UNITED STATES ~~SECURITIES AND EXCHANGE COMMISSION~~

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K

(Mark One)

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

For the fiscal year ended: December 31, ~~2005~~ 2006

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

For the transition period from to

Commission File Number 0-26582

World Air Holdings, Inc.

(Exact name of registrant as specified in its charter)

Delaware		20-2121036
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification Number)
The HLH Building, 101 World Drive, Peachtree City, GA (Address of principal executive offices)		30269 (Zip Code)

Registrant’s telephone number, including area code: (770) 632-8002

The HLH Building, 101 World Drive,

Peachtree City, GA

30269

(Address of principal executive offices)

(Zip Code)

Registrant’s telephone number, including area code:

(770) 632-8002

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


Title of Each Class		Name of Each Exchange on Which Registered
NONE

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

Common Stock ($.001 par value) ~~(Title~~ ~~of Class)~~

~~Indicate~~(Title ~~by check mark whether the registrant is a well-known seasoned issuer, as defined in Rule 405~~ of ~~the~~Class) ~~Security Act. Yes o No þ~~

Indicate by check mark whether the registrant is ~~not~~a ~~required~~well-known toseasoned ~~file~~issuer, ~~reports~~as ~~pursuant~~defined ~~to Section 13~~in orRule ~~Section 15~~405 ~~(d)~~ of the Security Act. Yes o ¨ No x þ

Indicate by check mark whether the registrant ~~(1) has~~is ~~filed~~not ~~all reports~~ required to befile ~~filed by~~reports pursuant to Section 13 or Section 15 (d) of the ~~Securities Exchange~~ Act ~~of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days~~. Yes o ¨ No x þ

Indicate by check mark ifwhether ~~disclosure~~the ofregistrant ~~delinquent~~(1) has ~~filers~~filed ~~pursuant~~all reports required to ~~Item~~be filed by Section ~~405~~13 or 15 (d) of ~~Regulation S-K~~the isSecurities ~~not~~Exchange ~~contained~~Act ~~herein,~~of ~~and~~1934 ~~will~~during ~~not~~the bepreceding ~~contained,~~12 tomonths ~~the~~(or ~~best~~for ofsuch ~~registrant’s~~shorter ~~knowledge,~~period inthat the ~~definitive~~registrant ~~proxy~~was orrequired ~~information~~to ~~statements~~file ~~incorporated~~such byreports), ~~reference in~~and ~~Part~~(2) ~~III~~has ofbeen ~~this~~subject ~~Form~~to ~~10-K or~~such ~~any~~filing ~~amendment~~requirements tofor ~~this~~the ~~Form~~past ~~10-K~~90 days. Yes ¨ No x o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o ¨ Accelerated filer þ x Non-accelerated filer ¨ o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o ¨ No x þ

Aggregate market value of common stock held by non-affiliates as of ~~June 30~~the Registrant, ~~2005~~based ~~was approximately~~upon ~~$275,043,636~~the ~~(based~~closing onstock price of the ~~last~~common ~~reported~~stock ~~sale~~as ~~price~~of June 30, 2006 as reported on the ~~Nasdaq~~Pink ~~National~~Sheets, ~~Market~~was ~~on that~~approximately ~~date)~~$204.8 million. As of the close of business on June 301, ~~2006~~2007, 24 22,~~201~~570,~~402~~717 shares of common stock were outstanding.

WORLD AIR HOLDINGS, INC.

~~2005~~2006 ANNUAL REPORT ON FORM 10-K

TABLE OF CONTENTS

PART I
			Page
		Page
	PART I
Item 1.	Business	4	4
Item 2.	Properties	15
Item 1A.	Risk Factors		8
Item 3.	Legal Proceedings	16
Item 2.	Properties		11
Item 4.	Submission of Matters to Vote of Security Holders	16
Item 3.	Legal Proceedings		11
PART II
Item 4.	Submission of Matters to Vote of Security Holders		11
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	16
	PART II
Item 6.	Selected Financial Data	18
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities		11
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	19
Item 6.	Selected Financial Data		13
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	33
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		14
Item 8.	Financial Statements and Supplementary Data	35
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk		22
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosures	62
Item 8.	Financial Statements and Supplementary Data		23
Item 9A.	Controls and Procedures	62
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosures		50
Item 9A.	Controls and Procedures		50
	PART III
Item 10.	Directors and Executive Officers of the Registrant		54
Item 11.	Executive Compensation		58
Item 12.	Security Ownership of Certain Beneficial Owners and Management		71
Item 13.	Certain Relationships and Related Transactions		75
Item 14.	Principal Accountant Fees and Services		75
	PART IV
Item 15.	Exhibits and Financial Statement Schedules		75

