and state securities laws.

Transactions During 2003 and 2004

Securities and Exchange Commission rules require we briefly describe transactions, or series of similar transactions, with specified persons (as defined in the rules) and involving amounts exceeding $60,000, which have occurred since January 1, 2003, the beginning of our most recent fiscal year. These

transactions are briefly described below and are also described in the notes accompanying our financial statements included in this report.

Year Ended December 31, 2003

The following transactions occurred during the year ended December 31, 2003.

• DeCrane Aircraft sold its Specialty Avionics Group on May 23, 2003. CSFB Corporation served as DeCrane Aircraft’s financial advisors for the transaction and received customary fees and reimbursement of expenses in connection with the transaction.

• DeCrane Aircraft amended its first-lien credit facility in connection with the sale of its Specialty Avionics Group in March 2003 and in connection with issuance of second-lien term debt in December 2003. Credit Suisse First Boston received customary fees and reimbursement of expenses in connection with obtaining these amendments. Credit Suisse First Boston was also paid an annual fee for serving as administrative agent for the first-lien credit facility and second-lien term debt.

• DeCrane Aircraft paid Credit Suisse First Boston a fee for arranging the syndication of its second-lien term debt in December 2003.

• CSFB Corporation received an annual advisory fee.

CSFB and affiliated funds and entities were paid an aggregate of $9.7 million in connection with the above transactions.

January 1, 2004 to the Present

The following transactions occurred during the period from January 1, 2004 to the date of this report:

• CSFB Corporation has received $87,500 of its annual advisory fee for 2004.

• CSFB Corporation has also received $375,000 for additional financial advisory services.

Indebtedness of Executive Officers and Directors

Securities and Exchange Commission rules require we disclose indebtedness owed to us by our executive officers and directors that individually exceeded $60,000 at any time during the year ended December 31, 2003.

All indebtedness set forth below results from purchases of DeCrane Holdings common stock in transactions consummated prior to the July 30, 2002 enactment of the Sarbanes-Oxley Act of 2002 and was payable to DeCrane Aircraft. Beginning July 30, 2002, we no longer provide loans to directors or executive officers as mandated by the Act. The indebtedness, plus accrued interest, is collateralized by shares of DeCrane Holdings stock. On December 29, 2003, the executive officers listed in the table surrendered the shares of stock collateralizing the loans. In accordance with the terms of notes evidencing the loans, DeCrane Aircraft canceled the notes. See “Item 10. Directors and Executive Officers of the Registrant” for information regarding each individual’s relationship with DeCrane Aircraft and DeCrane Holdings.

The table sets forth the maximum amount of indebtedness during the year ended December 31, 2003. None of the indebtedness remains as of December 31, 2003.

	Number of Shares			Maximum Indebtedness to DeCrane Aircraft During the Year Ended December 31, 2003
Name	Held as Collateral (1)	Interest Rate (2)		Principal (3)		Accrued Interest (4)		Total

R. Jack DeCrane	56,521	5.74	%	$	649,991	$	163,992	$	813,983
Richard J. Kaplan	21,739	5.74		249,998		63,074		313,072
James E. Mann	4,347	5.74		49,990		12,613		62,603
Robert G. Martin	4,347	5.74		49,990		12,613		62,603
Jeffrey A. Nerland	6,521	5.74		74,991		18,920		93,911

(1) Reflects the number of shares of DeCrane Holdings common stock held by DeCrane Aircraft as collateral for the loans.

(2) Reflects the applicable federal rate of interest charged on the loans. Interest is compounded annually.

(3) Reflects the original principal amount of the loans.

(4) Reflects accrued interest payable through December 29, 2003, the date the stock was surrendered.

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES

Principal Audit and Non-Audit Fees and Services

The aggregate fees billed by PricewaterhouseCoopers LLP (“PWC”), our independent accountants, in fiscal years 2003 and 2002 were as follows:

	Year Ended December 31,
(In thousands)	2003		2002

Audit fees (1)	$	383	$	253
Audit related fees (2)	358		181
Tax fees (3)	479		206
All other fees	—		—
Consolidated totals	$	1,220	$	640

(1) Reflects fees for the audits of our annual financial statements included in our Form 10-K’s and the review of the quarterly financial statements included in our Form 10-Q’s for fiscal years 2003 and 2002.

(2) Includes fees for due diligence related to acquisitions, stand-alone audits of acquisition targets and dispositions, employee benefit plan audits and consents related to SEC filings.

(3) Reflects fees for federal, state, local and foreign tax compliance, advisory (including due diligence related to acquisitions and dispositions) and planning services.

The Audit Committee has concluded the provision of the non-audit services listed above is compatible with maintaining the independence of PricewaterhouseCoopers LLP.

Pre-approval Policies and Procedures

The Board of Directors, acting as the audit committee, has adopted policies and procedures for pre-approving all non-audit work performed by PWC after January 1, 2003. Specifically, the policies and procedures prohibit PWC from performing any services for the Company or its subsidiaries without the

prior approval of the audit committee, except that the audit committee pre-approved the use of PWC for tax compliance, advisory and planning services.

All of the services provided by PWC in 2003 were approved by the audit committee pursuant to the approval policies described above. None of such services were approved pursuant to the procedures described in Rule 2-01(c)(7)(i)(C) of Regulation S-X, which waives the general requirement for pre-approval in certain circumstances.

PART IV

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

(a) List of Documents Filed as Part of this Report

1. Financial Statements

Our consolidated financial statements filed with this report are included in a separate section at the end of this report and are listed in an index on page F-1.

2. Financial Statement Schedules

Our consolidated financial statement schedules filed with this report are included in a separate section at the end of this report and are listed in an index on page F-1.

3. Exhibits

The following exhibits are filed as part of this report.

Exhibit Number	Filing Reference	Exhibit Description

2.1	(17)	Stock Purchase Agreement dated as of March 14, 2003 among Wings Holdings, Inc. and DeCrane Aircraft Holdings, Inc. and DeCrane Holdings Co. relating to the purchase and sale of 100% of the Common Stock of Avtech Corporation and Tri-Star Electronics International, Inc. and 100% of the Membership Interest of Aerospace Display Systems, LLC

3.1.1	(1)	Certificate of Incorporation of DeCrane Holdings Co.

3.1.2	*	Bylaws of DeCrane Holdings Co., as amended on February 2, 2004

3.1.2.1	(10)	Certificate of Amendment of Certificate of Incorporation of DeCrane Holdings Co. dated May 8, 2000

3.2.1	(1)	Certificate of Incorporation of DeCrane Aircraft Holdings, Inc.

3.2.1.1	(14)	Certificate of Amendment of Certificate of Incorporation of DeCrane Aircraft Holdings, Inc. dated October 17, 2001

3.2.2	*	Bylaws of DeCrane Aircraft Holdings, Inc., as amended on February 2, 2004

3.3.1	(1)	Articles of Incorporation of Audio International, Inc.

3.3.2	(1)	Amended & Restated Bylaws of Audio International, Inc.

3.4.1	(1)	Articles of Incorporation of Hollingsead International, Inc.

3.4.2	(1)	Bylaws of Hollingsead International Inc.

Exhibit Number	Filing Reference	Exhibit Description

3.5.1	*	Certificate of Formation and Certificate of Merger for PATS Aircraft, LLC

3.5.2	*	Limited Liability Company Operating Agreement for PATS Aircraft, LLC

3.6.1	(3)	Articles of Incorporation of PPI Holdings, Inc.

3.6.2	(3)	Bylaws of PPI Holdings, Inc.

3.7.1	(3)	Articles of Incorporation of Precision Pattern, Inc.

3.7.2	(3)	Bylaws of Precision Pattern, Inc.

3.8.1	(9)	Certificate of Formation and Certificate of Merger for Custom Woodwork & Plastics, LLC

3.8.2	(9)	Limited Liability Company Operating Agreement for Custom Woodwork & Plastics, LLC

3.9.1	(4)	Articles of Incorporation of PCI Newco, Inc. (formerly PCI Acquisition Co., Inc.)

3.9.1.1	(15)	Certificate of Amendment of Articles of Incorporation of PCI Acquisition Co., Inc. (changing its name to PCI Newco, Inc.)

3.9.2	(4)	Bylaws of PCI Newco, Inc. (formerly PCI Acquisition Co., Inc.)

3.10.1	(5)	Articles of Incorporation DAH-IP Holdings, Inc.

3.10.2	(5)	Bylaws of DAH-IP Holdings, Inc.

3.11.1	(5)	Articles of Incorporation of DAH-IP Infinity, Inc.

3.11.2	(5)	Bylaws of DAH-IP Infinity, Inc.

3.12.1	(5)	Certificate of Limited Partnership of The Infinity Partners, LTD. (formerly DAH-IP Acquisition Co., L.P.)

3.12.1.1	(15)	Certificate of Amendment of the Certificate of Limited Partnership of DAH-IP Acquisition Co., L.P. (changing its name to The Infinity Partners, LTD.)

3.12.2	(5)	Limited Partnership Agreement of The Infinity Partners, LTD. (formerly DAH-IP Acquisition Co., L.P.) among DAH-IP Holdings, Inc., the General Partner, and DeCrane Aircraft Holdings, Inc., the Limited Partner

3.12.3	(5)	Assignment of Partnership Interest in The Infinity Partners, LTD. (formerly DAH-IP Acquisition Co., L.P.) by DeCrane Aircraft Holdings, Inc. to DAH-IP Infinity, Inc.

3.13.1	(7)	Certificate of Formation and Certificate of Amendment of Carl F. Booth & Co., LLC

3.13.2	(7)	Limited Liability Company Agreement of Carl F. Booth & Co., LLC

3.14.1	(9)	Restated Articles of Incorporation of ERDA, Inc.

3.14.1.1	(16)	Articles of Amendment amending the Restated Articles of Incorporation of ERDA, Inc. (changing its name to DeCrane Aircraft Seating Company, Inc.)

3.14.2	(9)	Bylaws of ERDA, Inc. (formerly ERDA Acquisition Co., Inc.)

3.15.1	(16)	Certificate of Formation of DeCrane Cabin Interiors, LLC

3.15.2	(16)	Limited Liability Company Agreement of DeCrane Cabin Interiors, LLC

3.16.1	*	Certificate of Incorporation of DeCrane Cabin Interiors – Canada, Inc.

Exhibit Number	Filing Reference	Exhibit Description

3.16.2	*	Bylaws of DeCrane Cabin Interiors – Canada, Inc.

4.1	(1)	Indenture dated October 5, 1998 between DeCrane Aircraft and State Street Bank and Trust Company

4.1.1	*	Supplemental Indenture dated December 11, 2003 among PATS Aircraft, LLC, the other guarantors under the Indenture, DeCrane Aircraft and State Street Bank and Trust Company

4.1.2	(2)	Supplemental Indenture dated April 23, 1999 among PPI Holdings, Inc., Precision Pattern, Inc., the other guarantors under the Indenture, DeCrane Aircraft and State Street Bank and Trust Company

4.1.3	(11)	Supplemental Indenture dated August 5, 1999 among CWP Acquisition, Inc. d/b/a Custom Woodwork & Plastics, Inc., the other guarantors under the Indenture, DeCrane Aircraft and State Street Bank and Trust Company

4.1.4	(11)	Supplemental Indenture dated October 6, 1999 among PCI Acquisition Co., Inc. d/b/a PCI Newco, Inc., the other guarantors under the Indenture, DeCrane Aircraft and State Street Bank and Trust Company

4.1.5	(11)	Supplemental Indenture dated December 17, 1999 among DAH-IP Acquisition, L.P. d/b/a Infinity Partners, L.P., DAH-IP Holdings, Inc., DAH-IP Infinity, Inc., the other guarantors under the Indenture, DeCrane Aircraft and State Street Bank and Trust Company

4.1.6	(11)	Supplemental Indenture dated May 11, 2000 among Booth Acquisition, LLC, the other guarantors under the Indenture, DeCrane Aircraft and State Street Bank and Trust Company

4.1.7	(11)	Supplemental Indenture dated June 30, 2000 among ERDA, Inc., the other guarantors under the Indenture, DeCrane Aircraft and State Street Bank and Trust Company

4.1.8	(18)	Supplemental Indenture dated June 17, 2003 among DeCrane Cabin Interiors, LLC, the other guarantors under the Indenture, DeCrane Aircraft and State Street Bank and Trust Company

4.1.9	*	Supplemental Indenture dated January 1, 2004 among DeCrane Cabin Interiors – Canada, Inc., the other guarantors under the Indenture, DeCrane Aircraft and State Street Bank and Trust Company

4.3	(1)	Form of Class A Warrant for the Purchase of 155,000 Shares of Common Stock of DeCrane Holdings Co. at an exercise price of $.01 per share

4.3.1	(9)	Form of Class B Warrant for the Purchase of 139,357 Shares of Common Stock of DeCrane Holdings Co. at an exercise price of $.01 per share

4.3.2	(15)	Warrant Agreement dated October 5, 1998 for the Purchase of 155,000 Shares of Common of DeCrane Holdings Co. at an exercise price of $23.00 per share

4.4	(1)	Warrant Registration Rights Agreement – DeCrane Holdings Co.

4.5	(1a)	Form of DeCrane Aircraft 12% Senior Subordinated Notes due 2008

4.5	(15)	Certificate of Amendment amending the Certificate of Designations, Preferences and Rights of 14% Senior Redeemable Exchangeable Preferred Stock due 2008, effective October 2, 1998

Exhibit Number	Filing Reference	Exhibit Description

4.5.1	(9)	Amendment No. 1 to the Certificate of Designations, Preferences and Rights of 14% Senior Redeemable Exchangeable Preferred Stock due 2008, effective June 29, 2000

4.6	(9a)	Certificate of Designations, Preferences and Rights of 16% Senior Redeemable Exchangeable Preferred Stock due 2009

4.6.1	(11a)	Amendment to the Certificate of Designations, Preferences and Rights of 16% Senior Redeemable Exchangeable Preferred Stock due 2009 dated October 5, 2000

4.7	(9a)	Senior Preferred Stock Registration Rights Agreement dated as of June 30, 2000 among DeCrane Aircraft Holdings, Inc. and the Holders of Senior Preferred Stock

4.7.1	(11a)	Amendment No. 1 to the Senior Preferred Stock Registration Rights Agreement dated as of June 30, 2000 among DeCrane Aircraft Holdings, Inc. and the Holders of Senior Preferred Stock dated October 6, 2000

10.1	(9)	Securities Purchase Agreement dated as of June 30, 2000 among DeCrane Aircraft Holdings, Inc., DeCrane Holdings Co. and the purchasers named therein

10.2	(11)	Amended and Restated Investors’ Agreement dated as of October 6, 2000 by and among DeCrane Holdings Co., DeCrane Aircraft Holdings, Inc. and the stockholders named therein

10.5	(1)	Tax Sharing Agreement dated March 15, 1993 between DeCrane Aircraft and several subsidiaries

10.6 **	(1)	Employment Agreement dated July 17, 1998 between DeCrane Aircraft Holdings, Inc. and R. Jack DeCrane

10.6.1 **	(12)	First Amendment to Employment Agreement dated May 5, 2000 between DeCrane Aircraft Holdings, Inc. and R. Jack DeCrane

10.7 **	(1)	401(k) Salary Reduction Non-Standardized Adoption Agreement dated April 30, 1992 between the Company and The Lincoln National Life Insurance Company

10.8	(1)	Form of Subscription Agreement for DeCrane Holdings Co. common and preferred stock by certain members of Global Technology Partners LLC

10.10	(1)	Credit Agreement dated August 28, 1998 by and among DeCrane Aircraft Holdings, Inc. (successor by merger to DeCrane Finance Co.) and DLJ Capital Funding, Inc.