PART III
		Page
Item 10.	Directors and Executive Officers of the Registrant	72
Item 11.	Executive Compensation	77
Item 12.	Security Ownership of Certain Beneficial Owners and Management	80
Item 13.	Certain Relationships and Related Transactions	83
Item 14.	Principal Accountant Fees and Services	83
PART IV
Item 15.	Exhibits and Financial Statement Schedules	84
EX-10.4 WAVIER TO LOAN AGREEMENT DATED OCTOBER 28, 2005
EX-10.5 WAVIER TO LOAN AGREEMENT DATED NOVEMBER 11, 2005
EX-10.6 AMENDMENT NO. 1 TO WAVIER TO LOAN AGREEMENT DATED NOVEMBER 30, 2005
EX-10.7 AMENDMENT NO. 2 TO WAVIER TO LOAN AGREEMENT DATED DECEMBER 15, 2005
EX-10.15 BLOCKED ACCOUNT AGREEMENT DATED DECEMBER 30, 2003, WORLD AIRWAYS, INC.
EX-10.16 FIRST AMENDMENT TO BLOCKED ACCOUNT AGREEMENT DATED MAY 25, 2005, WORLD AIRWAYS, INC.
EX-10.17 BLOCKED ACCOUNT AGREEMENT DATED APRIL 27, 2005, NORTH AMERICAN AIRLINES, INC.
EX-10.18 BLOCKED ACCOUNT AGREEMENT DATED MAY 25, 2005, WORLD AIR HOLDINGS, INC.
EX-10.19 BLOCKED ACCOUNT AGREEMENT DATED MAY 25, 2005, NORTH AMERICAN AIRLINES, INC.
EX-12.1 STATEMENT REGARDING COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
EX-21.1 SUBSIDIARIES OF THE REGISTRANT
EX-23.1 CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM, KPMG LLP
EX-31.1 SECTION 302 CERTIFICATION OF THE CEO
EX-31.2 SECTION 302 CERTIFICATION OF THE CFO
EX-32.1 SECTION 906 CERTIFICATION OF THE CEO
EX-32.2 SECTION 906 CERTIFICATION OF THE CFO

FORWARD LOOKING STATEMENT AND INFORMATION

Throughout this Annual Report, all references to “the Company,” “World Air Holdings,” “we,” “us” and “our” refer to World Air Holdings, Inc., a Delaware corporation, and its wholly owned subsidiaries including World Airways, Inc. (“World Airways”), North American Airlines, Inc. (“North American”), and World Risk Solutions, Ltd. (“World Risk Solutions”) unless otherwise indicated or the context otherwise requires.

The Company makes its annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, available free of charge through the Investor Relations page on its website, www.worldairholdings.com, as soon as reasonably practicable after such reports are electronically filed with the Securities and Exchange Commission (“SEC”). In addition, the Company’s Code of Ethics for the Chief Executive and Senior Financial Officers, which applies to the Company’s principal executive officer, principal financial officer and principal accounting officer or controller, or persons performing similar functions, is posted on the Company’s website. The Company will disclose any amendments to, or waivers of, this Code of Ethics on its website.

The Company desires to take advantage of the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995 (the “Act”). This Annual Report contains forward-looking statements that are subject to risks and uncertainties including, but not limited to, those set forth under “Risk Factors” below or detailed from time to time in the Company’s periodic reports filed with the SEC. Such reports are available from the Company upon request. These various risks and uncertainties may cause the Company’s actual results to differ materially from those expressed in any of the forward looking statements made by, or on behalf of, the Company in this Annual Report.

Throughout this Annual Report, all references to the “Company,” “World Air Holdings,” “we,” “us” and “our” refer to World Air Holdings, Inc., a Delaware corporation, and its wholly-owned subsidiaries including World Airways, Inc. (“World Airways”), North American Airlines, Inc. (“North American”), and World Risk Solutions, Ltd. (“World Risk Solutions”) unless otherwise indicated or the context otherwise requires.