10.10.1	(1)	First Amendment to Credit Agreement dated January 22, 1999

10.10.2	(6)	Second Amended and Restated Credit Agreement dated as of December 17, 1999 among DeCrane Aircraft Holdings, Inc., the lenders listed therein, DLJ Capital Funding, Inc., as syndication agent, and Bank One NA, as administrative agent

10.10.3	(8)	Third Amended and Restated Credit Agreement dated as of May 11, 2000 among DeCrane Aircraft Holdings, Inc., the lenders listed therein, DLJ Capital Funding, Inc., as syndication agent, and Bank One NA, as administrative agent

Exhibit Number	Filing Reference	Exhibit Description

10.10.3.1	(11)	First Amendment to the Third Amended and Restated Credit Agreement dated as of June 30, 2000 among DeCrane Aircraft Holdings, Inc., the lenders listed therein, DLJ Capital Funding, Inc., as syndication agent, and Bank One NA, as administrative agent

10.10.4	(13)	Increased Commitments Agreement, dated as of April 27, 2001, pursuant to Third Amended and Restated Credit Agreement, dated as of May 11, 2000, as amended by the First Amendment to the Third Amended and Restated Credit Agreement, dated as of June 30, 2000

10.10.5	(15)	Second Amendment to the Third Amended and Restated Credit Agreement dated as of March 19, 2002 among DeCrane Aircraft Holdings, Inc., the lenders listed therein, Credit Suisse First Boston (as successor to DLJ Capital Funding, Inc.) as syndication agent, and Bank One NA, as administrative agent

10.10.6	(17)	Third Amendment to the Third Amended and Restated Credit Agreement dated as of March 31, 2003 among DeCrane Aircraft Holdings, Inc., the lenders listed therein, Credit Suisse First Boston (as successor to DLJ Capital Funding, Inc.) as syndication agent, and Bank One NA, as administrative agent

10.10.7	*	Fourth Amendment to the Third Amended and Restated Credit Agreement dated as of December 10, 2003 among DeCrane Aircraft Holdings, Inc., the lenders listed therein and Credit Suisse First Boston (as successor to DLJ Capital Funding, Inc.), as syndication and administrative agent for the lenders

10.11	(1)	General Terms Agreement between The Boeing Company and PATS, Inc. dated February 17, 1998

10.11.1	(1)	Special Business Provisions between The Boeing Company and PATS, Inc. dated February 17, 1998

10.11.2	(1)	Letter Agreement between The Boeing Company and DeCrane Aircraft Holdings, Inc. dated January 15, 1999

10.11.3	(19)	Addendum 6-5723-03-064 to the Special Business Provisions between The Boeing Company and PATS, Inc. dated April 16, 2003

10.12	*	Credit Agreement dated as of December 22, 2003 among DeCrane Aircraft Holdings, Inc., the lenders listed therein and Credit Suisse First Boston (acting through its Cayman Islands Branch), as syndication and administrative agent for the lenders

10.19 **	(5)	Amended Management Incentive Stock Option Plan

10.20 **	(5)	Amended Stock Subscription Agreement

10.21 **	(5)	Amended Incentive Bonus Plan

10.23 **	(17)	Form of Change of Control Agreements between DeCrane Aircraft Holdings, Inc. and certain executives

18	*	Letter regarding change in accounting principle effective January 1, 2003

21.1	*	List of Subsidiaries of Registrant

31.1	*	Chief Executive Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

Exhibit Number	Filing Reference	Exhibit Description

31.2	*	Chief Financial Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32	*	Chief Executive Officer and Chief Financial Officer Certifications Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

* Filed herewith.

** Denotes management contracts and compensatory plans and arrangements required to be filed as exhibits to this report.

(1) Filed as an exhibit to our Registration Statement (Registration No. 333-70363) on Form S-1 (Amendment No. 1) filed with the Commission on March 3, 1999.

(1a) Filed as an exhibit to the Registration Statement of DeCrane Aircraft Holdings, Inc. (Registration No. 333-70365) on Form S-1 (Amendment No. 1) filed with the Commission on March 3, 1999 and incorporated herein by reference.

(2) Filed as an exhibit to our Registration Statement (Registration No. 333-70363) on Form S-1 (Amendment No. 2) filed with the Commission on April 23, 1999.

(3) Filed as an exhibit to our Registration Statement (Registration No. 333-70363) on Form S-1 (Amendment No. 3) filed with the Commission on May 6, 1999.

(4) Filed as an exhibit to our Form 8-K dated August 5, 1999 filed with the Commission on October 19, 1999.

(5) Filed as an exhibit to our Form 8-K dated December 17, 1999 filed with the Commission on December 31, 1999.

(6) Filed as an exhibit to our Form 10-K dated December 31, 1999 filed with the Commission on March 30, 2000.

(7) Filed as an exhibit to our Form 8-K dated May 11, 2000 filed with the Commission on May 25, 2000.

(8) Filed as an exhibit to our Form 8-K (Amendment No. 1) dated May 11, 2000 filed with the Commission on June 16, 2000.

(9) Filed as an exhibit to our Form 8-K (Amendment No. 1) dated June 30, 2000 filed with the Commission on August 2, 2000.

(9a) Filed as an exhibit to the Form 8-K (Amendment No. 1) dated June 30, 2000 of DeCrane Aircraft Holdings, Inc. filed with the Commission on August 2, 2000 and incorporated herein by reference.

(10) Filed as an exhibit to our Form 10-Q dated June 30, 2000 filed with the Commission on August 14, 2000.

(11) Filed as an exhibit to our Form 10-Q dated September 30, 2000 filed with the Commission on November 14, 2000.

(11a) Filed as an exhibit to the Form 10-Q dated September 30, 2000 of DeCrane Aircraft Holdings, Inc. filed with the Commission on November 14, 2000 and incorporated herein by reference.

(12) Filed as an exhibit to our Form 10-K dated December 31, 2000 filed with the Commission on March 30, 2001.

(13) Filed as an exhibit to our Form 10-Q dated March 31, 2001 filed with the Commission on May 14, 2001.

(14) Filed as an exhibit to our Form 10-Q dated September 30, 2001 filed with the Commission on November 13, 2001.

(15) Filed as an exhibit to our Form 10-K dated December 31, 2001 filed with the Commission on March 27, 2002.

(16) Filed as an exhibit to our Form 10-Q dated March 31, 2002 filed with the Commission on May 13, 2002.

(17) Filed as an exhibit to our Form 10-K dated December 31, 2002 filed with the Commission on April 15, 2003.

(18) Filed as an exhibit to our Registration Statement (Registration No. 333-106381) on Form S-1 filed with Commission on June 23, 2003.

(19) Filed as an exhibit to our Registration Statement (Registration No. 333-106381) on Form S-1 (Amendment No. 1) filed with Commission on August 12, 2003.

(20) Filed as an exhibit to our Registration Statement (Registration No. 333-106381) on Form S-1 (Amendment No. 2) filed with Commission on September 18, 2003.

(b) Reports of Form 8-K Filed During the Quarter Ended December 31, 2003

On November 26, 2003 we filed a Form 8-K Current Report regarding the Company receiving commitments from financial institutions for an $80.0 million syndicated second-lien term loan.

On December 11, 2003 we filed a Form 8-K Current Report regarding the Company receiving requisite lender approval to permit the $80.0 million syndicated second-lien term loan.

On December 22, 2003 we filed a Form 8-K Current Report regarding the Company completing the $80.0 million syndicated second-lien term loan financing.

SIGNATURES

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

DECRANE HOLDINGS CO. (Registrant)

By:	/s/ R. Jack DeCrane	By:	/s/ Richard J. Kaplan
	R. Jack DeCrane		Richard J. Kaplan
	Chief Executive Officer		Chief Financial Officer and Assistant Secretary

Date:

March 25, 2004

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

By:	/s/ Thompson Dean	By:	/s/ R. Jack DeCrane
	Thompson Dean		R. Jack DeCrane
	Chairman of the Board of Directors		Director

By:	/s/ Richard J. Kaplan	By:	/s/ Susan C. Schnabel
	Richard J. Kaplan		Susan C. Schnabel
	Director		Director

By:	/s/ Albert E. Suter
	Albert E. Suter
	Director

Date:

March 25, 2004

Index to Consolidated Financial Statements and Financial Statement Schedules

Consolidated Financial Statements

Report of Independent Auditors

Consolidated Balance Sheets as of December 31, 2003 and 2002

Consolidated Statements of Operations for the years ended December 31, 2003, 2002 and 2001

Consolidated Statements of Stockholders’ Equity (Deficit) for the years ended December 31, 2003, 2002 and 2001

Consolidated Statements of Cash Flows for the years ended December 31, 2003, 2002 and 2001

Notes to Consolidated Financial Statements

Consolidated Financial Statement Schedule

For the years ended December 31, 2003, 2002 and 2001: II – Valuation and Qualifying Accounts

All other schedules are omitted because they are either not applicable or the required information is shown in the consolidated financial statements or notes thereto.

F-1

REPORT OF INDEPENDENT AUDITORS

To the Board of Directors and Stockholders of

DeCrane Holdings Co.

In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of DeCrane Holdings Co. and its subsidiary at December 31, 2003 and 2002, and the results of their operations and cash flows for each of the three years in the period ended December 31, 2003 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the accompanying index presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Company’s management; our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, 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.

As discussed in Note 1, the Company decided to discontinue the use of program accounting for the costs of products manufactured for delivery under production-type contacts in 2003. As a result, certain deferred program costs are no longer included in inventory commencing January 1, 2003.

As discussed in Note 7, in 2002 the Company adopted Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets.” Accordingly, the Company ceased amortizing goodwill as of January 1, 2002.

PRICEWATERHOUSECOOPERS LLP

Los Angeles, California

March 25, 2004

F-2

DECRANE HOLDINGS CO. AND SUBSIDIARY

Consolidated Balance Sheets

	December 31,
(In thousands, except share data)	2003			2002

Assets

Current assets:
Cash and cash equivalents	$	6,936		$	12,421
Accounts receivable, net	21,455			26,354
Inventories	42,981			59,300
Deferred income taxes	—			16,430
Prepaid expenses and other current assets	1,082			1,724
Assets of discontinued operations	—			160,741
Total current assets	72,454			276,970

Property and equipment, net	30,900			36,139
Goodwill	162,430			196,430
Other assets, principally intangibles, net	38,092			39,428
Total assets	$	303,876		$	548,967

Liabilities, Mandatorily Redeemable Preferred Stock and Stockholders’ Equity (Deficit)

Current liabilities:
Current portion of long-term debt	$	1,198		$	16,317
Accounts payable	15,462			13,055
Accrued liabilities	17,890			31,494
Liabilities of discontinued operations	—			19,928
Total current liabilities	34,550			80,794

Long-term debt	268,208			364,700
Deferred income taxes	—			27,077
Other long-term liabilities	5,464			7,364

Commitments and contingencies (Note 13)

Minority interest in preferred stock of subsidiary	40,835			34,081
Mandatorily redeemable preferred stock	71,402			62,222

Stockholders’ equity (deficit):
Undesignated preferred stock, $.01 par value, 1,140,000 shares authorized; none issued and outstanding as of December 31, 2003 and 2002	—			—
Common stock, $.01 par value, 10,000,000 shares authorized; 4,009,297 and 4,116,627 shares issued and outstanding as of December 31, 2003 and December 31, 2002, respectively	40			41
Additional paid-in capital	61,475			72,125
Notes receivable for shares sold	(1,268		)	(2,591		)
Accumulated deficit	(176,562		)	(96,485		)
Accumulated other comprehensive loss	(268		)	(361		)
Total stockholders’ equity (deficit)	(116,583		)	(27,271		)
Total liabilities, mandatorily redeemable preferred stock and stockholders’ equity (deficit)	$	303,876		$	548,967

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

F-3

DECRANE HOLDINGS CO. AND SUBSIDIARY

Consolidated Statements of Operations

	Year Ended December 31,
(In thousands)	2003			2002			2001

Revenues	$	170,109		$	229,841		$	272,112
Cost of sales	134,953			170,485			196,866

Gross profit	35,156			59,356			75,246

Operating expenses:
Selling, general and administrative expenses	24,896			40,262			44,731
Research and development expenses	10,440			56			698
Impairment of goodwill	34,000			—			8,583
Amortization of goodwill and other intangible assets	3,651			3,540			12,436
Total operating expenses	72,987			43,858			66,448

Income (loss) from operations	(37,831		)	15,498			8,798

Other expenses:
Interest expense	26,219			25,376			29,645
Minority interest in preferred stock of subsidiary	6,754			5,841			5,061
Loss on extinguishment of debt	1,439			—			—
Other expenses, net	945			505			634

Loss from continuing operations before income taxes	(73,188		)	(16,224		)	(26,542		)
Income tax benefit	13,496			3,621			3,933

Loss from continuing operations	(59,692		)	(12,603		)	(22,609		)

Income (loss) from discontinued operations, net of tax	(6,621		)	(41,396		)	3,546
Cumulative effect of change in accounting principle	(13,764		)	(17,828		)	—

Net loss	(80,077		)	(71,827		)	(19,063		)

Noncash preferred stock dividend accretion	(9,180		)	(7,999		)	(6,971		)

Net loss applicable to common stockholders	$	(89,257	)	$	(79,826	)	$	(26,034	)

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

F-4

DECRANE HOLDINGS CO. AND SUBSIDIARY

Consolidated Statements of Stockholders’ Equity

									Notes						Accumulated
						Additional			Receivable						Other
	Common Stock					Paid-in			For Shares			Accumulated			Comprehensive
(In thousands, except share data)	Shares		Amount			Capital			Sold			Deficit			Loss			Total

Balance, December 31, 2000	3,914,274		$	39		$	82,298		$	(2,552	)	$	(5,595	)	$	—		$	74,190

Comprehensive loss:
Net income	—		—			—			—			(19,063		)	—			(19,063		)
Unrealized loss on interest rate swap contract	—		—			—			—			—			(88		)	(88		)
																		(19,151		)

Noncash dividend accretion on preferred stock	—		—			(6,971		)	—			—			—			(6,971		)

Compensatory stock option expense	—		—			215			—			—			—			215

Notes receivable interest accrued	—		—			—			(116		)	—			—			(116		)

Balance, December 31, 2001	3,914,274		39			75,542			(2,668		)	(24,658		)	(88		)	48,167

Comprehensive loss:
Net loss	—		—			—			—			(71,827		)	—			(71,827		)
Unrealized loss on interest rate swap contract	—		—			—			—			—			(273		)	(273		)
																		(72,100		)

Sale of common stock	221,096		2			4,998			—			—			—			5,000

Repurchase of common stock, net of related note receivable repaid and tax benefit of options exercised	(18,743	)	—			(554		)	200			—			—			(354		)

Noncash dividend accretion on preferred stock	—		—			(7,999		)	—			—			—			(7,999		)

Compensatory stock option expense	—		—			138			—			—			—			138

Notes receivable interest accrued	—		—			—			(123		)	—			—			(123		)

Balance, December 31, 2002	4,116,627		41			72,125			(2,591		)	(96,485		)	(361		)	(27,271		)

Comprehensive income (loss):
Net loss	—		—			—			—			(80,077		)	—			(80,077		)
Unrealized gain on interest rate swap contract	—		—			—			—			—			93			93
																		(79,984		)

Common stock (collateral) surrendered and cancellation of the related notes	(107,330	)	(1		)	(1,470		)	1,471			—			—			—

Noncash dividend accretion on preferred stock	—		—			(9,180		)	—			—			—			(9,180		)

Notes receivable interest accrued	—		—			—			(148		)	—			—			(148		)

Balance, December 31, 2003	4,009,297		$	40		$	61,475		$	(1,268	)	$	(176,562	)	$	(268	)	$	(116,583	)

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

F-5

DECRANE HOLDINGS CO. AND SUBSIDIARY

Consolidated Statements of Cash Flows

	Year Ended December 31,
(In thousands)	2003			2002			2001

Cash flows from operating activities:
Net loss	$	(80,077	)	$	(71,827	)	$	(19,063	)
Adjustments to reconcile net loss to net cash provided by (used for) operating activities:
Cumulative effect of change in accounting principle	13,764			17,828			—
Net (income) loss from discontinued operations	6,621			41,396			(3,546		)
Minority interest in preferred stock of subsidiary	6,754			5,841			5,061
Loss on extinguishment of debt	1,439			—			—
Noncash portion of restructuring, asset impairment and other related charges	37,664			11,456			19,558
Depreciation and amortization	12,589			13,304			22,582
Deferred income taxes	(11,461		)	690			2,322
Other, net	331			110			389
Changes in assets and liabilities:
Accounts receivable	4,899			14,969			(5,508		)
Inventories	(518		)	(4,792		)	(10,427		)
Prepaid expenses and other assets	241			155			(2,126		)
Accounts payable	2,407			(1,458		)	409
Accrued liabilities	(13,496		)	(16,418		)	(7,321		)
Income taxes payable	(1,079		)	438			3
Other long-term liabilities	834			28			(400		)
Net cash provided by (used for) operating activities	(19,088		)	11,720			1,933

Cash flows from investing activities:
Net cash proceeds from sale of Specialty Avionics Group	132,223			—			—
Proceeds from sale of property and equipment	3,208			—			636
Capital expenditures	(4,797		)	(4,356		)	(10,191		)
Cash paid for acquisitions	(606		)	(5,890		)	(13,529		)
Net cash provided by (used for) investing activities	130,028			(10,246		)	(23,084		)

Cash flows from financing activities:
Debt borrowings:
First-lien term debt	—			—			20,000
Second-lien term debt	80,000			—			—
Other secured long-term debt	—			1,145			2,797
Proceeds from sale of common stock	—			5,000			—
Debt repayments:
Revolving line of credit, net	(6,000		)	(6,000		)	(400		)
First-lien term debt	(183,679		)	(11,506		)	(7,738		)
Other secured long-term debt	(1,876		)	(2,028		)	(1,401		)
Deferred financing costs	(6,614		)	(1,656		)	(767		)
Return of capital in connection with shares repurchased	—			(368		)	—
Net cash provided by (used for) financing activities	(118,169		)	(15,413		)	12,491

Net cash provided by discontinued operations	1,744			16,882			10,432

Net increase (decrease) in cash and cash equivalents	(5,485		)	2,943			1,772
Cash and cash equivalents at beginning of period	12,421			9,478			7,706
Cash and cash equivalents at end of period	$	6,936		$	12,421		$	9,478

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

F-6

DECRANE HOLDINGS CO. AND SUBSIDIARY

Notes to Consolidated Financial Statements

Note 1. Summary of Significant Accounting Policies

Description of the Business

DeCrane Holdings Co. (“DeCrane Holdings”) is a holding company and does not have any material operations or assets other than its ownership of all of the common stock of DeCrane Aircraft Holdings, Inc. (“DeCrane Aircraft”). References to the “Company” include both DeCrane Holdings and DeCrane Aircraft.