PART I

Item 1.

Business

World Airways, Inc. was reorganized into a holding company structure under the laws of the state of Delaware, effective January 10, 2005.

The accompanying consolidated financial statements include the accounts of World Air Holdings and its wholly owned subsidiaries, World Airways, North American, and World Risk Solutions. World Airways Parts Company, LLC is a wholly owned subsidiary of World Airways.

World Airways was organized in March 1948 and is a United States (“U.S.”) certificated air carrier. Air transportation operations account for 100% of World Airways’ operating revenues. World Airways provides long-range passenger and cargo charter and wet-lease air transportation serving the U.S. Government, international ~~passenger~~freight and ~~cargo~~passenger ~~air carriers~~airlines, tour operators, ~~international freight forwarders~~ and ~~cruise~~customers ~~ship~~requiring specialized ~~companies~~aircraft services.

North American, previously a privately-held airline based in Jamaica, New York, was acquired by World Air Holdings on April 27, 2005. North American was organized in April 1989 and is also a U.S. certificated air carrier. Air transportation operations account for 100% of North American’s operating revenues. North American provides passenger charter and wet-lease air transportation serving the U.S. Government, tour operators and other airlines. In addition, North American operates international scheduled passenger service in selected markets.

World Risk Solutions, a Bermuda corporation, was formed in November 2004 to improve risk management operations and to reduce ~~insurance~~the ~~costs.~~Company’s ~~World Risk Solutions provides certain~~ insurance ~~cost savings and enhanced risk management programs to the Company~~costs. All significant risks of loss are reinsured by ~~large~~highly rated third party insurance companies.

The Company’s operating philosophy is to build on its existing ~~relationships~~relationship with the U.S. Military to ~~achieve~~solidify a its strong ~~platform~~ ~~for future growth~~platform, while at the same time diversifying and expanding its commercial passenger and cargo business. ~~World Air Holdings further supported this commercial expansion with the acquisition of North American in April 2005.~~

The Company executes its business model under two operating segments, World Airways and North American, in which air transportation operations account for ~~99.9~~100% of World Air Holdings’ operating revenues.

World Airways Segment Performance

Information concerning the product mix of World Airways’ operating revenues is presented in the following table:

	Year Ended December 31,
World Airways	~~2005~~2006		2005	~~2004~~		2004		~~2003~~
	(in millions)
Passenger Charter Operations	$	~~520~~445.8	$	$520.8	~~432.6~~	$	432.6	$	~~343.3~~
Cargo Charter Operations		99112.93		99.9	~~69.1~~		69.1		~~128.5~~
Other		3.1.7		3.0	~~2.2~~		2.2		~~3.1~~

~~World~~The ~~Airways is highly dependent on revenues from the~~ United States Air Force (“USAF”), ~~and~~represented ~~the loss~~segment revenue of ~~the USAF as a customer would have a material adverse effect on the Company~~71.2% ~~The~~in ~~USAF represented~~2006, 76.6% in 2005, and 77.5% in 2004,. ~~and~~No ~~74.7%~~other insingle ~~2003~~customer asaccounted afor ~~percentage~~more than 10% of ~~segment~~World ~~revenues~~Airways’ 2006 operating revenue.

USAF. The Company has provided air transportation services, principally on an international basis, to the USAF since 1951. In exchange for pledges of aircraft to the Civil Reserve Air Fleet (“CRAF”) for use in times of national emergency, the USAF grants to CRAF participants awards of contracts to provide peacetime transportation of personnel and cargo.

The USAF assigns points to air carriers in proportion to the number and type of aircraft made available to the CRAF. The Company utilizes teaming arrangements with other carriers in order to consolidate points and maximize the value of potential awards. The USAF grants fixed contract awards for transportation to CRAF participants based on the number of points assigned. These “fixed” awards provide for known and determinable amounts of revenue to be received during the contract period, which runs from October 1 to September 30 of each year, in exchange for air transportation services. In addition, CRAF participants may be awarded additional revenue during the contract period for air transportation services required beyond those specified in the fixed awards. The Company refers to this additional revenue as “expansion” revenue.