The Company is a provider of products and services to the business, VIP and head-of-state aircraft market within the aerospace industry. The Company’s businesses are organized into two separate operating groups: Cabin Management and Systems Integration. The Company also had a third strategic business, its Specialty Avionics Group, which it sold in 2003 (Note 2).

Basis of Presentation

The consolidated financial statements include the accounts of the Company and all wholly-owned subsidiaries and a majority-owned partnership. All intercompany accounts and transactions have been eliminated. Certain reclassifications have been made to prior years’ financial statements to conform to the current year presentation.

Preparation of these consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.

Change in Accounting Principle

Inventories are stated at the lower of cost or market. Costs include materials, labor, including direct engineering labor, tooling costs and manufacturing overhead. As described below, measurement of the costs of inventories associated with products manufactured for delivery under production-type contracts in prior periods was made pursuant to the use of program accounting. As such, the cost of inventories included certain deferred program costs, which were principally comprised of engineering costs.

The events of September 11, 2001 and its aftermath have impacted the predictability of demand for the Company’s business, VIP and head-of-state aircraft products. The ability to make reliable estimates of future demand for these products is critical to the use of program accounting and the deferral of engineering and production costs. Under program accounting, certain product development costs incurred in connection with specific contracted programs were deferred and charged to cost of sales when revenues from the sale of products related to the program were recorded. Because of the changing economic conditions affecting the Company’s markets, demand for the Company’s products has exhibited an increased degree of volatility not seen in the past. In order to improve the reliability of its financial reporting, the Company decided to discontinue the use of program accounting which requires it to make long-term estimates of future sales for each program. Therefore, product development costs not specifically reimbursable through contractual terms or recoverable through firm orders will no longer be deferred and included in program inventory.

F-7

The Company concluded that the new method of accounting for program costs is preferable based, in part, on the aforementioned improvement in the reliability of its financial reporting. This new accounting method will also have the advantage of enhancing investor understanding of the Company’s performance since cash flows from operations will now more closely align with Adjusted EBITDA, the Company’s primary measurement of overall economic performance and return on invested capital.

As a result of the change, the Company has restated its quarterly results of operations for 2003 (Note 19). The following pro forma data summarizes the results of operations for the years ended December 31, 2002 and 2001 as if the new accounting policy had been in effect during those years.

	Year Ended December 31,
(In thousands)	2002			2001

As reported:
Loss from continuing operations	$	(12,603	)	$	(22,609	)
Net loss	(71,827		)	(19,063		)

Pro forma:
Loss from continuing operations	$	(15,579	)	$	(24,484	)
Net loss	(74,803		)	(20,938		)

Inventories

Inventories are stated at the lower of cost, as determined under the first-in, first-out (“FIFO”) method, or market. Costs include materials, labor, including direct engineering labor, tooling costs and manufacturing overhead. Prior to January 1, 2003, inventories also included deferred program costs, which were principally comprised of engineering costs relative to programs and contracts with long production cycles.

F-8

Property and Equipment

Property and equipment for companies acquired are stated at fair value as of the date the acquisition occurred and at cost for all subsequent additions. Property and equipment are depreciated using the straight-line method over their estimated useful lives. Useful lives for machinery and equipment range from three to twenty years. Building and building improvements are depreciated using the straight-line method over their estimated useful lives of forty years. Leasehold improvements are amortized using the straight-line method over their estimated useful lives or remaining lease term, whichever is less. Expenditures for maintenance and repairs are expensed as incurred. The costs for improvements are capitalized. Upon retirement or disposal, the cost and accumulated depreciation of property and equipment are reduced and any gain or loss is recorded in income or expense.

Goodwill

Prior to January 1, 2002, goodwill was amortized on a straight-line basis over thirty years from the date the acquisition occurred. Additional goodwill resulting from contingent consideration payments subsequent to the acquisition date was amortized prospectively over the remaining period of the initial thirty-year term. Starting January 1, 2002, goodwill is no longer amortized but instead is subject to at least annual impairment testing with a loss charged to operations in the period in which impairment occurs (Note 7).

Other Assets

Identifiable finite-lived intangible assets are amortized on a straight-line basis over their estimated useful lives, ranging from three to fifteen years. Deferred financing costs are amortized using either the straight-line or effective interest method, over the term of the related debt.

Impairment of Goodwill

Effective January 1, 2002 the Company adopted and began testing goodwill for impairment in accordance with SFAS No. 142, “Goodwill and Other Intangible Assets” as described in Note 7. As required by SFAS No. 142, the Company tests goodwill for impairment annually, on October 31^st of each year, or when events or changes in circumstances indicate the carrying amount may not be recoverable. The goodwill impairment model is a two-step process. First, it requires a comparison of the book value of net assets to the fair value of the related reporting units that have goodwill assigned to them. If the fair value is determined to be less than book value, a second step is performed to compute the amount of the impairment. In this process, a fair value for goodwill is estimated, based in part on the fair value of the operations used in the first step, and is compared to its carrying value. The amount by which carrying value exceeds fair value represents the amount of goodwill impairment. As a result of this impairment testing, the Company recorded pre-tax charges in 2003 of $34,000,000 relating to its Cabin Management Group and $7,500,000 relating to the sale of its Specialty Avionics Group. In 2002, the Company recorded pre-tax charges of $7,672,000 relating to its Specialty Avionics Group.

Prior to adoption of SFAS No. 142, impairment testing was in accordance with SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of.” In 2001, the Company recorded an $8,583,000 pre-tax charge to operations to reflect the impairment loss resulting from its restructuring program to close a manufacturing facility (Notes 3 and 7).

F-9

Impairment of Long-Lived Assets and Other Intangible Assets

In accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” the Company reviews long-lived assets held for use and intangible assets, other than goodwill, for impairment when events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. In the event the sum of the expected undiscounted future cash flows resulting from the use of the asset is less than the carrying value of the asset, an impairment loss equal to the excess of the asset’s carrying value over its fair value is recorded. Long-lived assets deemed held for sale are stated at the lower of cost or fair value. As a result of two restructuring programs conducted during 2001 and 2002, the Company recorded pre-tax charges of $1,320,000 during 2001 and $3,931,000 during 2002 to reflect the impairment of long-lived assets. The impairment losses are described in Note 3.

Product Warranty Obligations

The Company sells some products to customers with various repair or replacement warranties. The terms of the warranties vary according to the customer and/or product involved. The most common warranty periods are generally one to five years from the earlier of the date of delivery to the customer or six to twelve months from the date of manufacture.

Provisions for estimated future warranty costs are made in the period corresponding to the sale of the product and are charged to cost of sales. Warranty costs have been within management’s expectations. Classification between current and long-term warranty obligations is estimated based on historical trends.

Income Taxes

Deferred income taxes are determined using the liability method. A deferred tax asset or liability is determined based on the difference between the financial statement and tax basis of assets and liabilities as measured by the enacted tax rates that will be in effect when these differences reverse. Deferred tax expense is the result of changes in the deferred tax asset or liability. If necessary, valuation allowances are established to reduce deferred tax assets to their expected realizable values.

Derivative Financial Instruments

The Company accounts for derivative financial instruments in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 133, “Accounting for Derivative Instruments and Hedging Activities.” SFAS No. 133 requires companies to record derivatives on the balance sheet as assets or liabilities, measured at fair value. It also requires that gains or losses resulting from changes in the values of those derivatives be accounted for depending on the use of the derivative and whether it qualifies for hedge accounting.

F-10

The Company does not use derivative financial instruments for trading purposes but only to manage the risk that changes in interest rates would have on future interest payments for a portion of its variable-rate debt. As of December 31, 2003, the Company has an interest rate swap contract to effectively convert $3,102,000 of variable-rate debt to 4.2% fixed-rate debt until maturity in 2008. The contract is considered to be a hedge against changes in the amount of future cash flows associated with interest payments on this variable-rate debt. As a result, the interest rate swap contract is reflected at fair value and the related loss of $268,000 on this contract is deferred in stockholders’ equity as a component of comprehensive income (loss). The deferred loss will be recognized in future periods as interest expense as the related fixed-rate interest payments are made. In the unlikely event that the counterparty fails to perform under the contract, the Company bears the credit risk that payments due to the Company may not be collected.

Fair Value of Financial Instruments

All financial instruments are held for purposes other than trading. The estimated fair value of the Company’s long-term debt is based on either quoted market prices or current rates for similar issues for debt of the same remaining maturities. The estimated fair value of the Company’s $100,000,000 subordinated debt was approximately $45,000,000 as of December 31, 2003 and $40,000,000 as of December 31, 2002. All other non-derivative financial instruments as of December 31, 2003 and 2002 approximate their carrying amounts either because of the short maturity of the instrument, or based on their effective interest rates compared to current market rates for similar long-term debt or obligations.

Revenue Recognition

Revenues from the sale of manufactured products, except for products manufactured under long-term contracts, are recognized upon shipment of product to the customer provided that the Company has received a signed purchase order, the price is fixed, title has transferred, collection of the resulting receivables is reasonably assured and there are no remaining significant obligations.

Revenues for products manufactured under long-term contracts are recognized under the percentage-of-completion method using total contract price, actual costs incurred to date and an estimate of the completion costs for each contract. Costs include all direct material and labor costs and those indirect costs related to contract performance, such as indirect labor, supplies, tools, repairs, and depreciation. Selling, general, and administrative costs are charged to expense as incurred.

Percentage-of-completion is measured using an estimate of total costs incurred to date to total expected costs for each contract. This method is used because management considers total costs expended to be the best available measure of progress on these contracts. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined. Management believes that the Company will not incur any losses on uncompleted contracts as of December 31, 2003.

F-11

Measuring a contract’s percentage-of-completion requires management to make estimates. As a result, it is reasonably possible that factors may cause management to change its revenue and cost estimates, thereby altering estimated profitability. These factors include, but are not limited to, changes in contract scope, material and labor efficiencies, contract penalty provisions, if any, and final contract settlements. Revisions to revenue and profit estimates are made in the period in which the facts that give rise to the revision become known.

The asset “Costs and estimated earnings in excess of billings” represents revenues recognized in excess of amounts billed on uncompleted contracts and is reflected as a component of inventory. Conversely, the liability “Billings in excess of costs and estimated earnings” represents billings in excess of revenues recognized on uncompleted contracts and is reflected as an accrued liability. Unbilled revenues are expected to be billed and collected during the succeeding twelve-month period.

Research and Development Costs

Research and development costs are expensed as incurred. Commencing January 1, 2003, the Company changed its accounting policy for product developments costs incurred for long-term programs and such costs are also reflected as research and development. See “—Change in Accounting Principle” for additional information.

Stock Option Plan

The Company has one stock-based employee compensation plan, which is more fully described in the Note 15. As permitted under SFAS No. 123, “Accounting for Stock-Based Compensation,” the Company measures compensation expense related to the employee stock option plan utilizing the intrinsic value method as prescribed by Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations. No stock-based employee compensation cost is reflected in net income (loss), as all options granted under the plan had an exercise price equal to the value of the underlying common stock on the date of grant.

The following table illustrates the effect on net income if the Company had applied the fair value recognition provisions of SFAS No. 123 to stock-based employee compensation.

	Year Ended December 31,
(In thousands)	2003			2002			2001

Net loss, as reported	$	(80,077	)	$	(71,827	)	$	(19,063	)
Less total stock-based employee compensation expense determined under the fair value based method for all awards, net of related tax effects	(324		)	(376		)	(392		)
Pro forma net loss	$	(80,401	)	$	(72,203	)	$	(19,455	)

The effect of applying SFAS No. 123 may not be representative of the pro forma effect in future years since additional options may be granted during those future years. The assumptions underlying the computations of the fair value of the options are described in Note 15.

F-12

Statements of Cash Flows

For purposes of the statements of cash flows, cash equivalents include short-term, highly liquid investments with maturities of three months or less at the time of purchase.

Recent Accounting Pronouncements

SFAS No. 150

In May 2003, the Financial Accounting Standards Board issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.” SFAS No. 150 establishes standards for the classification and measurement of certain financial instruments with characteristics of both liabilities and equity. SFAS No. 150 requires classification of financial instruments within its scope as a liability, including financial instruments issued in the form of shares that are mandatorily redeemable, because those financial instruments are deemed to be, in essence, obligations of the issuer. The Company will be required to reclassify all of its mandatorily redeemable preferred stock as a liability commencing January 1, 2004 and reflect quarterly dividend accretion on its 14% preferred stock as a charge against pre-tax income in future periods.

Note 2. Acquisitions and Dispositions

Disposition of Specialty Avionics Group

During the fourth quarter of fiscal 2002 the Company assessed its long-term business strategies in light of current aerospace industry conditions. The Company believes that as the aerospace industry recovers, the demand for its Cabin Management and Systems Integration Groups’ products and services for business, VIP and head-of-state aircraft will return to historical levels and, accordingly, the Company decided to focus its resources in these market segments. To accomplish this objective, the Company embarked on a plan to sell its Specialty Avionics Group, which is highly dependent on the commercial airline industry.

On March 14, 2003, the Company entered into a definitive agreement to sell its equity interests in the subsidiaries comprising its Specialty Avionics Group to Wings Holdings, Inc., an affiliate of Odyssey Investment Partners, LLC, for $140,000,000 in cash. The sale was consummated on May 23, 2003. Proceeds from the sale of $130,723,000 were used to repay first-lien credit facility borrowings (Note 10). The sale of the Specialty Avionics Group is not expected to affect the operations of the Company’s remaining operating groups.

Based upon the fair value of the group implied in the definitive agreement, the Company determined that the carrying value of the group’s net assets was not fully recoverable. As required by SFAS No. 142, the Company recorded a goodwill impairment charge of $7,500,000 in 2003 to reduce the carrying value to the estimated net realizable value established by the definitive agreement. The Company recorded a modest $72,000 loss on the sale, based on the actual financial position of the group on the date of sale.

F-13

As a result of the sale, the Specialty Avionics Group is presented as a discontinued operation in the accompanying consolidated financial statements. The financial statements for prior periods have been reclassified to segregate the group’s assets and liabilities, results of operations and cash flows for all periods.

In accordance with the Financial Accounting Standards Board’s Emerging Issues Task Force Issue No. 87-24, “Allocation of Interest to Discontinued Operations,” as amended, interest expense includes interest on debt that is to be assumed by the buyer as well as interest on the $130,723,000 of debt that was required to be repaid as a result of the sale. Interest expense was based on the historical interest rates charged during each of the periods. In addition, and also in accordance with EITF 87-24, costs and expenses of the Specialty Avionics Group exclude the allocation of general corporate overhead.

The following tables summarize the financial position, results operations and cash flows of the Specialty Avionics Group.

(In thousands)	December 31, 2002

Assets:
Current assets	$	41,614
Property and equipment, net	15,744
Other assets, principally intangibles, net	103,383
Total assets	160,741

Liabilities:
Current liabilities	8,288
Long-term liabilities	11,640
Total liabilities	19,928

Net assets of the Specialty Avionics Group	$	140,813

F-14

	Year Ended December 31,
(In thousands)	2003 (1)			2002			2001

Results of Operations:
Revenues	$	36,595		$	95,789		$	123,240

Operating expenses:
Costs and expenses	30,128			75,031			97,320
Impairment of goodwill	7,500			7,672			—
Amortization of goodwill and other intangible assets	878			2,228			7,484
Total operating expenses	38,506			84,931			104,804

Income (loss) from operations	(1,911		)	10,858			18,436

Other expenses:
Interest expense:
Debt required to be repaid with proceeds from sale	3,297			7,720			8,439
Debt obligations assumed by the buyer	270			798			917
Other expenses, net	153			439			413

Pre-tax income (loss)	(5,631		)	1,901			8,667
Provision for income taxes	(918		)	(3,975		)	(5,121		)

Income (loss) before change in accounting principle	(6,549		)	(2,074		)	3,546
Cumulative effect of change in accounting principle	—			(39,322		)	—
Income (loss) from operations	(6,549		)	(41,396		)	3,546
Loss on sale, net of tax	(72		)	—			—

Net income (loss) from discontinued operations	$	(6,621	)	$	(41,396	)	$	3,546

Cash Flows Provided By (Used For):
Operating activities	$	3,310		$	18,598		$	12,996
Investing activities	(902		)	(1,073		)	(1,708		)
Financing activities	(649		)	(815		)	(1,094		)
Net (increase) decrease in cash and cash equivalents	(13		)	125			177
Effect of foreign currency translation on cash	(2		)	47			61
Net cash provided by discontinued operations	$	1,744		$	16,882		$	10,432

(1) Reflects the results of operations and cash flows through May 23, 2003, the date of sale.

F-15

Contingent Acquisition Consideration

During the three years ended December 31, 2000, seven companies were acquired in transactions in which the sellers were entitled to contingent consideration payments based upon their respective levels of attainment of defined performance criteria. Based upon the levels of attainment of the defined performance criteria during the two years ended December 31, 2002, the Company recorded contingent consideration payable of $600,000 in 2002 and $700,000 in 2001 resulting in a corresponding increase in goodwill. As of December 31, 2002 and 2003, there are no remaining contingent consideration payment obligations.

During 2001, the Company settled its asserted claims against the sellers of two companies acquired in 2000 for breach of representation and warranty provisions contained in the purchase agreements. The Company received $3,718,000 from the sellers upon entering into the settlement agreements, which also provided that the Company pay in 2002 a minimum of $3,125,000 of previously contingent consideration for the year ended December 31, 2001.

Note 3. Restructuring, Asset Impairment and Other Related Charges

During the three years ended December 31, 2003, the Company recorded restructuring, assets impairment and other related charges as follows:

	Year Ended December 31,
(In thousands)	2003		2002		2001

Nature of charges:
Seating Product Line and Furniture Manufacturing Facilities Restructuring	$	7,132	$	—	$	—
Asset Realignment Restructuring	—		6,901		20,075
Seat Manufacturing Facilities Restructuring	—		6,294		—
Adjustment of Previous Restructuring Charge	754		—		—
Goodwill impairment charges	41,500		7,672		8,583
Other asset impairment related charges	—		4,376		—
Total pre-tax charges	$	49,386	$	25,243	$	28,658

Business segment recording the charges:
Cabin Management	$	41,132	$	13,195	$	22,309
Systems Integration	754		4,060		3,525
Total continuing operations	41,886		17,255		25,834
Discontinued operations (Specialty Avionics)	7,500		7,988		2,824
Total pre-tax charges	$	49,386	$	25,243	$	28,658

Charged to operations:
Cost of sales	$	7,327	$	10,676	$	13,557
Selling, general and administrative expenses	559		6,579		3,694
Impairment of goodwill	34,000		—		8,583
Discontinued operations (Specialty Avionics)	7,500		7,988		2,824
Total pre-tax charges	$	49,386	$	25,243	$	28,658

F-16

	Year Ended December 31,
(In thousands)	2003		2002		2001

Components of charges:
Continuing operations:
Noncash charges	$	37,664	$	11,456	$	19,558
Cash charges	4,222		5,799		6,276
Total continuing operations	41,886		17,255		25,834

Discontinued operations (Specialty Avionics):
Noncash charges	7,500		7,988		2,500
Cash charges	—		—		324
Total discontinued operations	7,500		7,988		2,824
Total pre-tax charges	$	49,386	$	25,243	$	28,658

Seating Product Line and Furniture Manufacturing Facilities Restructuring

During the second quarter of fiscal 2003, the Company consolidated its seating product line offerings and adopted a restructuring plan to down-size a furniture manufacturing facility in response to continuing weakness in the business, VIP and head-of-state aircraft market. These actions were designed to reduce engineering, production and inventory carrying costs by supporting fewer product offerings and achieve profitability at the furniture manufacturing facility based on its lower production levels. In connection with these actions, the Company recorded pre-tax charges to operations totaling $7,132,000, comprised of the following:

• Lease Termination and Related Charges. Lease termination charges reflect lease cancellation costs for the facilities vacated and possession returned to the lessor in connection with down-sizing a furniture manufacturing facility. Other related charges include the write-off of leasehold improvements related to the vacated facilities.

• Excess and Obsolete Inventory Write-Downs. Inventory was written down by $3,073,000 to reflect its net realizable value for quantities on hand exceeding current and forecast order backlog requirements and obsolete inventory related to the curtailed seating product offerings.

• Severance and Other Compensation Costs. The Company reduced its total workforce at the down-sized facility by 49 employees, or 37%, from December 31, 2002 levels.

The components of the restructuring, asset impairment and other related charges are as follows:

									Balance at
	Total		Amounts Incurred						December 31,
(In thousands)	Charges		Noncash			Cash			2003

Lease termination and other related charges	$	3,876	$	(591	)	$	(3,285	)	$	—
Excess and obsolete inventory write-downs	3,073		(3,073		)	—			—
Severance and other compensation costs	183		—			(183		)	—
Total	$	7,132	$	(3,664	)	$	(3,468	)	$	—

The restructuring activities were completed during 2003.

F-17

Asset Realignment Restructuring

During the second quarter of 2001, the Company’s Cabin Management Group adopted a restructuring program to realign production programs between its manufacturing facilities. In response to the adverse impact on the aerospace industry resulting from the September 11^th terrorist attack and its aftermath, as well as the weakening of global economic conditions, the Company announced and implemented a further restructuring program in December 2001 designed to reduce costs and conserve working capital. This program included permanently closing one manufacturing facility and idling a second facility for an indefinite period, curtailing several product development programs and instituting workforce reductions. Due to the ongoing weakness of the business, VIP and head-of-state aircraft market, the Company decided during the second quarter of fiscal 2002 to permanently close the temporarily idled manufacturing facility. This program primarily affected the Company’s Cabin Management and Specialty Avionics Groups.

The restructuring, asset impairment and other related charges are comprised of the following:

• Impairment of Long-Lived Assets. In 2001, the restructuring program resulted in the impairment of property, equipment and goodwill and, accordingly, these assets were written down to their net realizable value. In 2002, the decision to permanently close the additional manufacturing facility resulted in an additional impairment of property and equipment and, accordingly, these assets were written down to their estimated net realizable value in 2002. Net realizable values are based on estimated current market values and the actual losses could exceed these estimates.

• Write-off of Product Development Costs. The curtailment of several product development programs in 2001 resulting in the write-off of inventoried costs related to these programs.

• Excess Inventory Write-Downs. Inventory was written down to net realizable value for quantities on hand exceeding current and forecast order backlog requirements.

• Realignment of Production Programs Between Facilities. Costs associated with this realignment were incurred during the fiscal second quarter of 2001.

• Severance and Other Compensation Costs. Since the September 11^th terrorist attack, the Company has reduced its total workforce by approximately 500 employees, or 18.5%, as of December 2002, of which approximately 260 employees had separated as of December 31, 2001.

• Lease Termination and Other Related Costs. Lease termination and other related costs are comprised of the net losses expected to be incurred under the existing long-term lease agreements for facilities permanently vacated. The losses have been reduced by the expected sublease income. These expected losses were based on estimated current market rates and anticipated dates that these facilities are subleased. If market rates decrease or should it take longer than expected to sublease these facilities, the actual loss could exceed these estimates.

• Other Asset Impairment Related Charges. Other expenses pertain to provisions for estimated losses on uncompleted long-term contracts aggregating $2,577,000 and other related charges expensed as incurred.

F-18

The components of the restructuring, assets impairment and other related charges are as follows:

	Balance at										Balance at
	Beginning of		Total		Amounts Incurred						End of
(In thousands)	the Year		Charges		Noncash			Cash			the Year

Year ended December 31, 2002:

Severance and other compensation costs	$	1,185	$	—	$	—		$	(1,185	)	$	—
Lease termination and other related costs	424		—		—			(334		)	90
Impairment of property and equipment	—		2,557		(2,557		)	—			—
Excess inventory write-downs	—		1,265		(1,265		)	—			—
Total	$	1,609	3,822		$	(3,822	)	$	(1,519	)	$	90

Other restructuring-related charges			3,079
Total pre-tax charges			$	6,901

Year ended December 31, 2001:

Impairment of long-lived assets:
Goodwill	$	—	$	8,583	$	(8,583	)	$	—		$	—
Property and equipment	—		1,320		(1,320		)	—			—
Product development cost write-offs	—		7,908		(7,908		)	—			—
Excess inventory write-downs	—		4,247		(4,247		)	—			—
Realignment of production programs between facilities	—		3,902		—			(3,902		)	—
Severance and other compensation costs	—		2,024		—			(839		)	1,185
Lease termination and other related costs	—		674		—			(250		)	424
Total	$	—	$	28,658	$	(22,058	)	$	(4,991	)	$	1,609

From the inception of this restructuring program in 2001, severance and other compensation costs of approximately $2,024,000 have been paid to manufacturing and administrative employees terminated at the manufacturing facilities closed. Since the September 11^th terrorist attack, the Company has, in addition to the positions eliminated as a result of the 2002 plant closures described below, reduced its total workforce by approximately 500 employees, or 18.5%, as of December 2002 pursuant to this restructuring program, of which approximately 260 employees had separated as of December 31, 2001.

This restructuring program was completed during the fourth quarter of fiscal 2002. The remaining balance of restructuring costs includes lease termination and other exit costs. The restructuring program related to leased facilities was completed during the second quarter of fiscal 2002; however, $90,000 of future cash payments extend into 2003 due to lease payments on the vacated facility and the incurrence of other exit costs. No future cash payment obligations related these restructuring activities remains as of December 31, 2003.

F-19

Seat Manufacturing Facilities Restructuring

During the first quarter of fiscal 2002, the Company announced it would consolidate the production of four seating and related manufacturing facilities into two, resulting in the permanent closure of two facilities. This program was designed to improve manufacturing efficiencies and to further reduce costs and conserve working capital. In connection with this restructuring program, the Company recorded pre-tax charges to operations totaling $6,294,000 during 2002 for restructuring, asset impairment and other related charges. The charges are comprised of the following:

• Inventory and Accounts Receivable Write-Downs. In connection with the consolidation of all production, the Company will discontinue manufacturing certain products, principally those which overlap. Inventory and certain receivables related to the discontinued products were written down to net realizable value.

• Impairment of Long-Lived Assets. The restructuring program resulted in the impairment of property and equipment and, accordingly, these assets were written down to their net realizable value.

• Severance and Other Compensation Costs. Approximately 115 employees were terminated in connection with the permanent closure of the manufacturing facilities.

• Lease Termination and Other Related Costs. Lease termination and other related costs are comprised of the net losses expected to be incurred under existing long-term lease agreements for the facilities being permanently vacated. The losses have been reduced by the expected sublease income. These expected losses were based on estimated current market rates and anticipated dates that these facilities are subleased. If market-rates decrease or should it take longer than expected to sublease these facilities, the actual loss could exceed these estimates.

• Other Asset Impairment Related Expenses. Other expenses pertain to FAA retesting and recertification of products manufactured at a different facility, moving, transportation and travel costs and shutdown / startup costs. Such costs were charged to expense as incurred.

The components of the restructuring, assets impairment and other related charges are as follows:

									Balance at
	Total		Amounts Incurred						December 31,
(In thousands)	Charges		Noncash			Cash			2002

Restructuring and assets impairment charges:
Inventory and accounts receivable write-downs	$	2,200	$	(2,200	)	$	—		$	—
Impairment of property and equipment	1,374		(1,374		)	—			—
Severance and other compensation costs	450		—			(450		)	—
Lease termination and other related costs	300		—			(236		)	64
Total restructuring and asset impairment charges	4,324		$	(3,574	)	$	(686	)	$	64

Other restructuring-related expenses	1,970
Total pre-tax charges	$	6,294

This restructuring program was completed during the second quarter of fiscal 2002. The remaining balance of restructuring costs includes lease termination and other exit costs. The manufacturing facilities were closed during June 2002; however, future cash payments extend beyond this date due to lease payments on the vacated facilities and the incurrence of other exit costs. No future cash payment obligations remain as of December 31, 2003.

F-20

Adjustment of Previous Restructuring Charge

In December 1999, the Company initiated a plan to reorganize and restructure the operations of two of its subsidiaries within the Systems Integration Group. The restructuring was a result of a management decision to exit the manufacturing business at these subsidiaries and consolidate and relocate operations into one facility to more efficiently and effectively manage the business and be more competitive.

In connection with these restructuring activities, the Company provided for lease termination costs expected to be incurred over the remaining term of the existing long-term lease at the facility being vacated following the restructuring. The expected costs were reduced by estimated sublease income which was based on estimated future market rates and anticipated sublease rental periods.

During 2003, the initial sublease was canceled and the Company entered into a new sublease agreement. Due to the deterioration in market rates since 1999, the terms of the new sublease were less favorable than the initial one. As a result, the Company determined that its remaining accrual for lease termination costs was insufficient to cover the net costs expected to be incurred over the remaining lease term. Consequently, an additional $754,000 was charged to operations during 2003 for these additional costs. A payment obligation totaling $734,000 remains as of December 31, 2003. The future cash payments will be funded from internally generated cash for operations.

Goodwill and Other Asset Impairment Related Charges

During the year ended December 31, 2003, the Company recorded $41,500,000 of goodwill impairment charges. Impairment charges totaling $34,000,000 pertained to goodwill impairment testing pursuant to SFAS No. 142 (Note 7) and were charged to continuing operations. The remaining $7,500,000 pertained to the sale of the Specialty Avionics Group and was charged to discontinued operations (Notes 2 and 7).

Due to continued weakness in the commercial aircraft portion of our business, in the fourth quarter of fiscal 2002 the Company recorded a pre-tax charge of $12,048,000 for additional asset impairments. Of this amount, $7,672,000 related to the Company’s annual goodwill impairment testing pursuant to SFAS No. 142 (Note 7) and $4,376,000 related to inventories and was charged to cost of goods sold. Charges totaling $7,988,000 pertained to discontinued operations.

Note 4. Accounts Receivable

The Company is potentially subject to concentrations of credit risk as the Company relies heavily on customers operating in the domestic and foreign business, VIP and head-of-state aircraft industries. Generally, the Company does not require collateral or other security to support accounts receivable subject to credit risk. Under certain circumstances, deposits or cash-on-delivery terms are required. The Company maintains allowances for doubtful accounts and generally, such losses have been within management’s expectations.

Accounts receivable are net of an allowance for doubtful accounts of $1,268,000 as of December 31, 2003 and $1,205,000 as of December 31, 2002.

F-21

Note 5. Inventories

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

	December 31,
(In thousands)	2003		2002

Raw materials	$	30,414	$	28,911
Work-in-process:
Direct and indirect manufacturing costs	6,817		6,843
Program costs, principally engineering costs	—		13,764
Finished goods	1,693		4,773
Costs and estimated earnings in excess of billings on uncompleted contracts	4,057		5,009
Total inventories	$	42,981	$	59,300

As described in Note 1, the Company changed its accounting policy for program costs, electing to expense such costs as incurred commencing January 1, 2003.

Total costs and estimated earnings on all uncompleted contracts as of December 31, 2003 and 2002 are comprised of the following:

	December 31,
(In thousands)	2003			2002

Costs incurred on uncompleted contracts	$	71,784		$	50,577
Estimated earnings recognized	77,782			63,699
Total costs and estimated earnings	149,566			114,276
Less billings to date	(145,661		)	(109,880		)
Net	$	3,905		$	4,396

Balance sheet classification:
Asset – Costs and estimated earnings in excess of billings	$	4,017		$	5,009
Liability – Billings in excess of costs and estimated earnings (Note 9)	(112		)	(613		)
Net	$	3,905		$	4,396

Note 6. Property and Equipment

Property and equipment includes the following as of December 31, 2003 and 2002:

	December 31,
(In thousands)	2003			2002

Land, buildings and leasehold improvements	$	22,251		$	25,074
Machinery and equipment	16,430			16,500
Computer equipment and software, furniture and fixtures	15,700			13,459
Tooling	1,001			1,111
Total cost	55,382			56,144
Accumulated depreciation and amortization	(24,482		)	(20,005		)
Net property and equipment	$	30,900		$	36,139

F-22

Property and equipment under capital leases included above consists of the following as of December 31, 2003 and 2002:

	December 31,
(In thousands)	2003			2002

Land, buildings and leasehold improvements	$	4,608		$	4,594
Machinery and equipment	601			608
Computer equipment and software, furniture and fixtures	1,717			1,747
Total cost	6,926			6,949
Accumulated depreciation and amortization	(1,836		)	(1,424		)
Net property and equipment	$	5,090		$	5,525

Depreciation of property and equipment under capital leases is included in depreciation expense in the consolidated financial statements.