The following table shows the original contract awards to World Airways for the contract fiscal year and actual revenues from the USAF for the three calendar years shown:

World Airways	2005		2004		2003
	(in millions)
Year ended September 30, Original contract award	$	94.0	$	125.8	$	120.0
Year ended December 31, USAF revenue earned:
Fixed passenger	$	102.4	$	129.3	$	73.6
Expansion passenger		375.0		255.7		207.1
Cargo fixed and expansion		0.2		5.7		74.0
Total USAF revenue earned	$	477.6	$	390.7	$	354.7

WorldTable Airways had a total contract backlog of $308.3 million at December 31, 2005. Approximately 42.9% of this backlog relates to contracts with the USAF. World Airways had a backlog of $96.2 million at December 31, 2004. See Note 10 of the Company’s “Notes to Consolidated Financial Statements” in Item 8 for additional information regarding major customers and foreign source revenue. Contents

The original contract for the fiscal year beginning October 1, 2005 and ending September 30, 2006 is $54.0 million for fixed flying for World Airways. The USAF contracts did not incorporate long-term expansion flying for fiscal years 2006, 2005 or 2004. It is expected that World Airways will receive additional expansion business during the fiscal year 2006 contract period for less predictable flying and other short notice requirements.


World Airways	2006		2005		2004
	(in millions)
Year ended September 30, original contract award	$	54.0	$	94.0	$	125.8

Year ended December 31, USAF revenue earned:
Fixed passenger	$	37.2	$	102.4	$	129.3
Expansion passenger		359.3		375.0		255.7
Cargo fixed and expansion		2.2		0.2		5.7

Total USAF revenue earned	$	398.7	$	477.6	$	390.7

World Airways had a total contract backlog of $72.5 million at December 31, 2006. Approximately 36.9% of this backlog relates to contracts with the USAF. World Airways had a backlog of $308.3 million at December 31, 2005. See Note 13 of the Company’s “Notes to Consolidated Financial Statements” in Item 8 for additional information regarding major customers.

The original contract for the fiscal year beginning October 1, 2006 and ending September 30, 2007 is $26.0 million in fixed flying for World Airways. It is expected that World Airways will receive additional expansion business during the fiscal year 2007 contract period for less predictable flying and other short notice requirements.

North American Segment Performance

Information concerning the product mix of North American’s operating revenues is presented in the following table:

	Period April 28 to
North American	2006		Period April 28 toDecember 31, 2005
North American	December 31, 2005
	(in millions)
	(in millions)
Passenger Charter Operations	$	204.8	$	131.0
Passenger Charter Operations	$	131.0
Passenger Scheduled Service		61.0		31.8
Passenger Scheduled Service		31.8
Other		1.4		0.5
Other		0.5

North American’s isprincipal ~~highly~~customers ~~dependent~~and onthe percent of revenues from ~~the~~those ~~USAF~~customers, ~~and~~for the ~~loss~~fiscal ofyear 2006 and the ~~USAF~~period asApril 28, ~~a customer~~2005 ~~would~~through ~~have~~December 31, a2005 ~~material~~were ~~adverse~~as ~~effect~~follows: ~~on the Company.~~

North American’s principal customers and the percent of revenues from those customers, for the period April 28, 2005 through December 31, 2005 were as follows:


North American	2006		Period April 28 to December 31, 2005
USAF	59.6	%	63.5	%
Scheduled service	22.8	%	19.5	%

North American	2005
USAF		63.5	%
Scheduled service		19.5	%

USAF. The following table shows the original contract award to North American for the contract fiscal year and actual revenues from the USAF for the fiscal year 2006 and the period April 28, 2005 through December 31, 2005:


North American	2006		Period April 28 to December 31, 2005
	(in millions)
Year ended September 30, Original contract award	$	7.3	$	1.6

Period ended December 31, USAF revenue earned:
Fixed passenger	$	22.8	$	1.6
Expansion passenger		136.6		102.0

Total USAF revenue earned	$	159.4	$	103.6

North American had a total contract backlog of $43.1 million at December 31, 2006. Approximately 95.6% of this backlog relates to contracts with the USAF. See Note 13 of the Company’s “Notes to Consolidated Financial Statements” in Item 8 for additional information regarding major customers.