Note 7. Goodwill

Effective January 1, 2002, the Company adopted SFAS No. 142, “Goodwill and Other Intangible Assets” and the provisions of SFAS No. 141, “Business Combinations,” which were required to be adopted concurrent with the adoption of SFAS No. 142. Adoption of these accounting pronouncements resulted in the following:

• Reassessment of Useful Lives of Intangible Assets. The reassessment of the useful lives of intangible assets acquired on or before June 30, 2001 (Note 8) was completed during the first quarter of fiscal 2002. The remaining useful lives were deemed appropriate.

• Reclassification of Intangible Assets. Intangible assets relating to acquired assembled workforce intangibles (Note 8) not meeting the criteria for recognition apart from goodwill were reclassified to goodwill, net of deferred income taxes.

During 2002, the Company completed the transitional impairment testing of goodwill recorded as of January 1, 2002 as required under SFAS No. 142. Fair value of each reporting unit was determined using a discounted cash flow approach taking into consideration projections based on the individual characteristics of the reporting units, historical trends, market multiples for comparable businesses and independent appraisals. Unallocated goodwill was allocated to the reporting units for impairment testing purposes. The results indicated that the carrying value of goodwill was impaired. The resulting impairment was primarily attributable to a change in the evaluation criteria for goodwill utilized under previous accounting guidance to the fair value approach stipulated in SFAS No. 142. In accordance with the transitional provision of SFAS No. 142, the Company recorded a $17,828,000 noncash write-down of goodwill (net of $878,000 income tax benefit) as of January 1, 2002 as a cumulative effect of a change in accounting principle. An additional $39,322,000 noncash write-down of goodwill pertained to the Specialty Avionics Group and is included in the loss from discontinued operations.

F-23

Reported income (loss) from continuing operations, net of tax and before the cumulative effect of the change in accounting principle, adjusted to reflect the discontinuance of periodic goodwill and assembled workforce amortization charges, is as follows:

	Year Ended December 31,
(In thousands)	2003			2002			2001

Reported loss from continuing operations, net of tax	$	(59,692	)	$	(12,603	)	$	(22,609	)
Add back goodwill and assembled workforce amortization, net of tax	—			—			6,681
Adjusted loss from continuing operations	$	(59,692	)	$	(12,603	)	$	(15,928	)

Changes in the carrying amount of goodwill, by business segment (Note 17), for the two years ended December 31, 2003 are as follows:

	Continuing Operations												Discontinued
(In thousands)	Cabin Management Group			Systems Integration Group			Corporate			Total			Specialty Avionics Group

Balance, December 31, 2001	$	178,715		$	28,277		$	3,956		$	210,948		$	126,495
Adoption of SFAS 141 and 142:
Reclassification of intangible assets	3,076			386			120			3,582			1,221
Transitional impairment charge	(8,463		)	(7,881		)	(2,362		)	(18,706		)	(39,322		)
Contingent consideration earned, including acquisition related expenses	606			—			—			606			—
Impairment charge	—			—			—			—			(7,672		)
Balance, December 31, 2002	173,934			20,782			1,714			196,430			80,722

Impairment charge	(34,000		)	—			—			(34,000		)	(7,500		)
Sale of Specialty Avionics Group	—			—			—			—			(73,222		)
Balance, December 31, 2003	$	139,934		$	20,782		$	1,714		$	162,430		$	—

During the fourth quarter of fiscal 2002, the Company performed its annual impairment testing and recorded an additional $7,672,000 impairment charge related to the Specialty Avionics Group. The charge resulted from a decrease in fair value due to further weakness during 2002 in the commercial aircraft portion of our business. This charge is included as a component of income (loss) from discontinued operations.

As described in Note 2, on March 14, 2003, the Company entered into a definitive agreement to sell its equity interests in the subsidiaries comprising its Specialty Avionics Group. Based upon the fair value of the group implied in the definitive agreement, the Company determined that the carrying value of the group’s net assets was not fully recoverable. As a result, the Company recorded a goodwill impairment charge of $7,500,000 during the three months ended March 31, 2003 to reduce the carrying value to estimated net realizable value.

F-24

As a result of the continuing weakness in the business, VIP and head-of-state aircraft market and the Company’s decision to down-size a furniture manufacturing facility in the second quarter of fiscal 2003, the Company determined that it should reevaluate the carrying value of its goodwill prior to the annual October 31^st testing date. Accordingly, the Company performed an impairment test of the goodwill associated with its furniture manufacturing reporting unit for recoverability and found the goodwill to be impaired. As a result, the Company recorded a pre-tax charge to operations of $34,000,000 during the three months ended June 30, 2003. The charge was primarily a result of a decrease in fair value caused by using lower cash flow forecasts based on the most recently reduced industry estimates of aircraft deliveries resulting from overall industry weakness. The annual impairment test on October 31^st indicated that no additional impairment had occurred.

Note 8. Other Assets, Principally Intangibles

Other assets are comprised of the following as of December 31, 2003 and 2002:

	December 31,
(In thousands)	2003		2002

Identifiable intangible assets with finite useful lives	$	25,455	$	29,106
Deferred financing costs	11,812		9,168
Other non-amortizable assets	825		1,154
Total other assets	$	38,092	$	39,428

Identifiable Intangible Assets with Finite Useful Lives

Identifiable intangible assets with finite useful lives are comprised of the following as of December 31, 2003 and 2002:

	December 31, 2003							December 31, 2002
(In thousands)	Cost		Accumulated Amortization			Net		Cost		Accumulated Amortization			Net

FAA certifications	$	22,272	$	(6,222	)	$	16,050	$	22,272	$	(4,737	)	$	17,535
Engineering drawings	7,645		(2,286		)	5,359		7,645		(1,776		)	5,869
Other identifiable intangibles	11,345		(7,299		)	4,046		11,345		(5,643		)	5,702
Total identifiable intangibles	$	41,262	$	(15,807	)	$	25,455	$	41,262	$	(12,156	)	$	29,106

Estimated annual amortization expense for all identifiable intangible assets with finite useful lives for the five-year period ending December 31, 2008 is as follows: 2004 – $3,644,000; 2005 – $3,477,000; 2006 – $2,275,000; 2007 – $2,175,000; and 2008 – $2,171,000.

F-25

• Reassessment of Useful Lives of Intangible Assets. The reassessment of the useful lives of intangible assets acquired on or before June 30, 2001 was completed during the first quarter of fiscal 2002. The remaining useful lives were deemed appropriate.

Note 9. Accrued Liabilities

Accrued liabilities are comprised of the following as of December 31, 2003 and 2002:

	December 31,
(In thousands)	2003		2002

Accrued interest	$	4,969	$	7,465
Salaries, wages, compensated absences and payroll related taxes	4,017		9,212
Customer advances and deposits	3,147		4,662
Current portion of accrued product warranty obligations	2,064		2,801
Billings in excess of costs and estimated earnings on uncompleted contracts	112		613
Other accrued liabilities	3,581		6,741
Total accrued liabilities	$	17,890	$	31,494

Accrued Product Warranty Obligations

The following table reflects the accrued product warranty obligation activity during the three years ended December 31, 2003.

	Year Ended December 31,
(In thousands)	2003			2002			2001

Accrual activity during the year:
Accrual at beginning of the year	$	3,686		$	2,642		$	2,640
Accruals for warranties issued during the period	369			763			602
Change in accrual estimate related to pre-existing warranties	518			481			(482		)
Settlements made (in cash or in kind) during the period	(989		)	(200		)	(118		)
Accrual at end of the year	$	3,584		$	3,686		$	2,642

Classification at end of the year:
Current liability	$	2,064		$	2,801		$	2,531
Long-term liability	1,520			885			111
Total	$	3,584		$	3,686		$	2,642

F-26

Note 10. Long-Term Debt

Long-term debt includes the following amounts as of December 31, 2003 and 2002:

	December 31,
(In thousands)	2003			2002

First-lien credit facility:
Term debt	$	80,521		$	264,200
Revolving line of credit	—			6,000
Second-lien term debt	80,067			—
Capital lease obligations and other debt, secured by property and equipment	8,818			10,817
12% subordinated notes	100,000			100,000
Total long-term debt	269,406			381,017
Less current portion	(1,198		)	(16,317		)
Long-term debt, less current portion	$	268,208		$	364,700

First-Lien Credit Facility

The credit facility provides, through a syndicate of lenders, for term debt borrowings in the initial principal amount of $290,000,000 and a revolving line of credit for working capital and to finance acquisitions. In March 2003, the credit facility was amended to permit the sale of the Specialty Avionics Group and, in December 2003, the credit facility was further amended to permit the incurrence of $80,000,000 of second-lien term debt.

Net proceeds from the sale of the Specialty Avionics Group of $130,723,000 and the net proceeds from the second-lien term debt of $74,081,000 were used to repay first-lien credit facility indebtedness. As a result of the debt repayments, the Company recorded noncash charges of $3,494,000 to reflect the write-off of deferred financing costs associated with the debt repaid. In connection with debt repaid with the proceeds from the sale of the Specialty Avionics Group, $2,055,000 of such debt issuance costs were written off and are reflected in the loss from discontinued operations; the remaining $1,439,000 is reflected as a loss on the extinguishment of debt.

The March 2003 amendment also revised various financial covenants (which the Company would otherwise have not been able to meet as of March 31, 2003), decreased by $10,000,000 the revolving line of credit commitment, increased the prime rate and LIBOR interest margins by 1.5% and permits the repurchase of a portion of the Company’s 12% subordinated notes with the proceeds from the sale of junior securities. The December 2003 amendment further revised various financial covenants to permit the second-lien debt, extended the scheduled repayment dates of the remaining first-lien term debt by 12 to 18 months, reduced the revolving credit commitment by an additional $16,000,000 and extended the commitment by 18 months. Interest rates charged on the first-lien debt remained unchanged.

F-27

The revolving line of credit commitment is $24,000,000 as of December 31, 2003 and all borrowings under the revolving facility must be repaid by March 31, 2006. Term debt principal payments are due in increasing amounts commencing December 31, 2005 and continue through December 31, 2007. Loans under the credit facility generally bear interest based on a margin over, at the Company’s option, prime rate or LIBOR. The margins applicable to portions of amounts borrowed vary depending upon the Company’s consolidated debt leverage ratio. Currently, the applicable margins are 4.00% to 4.75% for prime rate borrowings and 5.25% to 6.00% for LIBOR borrowings. The weighted-average interest rate on all first-lien credit facility borrowings outstanding was 6.85% as of December 31, 2003. Borrowings under this credit facility are secured by a first lien on substantially all of the assets of the Company. The Company is subject to certain commitment fees under the facility as well as the maintenance of certain financial ratios, cash flow results and other restrictive covenants, including the payment of dividends in cash. The Company was in compliance with the covenants during the year ended December 31, 2003.

As of December 31, 2003, the Company had an irrevocable standby letter of credit in the amount of $250,000 issued and outstanding under the credit facility, which reduces borrowings available under the revolving line credit.

Second-Lien Term Debt

In December 2003, the Company received proceeds from second-lien term loans in the aggregate amount of $80,000,000 from a syndicate of lenders and used the net proceeds to repay first-lien credit facility indebtedness. The second-lien debt, which is comprised of $70,000,000 of fixed rate debt and $10,000,000 of floating rate debt, matures on June 30, 2008.

The fixed rate debt bears interest at 15%; 12% payable quarterly in cash and 3% pay-in-kind or “accreted” interest, payable at maturity. The variable rate debt bears cash interest, at the Company’s option, at prime rate plus 7.5% or LIBOR plus 8.5%, plus 3% pay-in-kind interest. The weighted-average interest rate on all second-lien term debt outstanding was 14.71% as of December 31, 2003. As of December 31, 2003, $67,000 of pay-in-kind interest has accreted to the initial principal balance of the term debt. The term debt is secured by a second lien on substantially all of the assets of the Company. The Company is subject to customary fees under the agreement as well as the maintenance of certain financial ratios, cash flow results and other restrictive covenants which are similar to the covenants in the first-lien credit facility. The Company was in compliance with the covenants during the year ended December 31, 2003.

12% Subordinated Notes

The subordinated notes mature on September 30, 2008 and interest is payable semi-annually on March 30, and September 30, of each year. The subordinated notes are unsecured general obligations of the Company and are subordinated in right of payment to substantially all existing and future senior indebtedness of the Company, including first-lien credit facility and second-lien term indebtedness. Prior to maturity, the Company may redeem all or some of the subordinated notes at defined redemption prices, which may include a premium. In the event of a change in control, the holders may require the Company to repurchase the subordinated notes for a redemption price that may also include a premium. The Company is subject to restrictive covenants, including the payment of dividends in cash.

F-28

Aggregate Maturities

The total annual maturities of long-term debt outstanding as of December 31, 2003 are as follows:

(In thousands)

Year ending December 31,
2004	$	1,198
2005	4,007
2006	13,536
2007	66,289
2008	180,540
2009 and thereafter	3,836
Total aggregate maturities	$	269,406

Financial Condition and Liquidity

The acts and ongoing threats of global terrorism, the current military conflicts, health epidemics and weak global economic conditions are all adversely impacting the Company’s business. In response, a series of restructuring activities have been implemented as described in Note 3 which were designed to reduce costs and conserve working capital.

Also, as described above, the first-lien credit facility was amended twice during 2003 and $80,000,000 of second-lien debt was issued with the proceeds thereof used to repay first-lien indebtedness. These actions, among other things, resulted in debt maturities being extended and debt covenants relaxed.

The ability to comply with debt financial covenants, pay principal or interest and satisfy other debt obligations will depend on the Company’s future operating performance as well as competitive, legislative, regulatory, business and other factors beyond its control. The Company believes the extended debt maturity schedule through 2006 will coincide with its expectations of the recovery period for the business, VIP and head-of state aircraft market and resulting demand for its products and services. As a result, management believes expected operating cash flows, together with borrowings under the first-lien credit facility ($23,800,000 of which was available as of December 31, 2003, the commitment for which expires in March 2006), will be sufficient to meet operating expenses, working capital requirements, capital expenditures and debt service obligations for the next twelve months.

F-29

Note 11. Income Taxes

The components of the loss before income taxes and cumulative effect of change in accounting principle are as follows:

	Year Ended December 31,
(In thousands)	2003			2002			2001

Reported by:
Continuing operations	$	(73,188	)	$	(16,224	)	$	(26,542	)
Discontinued operations	(5,631		)	1,901			8,667
Total	$	(78,819	)	$	(14,323	)	$	(17,875	)

Taxed under the following jurisdictions:
Domestic	$	(78,411	)	$	(13,222	)	$	(17,297	)
Foreign	(408		)	(1,101		)	(578		)
Total	$	(78,819	)	$	(14,323	)	$	(17,875	)

The provisions for income taxes (benefit) are as follows:

	Year Ended December 31,
(In thousands)	2003			2002			2001

Current:
U.S. federal	$	(1,548	)	$	—		$	62
State and local	295			255			1,133
Foreign	(82		)	67			30
Total current	(1,335		)	322			1,225

Deferred:
U.S. federal	(6,112		)	(144		)	545
State and local	(5,131		)	463			(464		)
Foreign	—			(287		)	(118		)
Total deferred	(11,243		)	32			(37		)

Total provision:
U.S. federal	(7,660		)	(144		)	607
State and local	(4,836		)	718			669
Foreign	(82		)	(220		)	(88		)
Total provision	$	(12,578	)	$	354		$	1,188

Allocation of total provision:
Continuing operations	$	(13,496	)	$	(3,621	)	$	(3,933	)
Discontinued operations	918			3,975			5,121
Total provision	$	(12,578	)	$	354		$	1,188

The provision for income taxes differs from the amount of income tax determined by applying the applicable U.S. statutory federal rate to the income (loss) before income taxes and cumulative effect of change in accounting principle as a result of the following differences:

F-30

	Year Ended December 31,
(In thousands)	2003			2002			2001

Income tax (benefit) at U.S. statutory rates	$	(27,587	)	$	(5,013	)	$	(6,256	)
Tax effect of increases (decreases) resulting from:
Book benefit not provided for operating loss carryforwards	12,402			—			—
Amortization of assets and other expenses not deductible for income tax purposes	3,422			2,927			5,477
Minority interest in preferred stock of subsidiary not deductible for income tax purposes	2,364			2,044			1,771
State income taxes, net of federal benefit	(3,143		)	467			265
Lower tax rates on earnings of foreign subsidiaries and foreign sales corporation	(64		)	(8		)	(57		)
Other, net	28			(63		)	(12		)
Income tax (benefit) at effective rates	$	(12,578	)	$	354		$	1,188

Deferred tax assets and (liabilities) are comprised of the following as of December 31, 2003 and 2002:

	December 31,
(In thousands)	2003			2002

Gross deferred tax assets:
Loss carryforwards	$	23,471		$	12,173
Accrued liabilities	3,670			6,797
Inventory	2,920			4,252
Other	1,165			832
Gross deferred tax assets	31,226			24,054

Gross deferred tax (liabilities):
Intangible assets	(10,902		)	(31,267		)
Program costs	(491		)	(6,168		)
Property and equipment	(305		)	(3,119		)
Other	—			(56		)
Gross deferred tax (liabilities)	(11,698		)	(40,610		)

Net deferred asset (liability) before valuation allowance	19,528			(16,556		)
Net deferred tax asset valuation allowance	(19,528		)	—
Net deferred tax liability	$	—		$	(16,556	)

Balance sheet classification:
Continuing operations:
Current deferred tax asset	$	—		$	16,430
Noncurrent deferred tax liability	—			(27,077		)
Net continuing operations	—			(10,647		)

Discontinued operations:
Current deferred tax asset	—			6,201
Noncurrent deferred tax liability	—			(12,110		)
Net discontinued operations	—			(5,909		)
Net deferred tax liability	$	—		$	(16,556	)

F-31

As of December 31, 2003, the Company had a net deferred tax asset of $19,528,000, prior to recording the valuation allowance; a net deferred tax liability existed in prior periods. The change to a net asset position was primarily caused by the $34,000,000 goodwill impairment charge recorded during fiscal 2003. SFAS No. 109, “Accounting for Income Taxes,” requires the recognition of a deferred tax asset for the future income tax benefit of goodwill deductions that will be taken for income tax purposes (i.e. the goodwill that has been written off in the financial statements for book purposes will continue to be amortized and deducted for tax purposes and, accordingly, represents a new deferred tax asset).

As required by SFAS No. 109, the Company evaluated its deferred assets for expected recoverability based on the nature of the item, the associated taxing jurisdictions, the applicable expiration dates and future taxable income forecasts that would impact utilization. Since there is no loss carry back potential and the Company does not have any tax planning strategies to assure recoverability, the only possibility for recovery of the net deferred assets is future taxable income. Since there have been prior year losses, the Company believes it is not prudent to rely on future income as the means to support the carrying value of the net asset. As a result of the evaluation, the Company recorded a $19,528,000 valuation allowance, eliminating the net deferred asset, as of December 31, 2003.

The Company had a net deferred tax liability of $16,556,000 as of December 31, 2002. The full realization of the deferred tax assets was achieved through the reversal of the deferred tax liabilities in future periods. As a result, a valuation allowance was not required for periods ending or prior to December 31, 2002.

As of December 31, 2003, the Company has total loss carryforwards of approximately $55,472,000 for federal income tax purposes and $60,985,000 for state income tax purposes. The loss carryforwards are not subject to limitations on their annual utilization (“Section 382 limitation,” as defined in the Internal Revenue Code) and therefore are available for utilization in 2004 and future periods. The federal and state loss carryforwards expire in varying amounts commencing in 2011 and continuing through 2023.

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Note 12. Capital Structure

Mandatorily Redeemable Preferred Stock

The table below summarizes mandatorily redeemable preferred stock issued during the three years ended December 31, 2003.

	DeCrane Aircraft 16% Preferred Stock								DeCrane Holdings 14% Preferred Stock
(In thousands, except per share data)	Number of Shares	Mandatory Redemption Value		Unamortized Issuance Discount			Net Book Value		Number of Shares	Mandatory Redemption Value

Balance, December 31, 2000	270,400	$	27,040	$	(3,861	)	$	23,179	342,417	$	47,252
Accrued dividends and redemption value accretion	45,930	4,593		468			5,061		—	—
Noncash dividend accretion	—	—		—			—		—	6,971
Balance, December 31, 2001	316,330	31,633		(3,393		)	28,240		342,417	54,223
Accrued dividends and redemption value accretion	53,731	5,373		468			5,841		—	—
Noncash dividend accretion	—	—		—			—		—	7,999
Balance, December 31, 2002	370,061	37,006		(2,925		)	34,081		342,417	62,222
Accrued dividends and redemption value accretion	62,858	6,286		468			6,754		—	—
Noncash dividend accretion	—	—		—			—		—	9,180
Balance, December 31, 2003	432,919	$	43,292	$	(2,457	)	$	40,835	342,417	$	71,402
Per share liquidation value as of December 31, 2003		$	100.00							$	208.52

DeCrane Aircraft 16% Mandatorily Redeemable Preferred Stock

DeCrane Aircraft’s 16% preferred stock is reflected as minority interest in preferred stock of subsidiary in the consolidated financial statements.

DeCrane Aircraft is authorized to issue 700,000 shares of 16% Senior Redeemable Exchangeable Preferred Stock Due 2009, $.01 par value. The preferred stock has a $100.00 per share liquidation preference, plus accrued and unpaid cash dividends, and is non-voting.

Holders of the preferred stock are entitled to receive, when, as and if declared, dividends at a rate equal to 16% per annum. Prior to June 30, 2005, DeCrane Aircraft may, at its option, pay dividends either in cash or by the issuance of additional shares of preferred stock. Since the preferred stock issuance date on June 30, 2000, DeCrane Aircraft has elected to issue additional shares in lieu of cash dividend payments; such shares are reflected as a component of minority interest in preferred stock of subsidiary. The preferred stock is mandatorily redeemable on March 31, 2009. Upon the occurrence of a change in control, as defined, each holder has the right to require DeCrane Aircraft to redeem all or part of such holder’s shares at a price equal to 101% of the liquidation preference, plus accrued and unpaid cash dividends.

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A portion of the proceeds from the sale of the preferred stock was ascribed to the value of the DeCrane Holdings common stock warrants issued in connection with the sale and was credited to additional paid-in capital. The corresponding reduction in redemption value of the preferred stock, and related issuance costs, are recorded as an issuance discount and are being amortized using the effective interest method through the preferred stock mandatory redemption date.

DeCrane Holdings 14% Mandatorily Redeemable Preferred Stock

DeCrane Holdings is authorized to issue 1,360,000 shares of 14% Senior Redeemable Exchangeable Preferred Stock Due 2009, $.01 par value. The preferred stock had an initial $100.00 per share liquidation preference, subject to increases through noncash dividend accretion, plus accrued and unpaid cash dividends, and is non-voting.

Holders of the preferred stock are entitled to receive, when, as and if declared, dividends at a rate equal to 14% per annum. Prior to September 30, 2005, dividends are not paid in cash but instead accrete to the liquidation value of the preferred stock, which, in turn, increases the redemption obligation. The preferred stock is mandatorily redeemable on September 30, 2009. Upon the occurrence of a change in control, as defined, each holder has the right to require DeCrane Holdings to redeem all or part of such holder’s shares at a price equal to 101% of the liquidation preference plus accrued and unpaid cash dividends.

Undesignated Preferred Stock

The Company is authorized to issue 2,500,000 shares of $.01 par value preferred stock of which 1,360,000 are designated 14% Senior Redeemable Exchangeable Preferred Stock Due 2009; 1,140,000 shares remain undesignated as of December 31, 2003 and 2002.

Common Stock

DeCrane Holdings is authorized to issue 10,000,000 shares of $.01 par value common stock, of which 4,009,297 shares are issued and outstanding as of December 31, 2003 and 4,116,627 shares at December 31, 2002. As of December 31, 2003, a total of 855,020 shares of common stock are reserved for issuance upon exercise of all warrants and stock options.

During the year ended December 31, 2002, DeCrane Holdings sold 221,096 shares to DLJ and its affiliates and a director for $5,100,000 and used the proceeds to fund working capital requirements and repurchased and canceled 18,743 shares from former members of DeCrane Aircraft management at $27.00 per share. Also during 2002, the former DeCrane Aircraft management members elected to exercise 9,252 vested stock options on a cashless basis. The $14,000 income tax benefit associated with the stock options exercised was also credited to additional paid-in capital. Expenses related to the 2002 common stock transactions total $100,000 and were charged to additional paid-in capital.

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Notes Receivable for Shares Sold

During 1998 and 1999, DeCrane Holdings sold mandatorily redeemable preferred and common stock in three transactions in which one-half of the purchase price was paid in cash and one-half was loaned to the purchasers by DeCrane Aircraft, with interest at the then applicable federal rates. The loans bear interest at rates ranging between 4.33% and 5.74%. The loans, plus accrued interest, are payable upon the sale of the stock and are collateralized by such stock. The resulting notes receivable, plus accrued interest, are classified as a reduction of stockholders’ equity in the consolidated statement of financial position. The three transactions, which were based on the fair market value of the underlying securities as determined by the Board of Directors, resulted in loans for one-half of the total purchase price, were as follows:

• in December 1998, a group of related party investors (Note 16) purchased mandatorily redeemable preferred and common stock for $704,000;

• in October 1999, the same group of investors purchased additional shares of common stock for $250,000; and

• in December 1999, DeCrane Aircraft’s management purchased common stock for $3,940,000.

During 2002, a note receivable totaling $200,000, plus accrued interest, was repaid in connection with the repurchase of the common stock collateralizing the note receivable. During 2003, several DeCrane Aircraft management members surrendered 107,330 shares of common stock. In accordance with the terms of the notes evidencing the loans, the Company canceled the notes. The cancellation of the notes, which aggregated $1,471,000, including accrued interest, was charged to additional paid-in capital.

Common Stock Warrants

Common stock warrants issued outstanding during the three years ended December 31, 2003 are summarized in the table below.

	$.01 Warrants
(Number of shares, except per share data)	Class A Warrants		Class B Warrants		$22.31 Warrants		Total

Warrants issued, outstanding and exercisable during the years ended December 31, 2001, 2002 and 2003	155,000		139,357		159,794		454,151

Other information:
Exercise price per share	$	0.01	$	0.01	$	22.31
Expiration date	Aug. 28, 2009		Jun. 30, 2010		Sept. 30, 2008

All common stock warrants are subject to adjustment for anti-dilution and have demand registrations rights.

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Note 13. Commitments and Contingencies

Litigation

As part of its investigation of the crash of Swissair Flight 111 off the Canadian coast on September 2, 1998, the Canadian Transportation Safety Board (the “CTSB”) initially notified the Company that it recovered burned wire that was attached to the in-flight entertainment system installed on some of Swissair’s aircraft by one of the Company’s subsidiaries. The Company’s subsidiary has worked vigorously over the last five years with the CTSB investigators in the fact-finding investigation of this catastrophic incident. On March 27, 2003, the CTSB released its final report on its investigation. This report indicated that the CTSB was unable to conclusively determine the cause of the fire which led to the crash of the aircraft.

The Company was a defendant in most, but not all, of the actions brought by the estates of the 229 victims of the crash. The actions, which sought damages and costs in unstated amounts, claimed negligence, strict liability, and breach of warranty. Virtually all of the cases have been settled by Boeing and Swissair’s insurers and both assignment of the claims against, and releases in favor, of the Company have been obtained by the Boeing and Swissair insurers.

On September 22, 2003, the Company and its insurers entered into an agreement with Boeing, Swissair and each of their respective insurers, in which the Company received a release from those parties and an indemnification by Boeing and Swissair’s insurers against claims asserted on behalf of passengers for compensatory damage and by others for contribution and/or indemnity claims. Company management believes the agreement adequately protects the Company from all existing litigation pending against the Company arising from this catastrophic incident. Punitive damages are not subject to the indemnity; however, while some of the passenger actions originally asserted punitive damages, by virtue of a court order, claims for punitive damages may not be prosecuted. The aforementioned agreement did not result in the Company incurring a loss and, accordingly, no charge to operations was required.

The Company and its subsidiaries are also involved in other routine legal and administrative proceedings incident to the normal conduct of business. Management believes the ultimate disposition of all such matters will not have a material adverse effect on the Company’s business, consolidated financial position, results of operations or cash flows.

Lease Commitments

The Company leases some of its facilities and equipment under capital and operating leases. Some of the leases require payment of property taxes and include escalation clauses. Future minimum capital and operating lease commitments under non-cancelable leases are as follows as of December 31, 2003:

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(In thousands)	Capital Leases			Operating Leases

Year ending December 31,
2004	$	786		$	2,937
2005	839			2,656
2006	595			2,359
2007	534			1,481
2008	368			885
2009 and thereafter	1,787			4,403
Total minimum payments required	4,909			$	14,721
Less amount representing future interest cost	(1,534		)
Recorded obligation under capital leases	$	3,375

Total rental expense charged to operations was $2,911,000 for the year ended December 31, 2003, $3,083,000 for the year ended December 31, 2002 and $2,982,000 for the year ended December 31, 2001.

Note 14. Consolidated Statements of Cash Flows

The following information supplements the Company’s consolidated statements of cash flows.

	Year Ended December 31,
(In thousands)	2003			2002			2001

Components of cash paid for acquisitions:
Contingent consideration paid for previously completed acquisitions	$	600		$	5,826		$	17,075
Cash purchase price reductions received as a result of settling asserted claims against the sellers (Note 2)	—			—			(3,718		)
Additional acquisition related expenses	6			64			172
Total cash paid for acquisitions	$	606		$	5,890		$	13,529

Noncash investing and financing transactions:
14% mandatorily redeemable preferred stock liquidation value accretion in lieu of cash dividend payments	$	9,180		$	7,999		$	6,971
16% mandatorily redeemable preferred stock:
Dividends paid by the issuance of additional shares	6,286			5,373			4,593
Redemption value accretion	468			468			468
Capital expenditures financed with capital lease obligations	14			67			4,376
Additional acquisition contingent consideration earned and recorded as a liability	—			600			3,825
Interest accrued during the period on loans to stockholders for the purchase of DeCrane Holdings capital stock	148			123			116

Paid in cash:
Interest	$	25,973		$	27,619		$	34,904
Income taxes paid (refunded), net	(225		)	(91		)	1,161

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Note 15. Employee Benefit Plans

Stock Based Incentive Compensation

Management Incentive Stock Option Plan

DeCrane Holding’s Board of Directors has approved a management incentive plan which provides for the issuance of options to purchase the common stock of DeCrane Holdings as incentive compensation to designated executive personnel and other key employees of the Company and its subsidiaries. The Compensation Committee of the Board of Directors of DeCrane Holdings administers the plan and makes a determination as to any options to be granted. The plan provides for the granting of options to purchase a maximum of 356,257 common shares prior to expiration in 2009. The options are granted at fair market value at the date of grant. Substantially all of the options awarded become fully vested and exercisable eight years from the date of grant but vesting can be accelerated based upon future attainment of defined performance criteria. In addition, the Compensation Committee may authorize alternate vesting schedules. The plan also provides for the acceleration of vesting upon the occurrence of certain events, including, under certain circumstances, a change of control.

During 2001, no options were granted under the plan and no additional shares from prior year grants vested based on the required year 2001 performance criteria. During 2002, options to purchase 15,000 shares, with vesting over a three year period from the grant date, were granted under the plan and no additional shares from prior year grants vested based on the required year 2002 performance criteria. During 2003, no options were granted under the plan and no additional shares from prior year grants vested based on the required year 2003 performance criteria.

The per share exercise price of the options granted was equal to the fair market value of the common stock on each of the grant dates and, accordingly, no compensation expense was recognized during the three years ended December 31, 2003.

Incentive Stock Options Granted to Others

In July 1999, a group of related party investors, including two individuals who were then serving as directors, were granted options as compensation for consulting services. Options were granted to purchase 44,612 shares of DeCrane Holdings common stock at an exercise price of $23.00 per share, equal to the fair market value of the common stock on the grant date. The options vest over a three-year period, are subject to acceleration if DLJ and its affiliates sell any of their shares of common stock, and expire in 2009. The options are fully vested as of December 31, 2003.

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Summary of All Stock Options

The following table summarizes all stock option activity during the three years ended December 31, 2003.

	Year Ended December 31,
	2003				2002				2001
	Number of Shares		Weighted- Average Exercise Price		Number of Shares		Weighted- Average Exercise Price		Number of Shares		Weighted- Average Exercise Price

Options outstanding at beginning of the year	338,073		$	24.37	363,353		$	24.82	386,869		$	24.86
Granted	—		—		15,000		27.00		—		—
Exercised	—		—		(9,252	)	23.00		—		—
Canceled	(53,946	)	26.45		(31,028	)	31.32		(23,516	)	25.55
Options outstanding at end of the year	284,127		23.97		338,073		24.37		363,353		24.82
Options exercisable at end of the year	125,185		23.56		138,546		23.66		139,051		23.82

As of December 31, 2003, options to purchase 107,490 common shares remained available for grant under the Management Incentive Stock Option Plan. The following table summarizes information about stock options outstanding and stock options exercisable as of December 31, 2003.

	All Options Outstanding		Number of Shares Exercisable as of December 31, 2003
	Number of Shares as of December 31, 2003	Weighted-Average Remaining Contractual Life





Per share exercise price:
$23.00	256,081	5.94 years	117,630
$27.00	7,500	8.35 years	2,500
$35.00	20,546	6.93 years	5,055
Total	284,127	6.07 years	125,185

For compensatory stock options granted to non-employees, the Company recognized compensation expense of $138,000 for the year ended December 31, 2002 and $215,000 for the year ended December 31, 2001.