The original contract for the fiscal year beginning October 1, 2006 and ending September 30, 2007 is $47.0 million in fixed flying for North American. It is expected that North American will receive additional expansion business during the fiscal year 2007 contract period for less predictable flying and other short notice requirements.

Scheduled Service. North American provides non-stop scheduled service between New York John F. Kennedy International Airport (“JFK”) and Georgetown, Guyana, with four round-trip flights per week. Service schedules are adjusted to accommodate higher demand during the peak summer and Christmas periods. On June 3, 2006, North American initiated new non-stop scheduled service

~~USAF.~~ between ~~The~~Baltimore/Washington ~~following~~International ~~table~~Thurgood ~~shows~~Marshall ~~the~~Airport ~~original~~(“BWI”) ~~contract~~and ~~award~~Banjul, The Gambia with continuing service to Accra, Ghana. Additionally, North American ~~for~~launched ~~the contract~~scheduled ~~fiscal~~service ~~year~~between JFK and ~~actual~~Lagos, ~~revenues~~Nigeria, ~~from~~with ~~the~~three ~~USAF~~round-trip ~~for~~flights ~~the~~per ~~period~~week ~~April 28,~~effective ~~2005~~July ~~through December 31, 2005~~2006.

North American	2005
	(in millions)
Year ended September 30, Original contract award	$	1.6
Period ended December 31, USAF revenue earned:
Fixed passenger	$	1.6
Expansion passenger		102.0
Total USAF revenue earned	$	103.6

North American had a total contract backlog of $26.6 million at December 31, 2005. Approximately 32.1% of this backlog relates to contracts with the USAF. See Note 10 of the Company’s “Notes to Consolidated Financial Statements” in Item 8 for additional information regarding major customers and foreign source revenue.

The original contract for the fiscal year beginning October 1, 2005 and ending September 30, 2006 is $7.3 million for fixed flying for North American. The USAF contracts did not incorporate long-term expansion flying for fiscal years 2006 or 2005. It is expected that North American will receive additional expansion business during the fiscal year 2006 contract period for less predictable flying and other short notice requirements.

Scheduled Service. North American provides non-stop scheduled service between New York John F. Kennedy International Airport (“JFK”) and Georgetown, Guyana with four round-trip flights per week. The service was increased to five round-trip flights per week for the summer season and daily service for the peak Christmas period (December 14, 2005 — January 9, 2006). On July 1, 2005, North American initiated new non-stop scheduled service between JFK and Accra, Ghana, which is currently the only non-stop scheduled service between the United States and Africa provided by a U.S. airline. This service was initiated with one round-trip flight per week. North American previously provided scheduled service between Oakland, California and Hawaii, but this service was discontinued effective September 1, 2005.

Available Information

The Company makes its annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, available free of charge under the Investor Relations page on its website, www.worldairholdings.com, as soon as reasonably practicable after such reports are electronically filed with the Securities and Exchange Commission (“SEC”). In addition, the Company’s Code of Ethics for Chief Executive and Senior Financial Officers, which applies to the Company’s principal executive officer, principal financial officer and principal accounting officer or controller, or persons performing similar functions, is posted on the Company’s website. The Company will disclose any amendments to, or waivers of, this Code of Ethics on its website.

The Company desires to take advantage of the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995 (the “Act”). This Annual Report contains forward looking statements that are subject to risks and uncertainties including, but not limited to, those set forth under “Risk Factors” below or detailed from time to time in the Company’s periodic reports filed with the SEC. Such reports are available from the Company upon request. These various risks and uncertainties may cause the Company’s actual results to differ materially from those expressed in any of the forward looking statements made by, or on behalf of, the Company in this Annual Report.

Overview & Operating Environment

The Company’s ~~core~~operates ~~customers~~in ~~are~~several ~~the~~different ~~USAF~~markets ~~Air~~with ~~Mobility~~the ~~Command~~following ~~(“AMC”),~~type ~~international~~of ~~freight and~~services: passenger airlines, freight forwarders, tour operators and individual customers served by its North American scheduled service. World Airways increases its potential customer base by being able to serve both passenger and

6 • USAF Air Mobility Command (“AMC”) Passenger/Cargo. The USAF awards CRAF participants contracts to provide transportation of personnel and cargo. The revenue rate is fixed annually on a “cost-plus” basis through an annual rate making process. Fuel is reconciled monthly and revenue is adjusted to reflect the actual cost.