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For non-compensatory stock options granted to employees, the Company uses APB Opinion No. 25 to account for stock-based compensation and, accordingly, no compensation expense was recognized during the three years ended December 31, 2003. The Company has adopted the disclosure-only provisions of SFAS No. 123, as amended by SFAS No. 148 (Note 1). For the purposes of the pro forma disclosure presented in Note 1, the estimated fair value of the options is amortized over the options’ vesting period. The effect of applying SFAS No. 123 may not be representative of the pro forma effect in future years since additional options may be granted during those future years.

The fair value of the options was determined using the following assumptions:

	2003		2002			2001

Compensatory options (1):
Risk free interest rates	—		5.13		%	5.35		%
Expected dividend yield	—		—			—
Expected life	—		10 years			10 years
Expected stock price volatility	—		—			—

Non-compensatory options granted to employees and directors (2):
Risk free interest rates	—		—			—
Expected dividend yield	—		—			—
Expected life	—		—			—
Weighted-average fair value of options granted (per share)	$	—	$	10.96		$	—

(1) Using the Black Scholes option valuation model.

(2) Using the minimum value method.

The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company’s employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management’s opinion, the existing models, as well as the minimum value method, do not necessarily provide a reliable single measure of its employee stock options. The Company determines the fair value of its common shares as of any given period-end date based on the aggregate enterprise value of DeCrane Holdings. Enterprise value is computed based upon a multiple of Adjusted EBITDA, as reflected in its financial statements, and the multiple is based upon comparable data from other publicly-held companies as well as publicly available information on privately-held companies.

The minimum value method, which is an acceptable method for non-public companies, excludes stock price volatility.

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Management Stock Purchases

Beginning in December 1999, DeCrane Holding’s Board of Directors has permitted designated executive personnel and other key employees to purchase shares of common stock of DeCrane Holdings, with a portion of the purchase price to be loaned to the participants by DeCrane Aircraft. In December 1999, management purchased 171,295 shares of DeCrane Holdings’ common stock for $23.00 per share. The total purchase price was approximately $3,900,000, of which one-half was paid in cash and one-half was loaned to management by DeCrane Aircraft as described in Note 12. In 2000, management purchased an additional 20,707 shares for $23.00 per share in cash pursuant to the plan’s antidilution provisions. Dilution resulted from the issuance of the DeCrane Holdings common stock warrants in connection with the sale of DeCrane Aircraft’s 16% preferred stock.

401(k) Retirement Plan

Substantially all domestic employees are eligible to participate in one of the 401(k) retirement plans the Company sponsors, which are defined contribution plans satisfying the requirements of the Employee Retirement Income Security Act of 1974. The Company’s expense related to its matching contributions to these plans totaled $1,007,000 for the year ended December 31, 2002 and $1,767,000 for the year ended December 31, 2001; no matching contributions were made during the year ended December 31, 2003.

Note 16. Related Party Transactions and Investors’ Agreement

Related Party Transactions

The Company’s transactions with related parties included in the consolidated financial statements are summarized in the table below.

	Year Ended December 31,
(In thousands)	2003		2002		2001

CSFB / DLJ:
Transaction and advisory fees and expenses	$	9,375	$	1,627	$	520
Management fees:
Charged to operations during the period	350		350		300
Payable as of period end	—		125		375

Global Technology Partners, LLC:
Promissory notes:
Receivable as of period end, including interest	594		567		542

Each related party is described below.

F-41

CSFB / DLJ

DLJ Merchant Banking Partners II, L.P. and affiliated funds own 97.1% of DeCrane Holdings common stock and 99.3% of its preferred stock, and 80.0% of DeCrane Aircraft’s preferred stock, all on a fully diluted basis. DLJ Merchant Banking Partners II, L.P. and affiliated funds are indirect affiliates of Credit Suisse First Boston.

DLJ is represented on the Board of Directors of both DeCrane Holdings and DeCrane Aircraft. In addition, CSFB is involved in market-making activities for DeCrane Holding’s Class A $22.31 common stock warrants and DeCrane Aircraft’s subordinated notes and may hold such securities from time to time. CSFB is paid fees for serving as the syndication agent and, commencing in 2003, administrative agent for the lenders providing DeCrane Aircraft’s first-lien credit facility and second-lien term debt. In 2003, CSFB also received customary fees and reimbursement of expenses for serving as DeCrane Aircraft’s financial advisors for the sale of the Specialty Avionics Group.

Global Technology Partners, LLC

Members of Global Technology own 1.8% of DeCrane Holdings common stock and 0.7% of its preferred stock, all on a fully diluted basis, and had two members on the Company’s Board of Directors from August 1998 through July 2000. DeCrane Aircraft loaned one-half of the purchase price for such shares to the members at rates ranging between 4.33% and 5.44%. The loans, plus accrued interest, are payable from the proceeds from the sale of the stock and are collateralized by such stock.

Investors’ Agreement

Investors owing 96.6% of DeCrane Holdings’ issued and outstanding common stock and common stock warrants and options, all of DeCrane Holdings’ preferred stock and all of DeCrane Aircraft’s preferred and common stock, have entered into an Amended and Restated Investors’ Agreement, dated October 6, 2000, among DeCrane Holdings Co., DLJ Merchant Banking Partners II, L.P. and affiliated funds and entities, Putnam Investment Management, Inc. and affiliated funds and entities and all management investors. Investors who own DeCrane Holdings’ warrants to purchase 159,794 shares of common stock are not parties to the Investors’ Agreement. The agreement provides that:

• The parties to the agreement shall vote their shares to cause DLJ Merchant Banking Partners, II, L.P. to select all members of the Board of Directors of DeCrane Holdings and DeCrane Aircraft, thereby giving them control over the Company’s operations. At least one of such directors on each board shall be an independent director.

• Transfers of the shares by the parties to the agreement are restricted.

• Parties to the agreement may participate in some specific kinds of sales of shares by DLJ affiliates.

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• DeCrane Holdings will indemnify the stockholders against some liabilities and expenses, including liabilities under the Securities Act.

Note 17. Business Segment Information

The Company supplies products and services to the business, VIP and head-of-state aircraft market within the aerospace industry. The Company’s subsidiaries are organized into two groups, each of which is a strategic business that develops, manufactures and sells distinct products and services. The groups and a description of their businesses are as follows:

• Cabin Management – manufactures interior cabin components, including cabin interior furnishings, cabin management systems, seating and composite components;

• Systems Integration – manufactures auxiliary fuel systems and auxiliary power units, provides system integration services, provides aircraft completion and refurbishment services and is a Boeing Business Jet authorized service center.

In prior periods, the Company’s Specialty Avionics Group was a third strategic business for which segment information was provided. As a result of the sale of the Specialty Avionics Group, this group is reflected as a discontinued operation and segment information for prior periods has been restated to exclude the group.

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Management utilizes more than one measurement to evaluate group performance and allocate resources; however, management considers Adjusted EBITDA, as defined, to be the primary measurement of a group’s overall core economic performance and return on invested capital. Management also uses Adjusted EBITDA in the Company’s annual budget and planning process for future periods, as one of the decision-making criteria for funding discretionary capital expenditures and product development programs and as the measure in determining the value of acquisitions and dispositions. The board of directors uses Adjusted EBITDA as one of the performance metrics for determining the amount of bonuses awarded to pursuant to the Company’s cash incentive bonus plan and as an indicator of enterprise value used in determining the exercise price of stock options granted and the acceleration of stock option vesting pursuant to the Company’s incentive stock option plan.

Management defines Adjusted EBITDA as earnings before interest, income taxes, depreciation and amortization, restructuring, asset impairment and other related charges, acquisition related charges not capitalized and other noncash and nonoperating charges. Management believes the presentation of this measure is relevant and useful to investors because it allows investors and analysts to view group performance in a manner similar to the method used by management, helps improve their ability to understand the Company’s core segment performance, adjusted for items management believes are unusual, and makes it easier to compare the Company’s results with other companies that have different financing, capital structures and tax rates. In addition, management believes these measures are consistent with the manner in which its lenders and investors measure the Company’s overall performance and liquidity, including its ability to service debt and fund discretionary capital expenditure and product development programs.

The financial measure Adjusted EBITDA, as defined, excludes certain charges reflected in the Company’s financial statements which are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). However, the Company’s presentation of Adjusted EBITDA is in accordance with the GAAP requirements of SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information,” which requires the Company to report the primary measure of segment performance used by management to evaluate and manage its businesses. The Company’s method of calculating Adjusted EBITDA may not be consistent with that of other companies and should be viewed in conjunction with measurements that are computed in accordance GAAP, such as net income (loss), the nearest comparable GAAP financial measure. A reconciliation of Adjusted EBITDA to net income (loss) is included herein to clarify the differences between these financial measures.

The accounting policies of the groups are substantially the same as those described in the summary of significant accounting policies (Note 1). Some transactions are recorded at the Company’s corporate headquarters and are not allocated to the groups, such as most of the Company’s cash and cash equivalents, debt and related net interest expense, corporate headquarters costs and income taxes.

F-44

Summary of Business by Segment

	Year Ended December 31,
(In thousands)	2003			2002			2001

Revenues:
Cabin Management	$	119,000		$	172,832		$	206,052
Systems Integration	51,687			58,051			67,528
Inter-group elimination (1)	(578		)	(1,042		)	(1,468		)
Consolidated totals	$	170,109		$	229,841		$	272,112

Revenues from significant customers (2):
Cabin Management	$	50,297		$	94,014		$	108,737
Systems Integration	28,508			35,388			46,138
Consolidated totals	$	78,805		$	129,402		$	154,875

Adjusted EBITDA (as defined):
Cabin Management	$	8,978		$	32,644		$	45,554
Systems Integration	11,020			18,084			17,152
Corporate (3)	(5,488		)	(6,072		)	(7,125		)
Inter-group elimination (4)	110			9			(62		)
Consolidated totals (5)	14,620			44,665			55,519
Reconciling items (6)	(94,697		)	(116,492		)	(74,582		)
Net loss	$	(80,077	)	$	(71,827	)	$	(19,063	)

Depreciation and amortization:
Cabin Management	$	6,335		$	6,695		$	14,607
Systems Integration	2,770			2,956			4,346
Corporate	676			961			1,411
Consolidated totals (7)	$	9,781		$	10,612		$	20,364

Total assets (as of period end):
Cabin Management	$	224,116		$	281,655		$	311,476
Systems Integration	58,395			62,437			76,312
Corporate (8)	21,456			44,247			35,627
Inter-group elimination (9)	(91		)	(113		)	(143		)
Continuing operations	303,876			388,226			423,272
Discontinued operations (Specialty Avionics)	—			160,741			222,439
Consolidated totals	$	303,876		$	548,967		$	645,711

Capital expenditures:
Cabin Management	$	4,216		$	3,829		$	6,579
Systems Integration	555			478			3,371
Corporate	26			49			241
Consolidated totals (10)	$	4,797		$	4,356		$	10,191

The notes appear on the next page.

F-45

Summary of Business by Geographical Area

	Year Ended December 31,
(In thousands)	2003		2002		2001

Consolidated net revenues to unaffiliated customers (11)
United States	$	159,052	$	222,401	$	268,981
Mexico	11,057		7,440		3,131
Consolidated totals	$	170,109	$	229,841	$	272,112
Consolidated long-lived assets (12):
United States	$	28,786	$	34,420	$	40,369
Mexico	2,114		1,719		2,291
Consolidated totals	$	30,900	$	36,139	$	42,660

Notes

(1) Inter-group sales are accounted for at prices comparable to sales to unaffiliated customers, and are eliminated in consolidation.

(2) Three customers each accounted for more than 10% of the Company’s consolidated revenues during the three years ended December 31, 2003 as shown in the table below. Complete loss of any of these customers could have a significant adverse impact on the results of operations expected in future periods.

	Year Ended December 31,
(In thousands)	2003		2002		2001

Boeing (b)	$	29,815	$	35,427	$	43,836
Textron (a)	27,578		54,017		55,522
Bombardier (b)	21,412		39,958		55,517
Consolidated totals	$	78,805	$	129,402	$	154,875

All operating groups derived revenues from each of the customers during each of the years in the three years ended December 31. 2003.

(3) Reflects the Company’s corporate headquarters costs and expenses not allocated to the groups.

(4) Reflects elimination of the effect of inter-group profits in inventory.

F-46

(5) Adjusted EBITDA (as defined) for the year ended December 31, 2003 was reduced by $8,124,000 for Cabin Management and $2,316,000 for Systems Integration as a result of the Company’s change in accounting policy for program costs as more fully described in Note 1—Change in Accounting Principle.

(6) Adjusted EBITDA (as defined) excludes the following charges reflected in the Company’s financial statements which are prepared in accordance with generally accepted accounting principles:

	Year Ended December 31,
(In thousands)	2003			2002			2001

Restructuring, asset impairment and other related charges	$	41,886		$	17,255		$	25,834
Depreciation and amortization of long-lived assets (7)	9,781			10,612			20,364
Acquisition related charges not capitalized	784			1,162			308
Other noncash charges	—			138			215
Interest expense	26,219			25,376			29,645
Minority interest in preferred stock of subsidiary	6,754			5,841			5,061
Loss on extinguishment of debt	1,439			—			—
Other expenses, net	945			505			634
Income tax benefit	(13,496		)	(3,621		)	(3,933		)
(Income) loss from discontinued operations, net of tax	6,621			41,396			(3,546		)
Cumulative effect of change in accounting principle	13,764			17,828			—
Total reconciling items	$	94,697		$	116,492		$	74,582

(7) Reflects depreciation and amortization of long-lived assets, goodwill (for periods prior to the January 1, 2002 adoption of SFAS No. 142), other intangible assets and deferred financing costs, which are classified as a component of interest expense, as follows:

	Year Ended December 31,
(In thousands)	2003		2002		2001

Depreciation and amortization of long-lived assets	$	9,781	$	10,612	$	20,364
Amortization of deferred financing costs	2,808		2,692		2,218
Consolidated depreciation and amortization	$	12,589	$	13,304	$	22,582

(8) Reflects the Company’s corporate headquarters assets, excluding investments in and notes receivable from subsidiaries.

(9) Reflects elimination of inter-group receivables and profits in inventory as of period end.

(10) Reflects capital expenditures paid in cash. Excludes capital expenditures financed with capital lease obligations of $14,000 for the year ended December 31, 2003, $67,000 for the year ended December 31, 2002 and $4,376,000 for the year ended December 31, 2001.

(11) Allocated on the basis of the location of the subsidiary originating the sale.

(12) Allocated on the basis of the location of the subsidiary and consists of the Company’s property and equipment. Corporate long-lived assets are included with the United States assets.

F-47

Note 18. Supplemental Condensed Consolidating Financial Information

In conjunction with the 12% subordinated notes described in Note 10, the following condensed consolidating financial information is presented segregating DeCrane Aircraft, as the issuer, and the guarantor and non-guarantor subsidiaries. The accompanying financial information in the guarantor subsidiaries column reflects the financial position, results of operations and cash flows for those subsidiaries guaranteeing the notes. DeCrane Holdings is not a guarantor of the notes and is therefore reflected in the non-guarantor subsidiary column with DeCrane Aircraft’s non-guarantor subsidiaries. DeCrane Aircraft’s non-guarantor subsidiaries are companies within the Specialty Avionics Group which was sold in May 2003 and is therefore classified as a component of discontinued operations.

The guarantor subsidiaries are wholly-owned subsidiaries of DeCrane Aircraft and their guarantees are full and unconditional on a joint and several basis. There are no restrictions on the ability of the guarantor subsidiaries to transfer funds to the issuer in the form of cash dividends, loans or advances. Separate financial statements of the guarantor subsidiaries are not presented because management believes that such financial statements would not be material to investors. Investments in subsidiaries in the following condensed consolidating financial information are accounted for under the equity method of accounting. Consolidating adjustments include the following:

(1) Elimination of investments in subsidiaries.

(2) Elimination of intercompany accounts.

(3) Elimination of equity in earnings of subsidiaries.