~~Table~~• ofACMI-Passenger/Cargo. ~~Contents~~These contracts require that the company provide the aircraft, crew, maintenance and insurance. The customer is responsible to pay for all other operating expenses, including fuel. These contracts are also referred to as “wet leases”.

~~cargo~~• ~~customers~~Full ~~with~~Service-Passenger/Cargo. ~~its~~These ~~aircraft~~contracts ~~fleet.~~require To the ~~knowledge~~company provide all components of ~~the~~flight ~~Company~~operations, noincluding ~~other U~~fuel.S. ~~charter~~The ~~airline~~company ~~flying~~is ~~wide-body~~limited ~~aircraft~~in ~~serves~~its ~~both~~exposure ~~the~~to ~~passenger~~fuel ~~and~~price ~~cargo~~fluctuations ~~markets.~~by ~~Both World~~utilizing ~~Airways~~a ~~and~~reconciliation ~~North~~clause ~~American can respond~~ to ~~rapidly~~the ~~changing~~actual ~~market~~cost ~~conditions~~of ~~and~~fuel ~~requirements because~~as ~~each~~a ~~carrier’s~~“pass ~~fleet~~through” type of ~~passenger~~cost ~~aircraft~~on ~~can~~most ~~be deployed in a variety~~ of ~~configurations~~its contracts.

~~Charter~~• ~~contracts~~Scheduled ~~that~~Passenger require the Company to supply an aircraft, operating crew, maintenance, and insurance are called “ACMI” or “wet-leases”, and the Company’s customers are responsible for other operating costs, including fuelService. ~~“Full~~This service” ~~charter~~requires ~~contracts are those which, in addition to ACMI costs,~~ the Company isto ~~responsible~~provide ~~for~~all ~~most~~components ~~other~~of ~~costs associated with~~ flight operations, including ~~landing fees, ground handling and~~ fuel. InCustomers ~~general,~~purchase ~~fluctuations~~seats ~~in the price of fuel has not had a significant impact~~ on ~~the~~regularly Company’s operations due to provisions protecting against such risk contained in the Company’s military contracts and charter contracts with its customers, thereby limiting the Company’s exposure. The Company does have limited exposure to fuel price fluctuations for scheduled services operated ~~by North American, which represented less than 5% of consolidated operating revenues for the year ended December 31, 2005~~flights. In 2005, full service and ACMI charter contracts represented 78% and 18% of total operating revenues, respectively. By comparison, full service charter contracts in 2004 represented 82% of total operating revenue, while ACMI contracts accounted for 18% of total operating revenues. This shift in revenue mix is due almost entirely to the inclusion of scheduled service revenue at North American. In any given year, the mix of full service versus ACMI can shift, depending on new contracts as well as the magnitude of flying for the USAF, which is classified as full service. The Company attempts to maximize profitability by entering into both ACMI contracts and full service agreements that meet the requirements of its customers. Under both types of contracts, the customer bears the risk of utilizing the passenger and/or cargo capacity of the aircraft.

~~The~~A ~~market~~core ~~for~~concept ~~ACMI~~of ~~and~~the ~~full~~Company’s ~~service charter~~ business model is ~~highly~~having ~~competitive.~~a ~~The~~flexible ~~Company~~aircraft ~~believes~~fleet, which allows the ~~that~~Company to cross utilize the ~~most~~same ~~important~~passenger ~~criteria~~configured ~~for~~aircraft ~~competition~~used in the AMC, charter ~~business~~or ~~include~~scheduled service markets. The Company employs a similar model as it relates to the ~~range~~cockpit workforce, asthat ~~well~~is, the same crewmembers can be utilized to fly aseither the passenger ~~and~~or ~~payload~~freighter ~~capabilities~~aircraft ofat ~~the~~World Airways or either passenger aircraft, intype ~~addition~~at toNorth ~~the~~American. ~~price,~~This flexibility allows the Company to maximize both aircraft and crew utilization, each of which is a crucial component of sustained ~~quality~~profitability. ~~and~~Another ~~reliability~~key component of the ~~air~~business ~~transportation~~model ~~service~~is ~~provided~~to reduce exposure to fuel costs. The ~~ability~~fuel exposure of the Company ~~to compete~~is ~~depends~~limited through its contracts with the AMC, inwhere ~~part~~actual fuel costs are fully reimbursed and through ACMI contracts, where ~~upon~~fuel is directly paid for by the customer. The Company’s only exposure to fluctuations in fuel prices is with its ~~ability~~North American scheduled service (surcharges are utilized to ~~provide~~reduce ~~the~~this ~~quality~~exposure), ~~dependable~~maintenance ~~product~~ferries, ~~that~~where ~~brings~~aircraft are ~~value~~positioned for maintenance, and a small number of full-service contracts. Finally, with the exception of scheduled service, the Company has no exposure to unused capacity with any of its other customers. The Company’s customers buy the entire aircraft for their use, and the utilization of the aircraft’s capacity, whether seats or pallet positions, is the responsibility of the customer.