F-48

Balance Sheets

	December 31, 2003
(In thousands)	Issuer			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Consolidating Adjustments			Consolidated Total

Assets

Current assets:
Cash and cash equivalents	$	6,540		$	396		$	—		$	—		$	6,936
Accounts receivable, net	—			21,455			—			—			21,455
Inventories	—			42,981			—			—			42,981
Other current assets	254			828			—			—			1,082
Total current assets	6,794			65,660			—			—			72,454

Property and equipment, net	1,047			29,853			—			—			30,900
Other assets, principally goodwill	13,615			186,907			—			—			200,522
Investments in subsidiaries	85,668			—			(44,913		)	(40,755		)(1)	—
Intercompany receivables	261,631			100,642			—			(362,273		)(2)	—
Total assets	$	368,755		$	383,062		$	(44,913	)	$	(403,028	)	$	303,876

Liabilities, Mandatorily Redeemable Preferred Stock and Stockholders’ Equity (Deficit)

Current liabilities:
Current portion of long-term debt	$	11		$	1,187		$	—		$	—		$	1,198
Other current liabilities	8,532			24,820			—			—			33,352
Total current liabilities	8,543			26,007			—			—			34,550

Long-term debt, less current portion	260,654			7,554			—			—			268,208
Intercompany payables	100,642			261,631			—			(362,273		)(2)	—
Other long-term liabilities	2,994			2,470			—			—			5,464

Minority interest in preferred stock of subsidiary	40,835			—			—			—			40,835
Mandatorily redeemable 14% preferred stock	—			—			71,402			—			71,402

Stockholders’ equity (deficit):
Paid-in capital	111,719			151,492			60,247			(263,211		)(1)	60,247
Retained earnings (deficit)	(156,632		)	(65,824		)	(176,562		)	222,456		(1)	(176,562		)
Accumulated other comprehensive loss	—			(268		)	—			—			(268		)
Total stockholders’ equity	(44,913		)	85,400			(116,315		)	(40,755		)	(116,583		)
Total liabilities, mandatorily redeemable preferred stock and stockholders’ equity (deficit)	$	368,755		$	383,062		$	(44,913	)	$	(403,028	)	$	303,876

F-49

	December 31, 2002
(In thousands)	Issuer			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Consolidating Adjustments			Consolidated Total

Assets

Current assets:
Cash and cash equivalents	$	12,343		$	78		$	—		$	—		$	12,421
Accounts receivable, net	—			26,354			—			—			26,354
Inventories	—			59,300			—			—			59,300
Other current assets	17,711			443			—			—			18,154
Assets of discontinued operations	—			166,507			5,197			(10,963		)(1)	160,741
Total current assets	30,054			252,682			5,197			(10,963		)	276,970

Property and equipment, net	2,485			33,654			—			—			36,139
Other assets, principally goodwill	11,708			224,150			—			—			235,858
Investments in subsidiaries	348,559			—			35,312			(383,871		)(1)	—
Intercompany receivables	276,121			172,389			5,740			(454,250		)(2)	—
Total assets	$	668,927		$	682,875		$	46,249		$	(849,084	)	$	548,967

Liabilities, Mandatorily Redeemable Preferred Stock and Stockholders’ Equity (Deficit)

Current liabilities:
Current portion of long-term debt	$	15,337		$	980		$	—		$	—		$	16,317
Other current liabilities	16,786			27,763			—			—			44,549
Liabilities of discontinued operations	—			19,954			(26		)	—			19,928
Total current liabilities	32,123			48,697			(26		)	—			80,794
Long-term debt, less current portion	355,568			9,132			—			—			364,700
Intercompany payables	178,242			276,008			—			(454,250		)(2)	—
Other long-term liabilities	33,601			840			—			—			34,441
Minority interest in preferred stock of subsidiary	34,081			—			—			—			34,081
Mandatorily redeemable 14% preferred stock	—			—			62,222			—			62,222
Stockholders’ equity (deficit):
Paid-in capital	118,621			337,592			85,015			(471,653		)(1)	69,575
Retained earnings (deficit)	(83,309		)	10,967			(100,962		)	76,819		(1)	(96,485		)
Accumulated other comprehensive loss	—			(361		)	—			—			(361		)
Total stockholders’ equity	35,312			348,198			(15,947		)	(394,834		)	(27,271		)
Total liabilities, mandatorily redeemable preferred stock and stockholders’ equity (deficit)	$	668,927		$	682,875		$	46,249		$	(849,084	)	$	548,967

F-50

Statements of Operations

	Year Ended December 31, 2003
(In thousands)	Issuer			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Consolidating Adjustments			Consolidated Total

Revenues	$	—		$	170,109		$	—		$	—		$	170,109
Cost of sales	—			134,953			—			—			134,953

Gross profit	—			35,156			—			—			35,156

Selling, general and administrative expenses	6,948			17,948			—			—			24,896
Research and development expenses	—			10,440			—			—			10,440
Impairment of goodwill	—			34,000			—			—			34,000
Amortization of intangible assets	—			3,651			—			—			3,651
Interest expense	25,708			511			—			—			26,219
Minority interest in preferred stock of subsidiary	—			—			6,754			—			6,754
Loss on extinguishment of debt	1,439			—			—			—			1,439
Intercompany charges	(25,819		)	25,819			—			—			—
Equity in loss of subsidiaries	55,404			218			73,323			(128,945		)(3)	—
Other expenses, net	466			479			—			—			945
Provision for income taxes (benefit)	9,177			(22,673		)	—			—			(13,496		)
Loss from discontinued operations	—			6,403			218			—			6,621
Cumulative effect of change in accounting principle	—			13,764			—			—			13,764

Net loss	$	(73,323	)	$	(55,404	)	$	(80,295	)	$	128,945		$	(80,077	)

F-51

	Year Ended December 31, 2002
(In thousands)	Issuer			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Consolidating Adjustments			Consolidated Total

Revenues	$	—		$	229,841		$	—		$	—		$	229,841
Cost of sales	—			170,485			—			—			170,485

Gross profit	—			59,356			—			—			59,356

Selling, general and administrative expenses	11,206			29,056			—			—			40,262
Research and development expenses	—			56			—			—			56
Amortization of intangible assets	—			3,540			—			—			3,540
Interest expense	20,583			4,793			—			—			25,376
Minority interest in preferred stock of subsidiary	—			—			5,841			—			5,841
Intercompany charges	(24,309		)	24,309			—			—			—
Equity in loss of subsidiaries	55,833			9,535			65,986			(131,354		)(3)	—
Other expenses, net	495			10			—			—			505
Provision for income taxes (benefit)	694			(4,315		)	—			—			(3,621		)
Loss from discontinued operations	—			31,861			9,535			—			41,396
Cumulative effect of change in accounting principle	1,484			16,344			—			—			17,828

Net loss	$	(65,986	)	$	(55,833	)	$	(81,362	)	$	131,354		$	(71,827	)

	Year Ended December 31, 2001
(In thousands)	Issuer			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Consolidating Adjustments			Consolidated Total

Revenues	$	—		$	272,112		$	—		$	—		$	272,112
Cost of sales	—			196,866			—			—			196,866

Gross profit	—			75,246			—			—			75,246

Selling, general and administrative expenses	11,840			32,891			—			—			44,731
Research and development expenses	—			698			—			—			698
Impairment of goodwill	—			8,583			—			—			8,583
Amortization of intangible assets	202			12,234			—			—			12,436
Interest expense	29,357			288			—			—			29,645
Minority interest in preferred stock of subsidiary	—			—			5,061			—			5,061
Intercompany charges	(23,815		)	23,815			—			—			—
Equity in (earnings) loss of subsidiaries	(1,259		)	(115		)	14,002			(12,628		)(3)	—
Other expenses, net	361			273			—			—			634
Provision for income tax benefit	(2,684		)	(1,249		)	—			—			(3,933		)
Income from discontinued operations	—			(3,431		)	(115		)	—			(3,546		)

Net income (loss)	$	(14,002	)	$	1,259		$	(18,948	)	$	12,628		$	(19,063	)

F-52

Statements of Cash Flows

	Year Ended December 31, 2003
(In thousands)	Issuer			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Consolidating Adjustments			Consolidated Total

Cash flows from operating activities:
Net loss	$	(73,323	)	$	(55,404	)	$	(80,295	)	$	128,945	(3)	$	(80,077	)
Noncash adjustments:
Cumulative effect of change in accounting principle	—			13,764			—			—			13,764
Loss from discontinued operations	—			6,403			218			—			6,621
Equity in loss of subsidiaries	55,404			218			73,323			(128,945		)(3)	—
Other noncash adjustments	(6,835		)	47,397			6,754			—			47,316
Changes in working capital	3,441			(10,153		)	—			—			(6,712		)
Net cash provided by (used for) operating activities	(21,313		)	2,225			—			—			(19,088		)

Cash flows from investing activities:
Net proceeds from sale of Specialty Avionics Group	132,223			—			—			—			132,223
Proceeds from sale of property and equipment	855			2,353			—			—			3,208
Capital expenditures	(26		)	(4,771		)	—			—			(4,797		)
Cash paid for acquisitions	(606		)	—			—			—			(606		)
Net cash provided by (used for) investing activities	132,446			(2,418		)	—			—			130,028

Cash flows from financing activities:
Second-lien term debt borrowings	80,000			—			—			—			80,000
Revolving line of credit repayments, net	(6,000		)	—			—			—			(6,000		)
First-lien debt repaid	(183,679		)	—			—			—			(183,679		)
Other secured long-term debt repaid	(643		)	(1,233		)	—			—			(1,876		)
Deferred financing costs	(6,614		)	—			—			—			(6,614		)
Net cash used for financing activities	(116,936		)	(1,233		)	—			—			(118,169		)

Net cash provided by discontinued operations	—			1,744			—			—			1,744

Net increase (decrease) in cash and equivalents	(5,803		)	318			—			—			(5,485		)

Cash and equivalents at beginning of period	12,343			78			—			—			12,421

Cash and equivalents at end of period	$	6,540		$	396		$	—		$	—		$	6,936

F-53

	Year Ended December 31, 2002
(In thousands)	Issuer			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Consolidating Adjustments			Consolidated Total

Cash flows from operating activities:
Net loss	$	(65,986	)	$	(55,833	)	$	(81,362	)	$	131,354	(3)	$	(71,827	)
Noncash adjustments:
Loss from discontinued operations	—			31,861			9,535			—			41,396
Equity in loss of subsidiaries	55,833			9,535			65,986			(131,354		)(3)	—
Other noncash adjustments	5,542			37,846			5,841			—			49,229
Changes in working capital	28,171			(35,249		)	—			—			(7,078		)
Net cash provided by (used for) operating activities	23,560			(11,840		)	—			—			11,720

Cash flows from investing activities:
Cash paid for acquisitions, net of cash acquired	(5,890		)	—			—			—			(5,890		)
Investment in subsidiary	—			—			(4,632		)	4,632		(1)	—
Capital expenditures	(49		)	(4,307		)	—			—			(4,356		)
Net cash used for investing activities	(5,939		)	(4,307		)	(4,632		)	4,632			(10,246		)

Cash flows from financing activities:
Capital contribution to subsidiary of net proceeds from sale of common stock	5,000			—			5,000			(5,000		)(1)	5,000
Other secured long-term borrowings	—			1,145			—			—			1,145
First-lien debt repaid	(11,506		)	—			—			—			(11,506		)
Revolving line of credit repayments, net	(6,000		)	—			—			—			(6,000		)
Other secured debt repaid	(389		)	(1,639		)	—			—			(2,028		)
Deferred financing costs	(1,656		)	—			—			—			(1,656		)
Other, net	(368		)	—			(368		)	368		(1)	(368		)
Net cash provided by (used for) financing activities	(14,919		)	(494		)	4,632			(4,632		)	(15,413		)

Net cash provided by discontinued operations	—			16,882			—			—			16,882

Net increase in cash and equivalents	2,702			241			—			—			2,943

Cash and equivalents at beginning of period	9,641			(163		)	—			—			9,478

Cash and equivalents at end of period	$	12,343		$	78		$	—		$	—		$	12,421

F-54

	Year Ended December 31, 2001
(In thousands)	Issuer			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Consolidating Adjustments			Consolidated Total

Cash flows from operating activities:
Net income (loss)	$	(14,002	)	$	1,259		$	(18,948	)	$	12,628	(3)	$	(19,063	)
Noncash adjustments Income from discontinued operations	—			(3,431		)	(115		)	—			(3,546		)
Equity in (earnings) loss of subsidiaries	(1,259		)	(115		)	14,002			(12,628		)(3)	—
Other noncash adjustments	3,950			40,901			5,061			—			49,912
Changes in working capital	16,352			(41,722		)	—			—			(25,370		)
Net cash provided by (used for) operating activities	5,041			(3,108		)	—			—			1,933

Cash flows from investing activities:
Cash paid for acquisitions, net of cash acquired	(13,529		)	—			—			—			(13,529		)
Capital expenditures and other	(241		)	(9,314		)	—			—			(9,555		)
Net cash used for investing activities	(13,770		)	(9,314		)	—			—			(23,084		)

Cash flows from financing activities:
First-lien term debt borrowings	20,000			—			—			—			20,000
Other secured long-term borrowings	—			2,797			—			—			2,797
Revolving line of credit repayments, net	(400		)	—			—			—			(400		)
First-lien debt repaid	(7,738		)	—			—			—			(7,738		)
Other secured long-term debt repaid	(465		)	(936		)	—			—			(1,401		)
Deferred financing costs	(580		)	(187		)	—			—			(767		)
Net cash provided by financing activities	10,817			1,674			—			—			12,491

Net cash provided by discontinued operations	—			10,432			—			—			10,432

Net increase (decrease) in cash and equivalents	2,088			(316		)	—			—			1,772

Cash and equivalents at beginning of period	7,553			153			—			—			7,706

Cash and equivalents at end of period	$	9,641		$	(163	)	$	—		$	—		$	9,478

F-55

Note 19. Restated Selected Quarterly Financial Data (Unaudited)

Unaudited condensed quarterly data for the year ended December 31, 2003 are summarized in the tables below. As more fully described in Note 1—Change in Accounting Principle, the Company elected to change its accounting policy for program costs after concluding the 2003 fiscal year but retroactively applied the change to the beginning of the year, January 1, 2003. As a result, the condensed quarterly data are presented on both an “as reported” and “as restated” basis.

The “as reported” data for 2003 reflects the results of operations as originally reported for the first three quarters and, for the fourth quarter and resulting year, as would have been reported, prior to the accounting change. The “as restated” data reflects the accounting change as of the beginning of the year, January 1, 2003.

	Year Ended December 31, 2003
(In thousands)	1^stQuarter			2^nd Quarter			3^rd Quarter			4^th Quarter			Total

As reported:
Revenues	$	41,900		$	44,113		$	44,273		$	39,823		$	170,109
Gross profit (loss)	10,997			(1,270		)	9,221			9,946			28,894
Loss from continuing operations	(4,360		)	(41,923		)	(4,461		)	(4,770		)	(55,514		)
Income (loss) from discontinued operations	(6,397		)	747			—			(971		)	(6,621		)
Net loss	(10,757		)	(41,176		)	(4,461		)	(5,741		)	(62,135		)

As restated:
Revenues	$	41,900		$	44,113		$	44,273		$	39,823		$	170,109
Gross profit	10,997			4,992			9,221			9,946			35,156
Loss from continuing operations	(5,933		)	(38,939		)	(6,672		)	(8,148		)	(59,692		)
Income (loss) from discontinued operations	(6,397		)	747			—			(971		)	(6,621		)
Cumulative effect of change in accounting principle	(13,764		)	—			—			—			(13,764		)
Net loss	(26,094		)	(38,192		)	(6,672		)	(9,119		)	(80,077		)

The principal differences between “as reported” and “as restated” are caused by the recognition of the $13,764,000 cumulative effect of the change in accounting principle in the first quarter and the timing of a write off of previously deferred program costs. As part of the Company’s second quarter restructuring activities, $6,262,000 of program costs that were deferred under the old accounting policy were written off and charged to cost of sales. Since under the new policy (which was adopted in 2004 and retroactively applied to January 1, 2003) those costs are deemed expensed as incurred, the second quarter write off is not required in the “as restated” data.

F-56

DECRANE HOLDINGS CO. AND SUBSIDIARY

Consolidated Financial Statement Schedules

Schedule II – Valuation and Qualifying Accounts

(In thousands)	Balance at Beginning of Period		Charged to Cost and Expense		Charged to Other Accounts		Deductions			Balance at End of Period

Year Ended December 31, 2003 (1)
Allowance for doubtful accounts	$	1,205	$	670	$	—	$	(607	)	$	1,268
Reserve for excess, slow moving and potentially obsolete material	3,759		3,199		—		(1,744		)	5,214
Deferred tax asset valuation allowance	—		19,528		—		—			19,528

Year Ended December 31, 2002 (1)
Allowance for doubtful accounts	$	2,108	$	843	$	—	$	(1,746	)	$	1,205
Reserve for excess, slow moving and potentially obsolete material (2)	2,986		3,553		—		(2,780		)	3,759

Year Ended December 31, 2001 (1)
Allowance for doubtful accounts	$	1,536	$	2,001	$	—	$	(1,429	)	$	2,108
Reserve for excess, slow moving and potentially obsolete material (3)	3,213		731		—		(958		)	2,986

(1) Excludes amounts attributable to the Specialty Avionics Group which is classified as discontinued operation.

(2) Excludes $7,241,000 of other asset impairment related charges resulting from the 2002 and 2001 restructuring programs.

(3) Excludes $12,155,000 of inventory and capitalized program cost write-offs resulting from the 2001 restructuring program.

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