Due to the high fixed costs of leasing and maintaining aircraft and the costs for cockpit crewmembers and flight attendants, the Company strives to increase utilization to enhance profitability. Although the Company’s preferred strategy is to enter into long-term contracts with customers, the terms of existing customer contracts are shorter than the terms of the Company’s lease obligations with respect to its aircraft. There is no assurance that the Company will be able to enter into additional contracts with new or existing customers or that it will be able to obtain enough additional business to fully utilize each aircraft. The Company’s financial position, results of operations or liquidity could be materially adversely affected by periods of low aircraft utilization and yields.

The Company has unsold capacity. However, the Company historically has been successful in obtaining additional business to utilize some or all of its available capacity. Although there can be no assurance that it will be able to secure additional business to utilize unsold capacity, the Company is actively seeking additional business for 2006 and beyond.

Aircraft Leases

The Company leases ~~100%~~all but one of its operational aircraft fleet under operating lease agreements. World Airways’ operating fleet consists of 17 aircraft, of which ~~ten~~nine are passenger aircraft and ~~seven~~eight are freighter aircraft, with an average remaining base lease term of ~~four~~five years. North American’s operating fleet consists of ~~eight~~nine aircraft, all of which are operated in passenger configurations, with an average remaining base lease term of ~~three~~five years.

Maintenance ]

Airframe and engine maintenance costs, which account for most of the Company’s maintenance expenses, typically increase as the aircraft fleet ages. The Company outsources major airframe maintenance and engine work to several suppliers.

Aviation Fuel

The Company incurs fuel expenses for full- service charter flights provided to customers, ~~and for~~ scheduled service flights and ~~military~~maintenance ~~contracts~~ferries. ~~Military~~The military contracts ~~and~~ and certain full service charter contracts contain terms that limit the Company’s exposure to increases in fuel prices. However, the terms of such contracts are renewed annually and take into consideration estimated market prices for fuel for the period under contract and are ~~trued~~reconciled up based on actual fuel prices. Both the cost and availability of aviation fuel are ~~subject~~ toinfluenced by many economic and political factors as well as events occurring throughout the world and remain subject to various unpredictable economic and market factors that affect the supply of all petroleum products. Fluctuations in the price of fuel have historically not had a significant impact on the Company’s operations because, in general, World Airways’ charter contracts with its customers limit the Company’s exposure to increases in fuel prices. For the period ending December 31, 2006, these contracts covered approximately 96% of fuel gallons purchased. North American’s overall fuel price volatility exposure is limited to scheduled service operations, which represented approximately 24% of its block hours for the period ending December 31, 2006. The Company’s primary sources of aviation fuel are major oil companies serving commercial airports and United States military organizations at military bases. The Company’s current fuel purchasing policy provides for the purchase of fuel within seven days in advance of all flights based on

7 6

~~supply~~ current ofprices ~~all~~set ~~petroleum~~by ~~products~~individual suppliers. ~~Fluctuations~~The inCompany ~~the~~annually ~~price~~solicits ofquotes ~~fuel~~for ~~have~~prices ~~historically not~~of ~~had~~aviation afuel ~~significant~~from ~~impact~~a ongroup ~~the~~of ~~Company’s~~suppliers ~~operations~~at ~~because, in general, World Airways’~~commercial ~~charter~~airports. ~~contracts~~Since ~~with its customers limit~~ the Company’s exposure to ~~increases in~~ fuel ~~prices. For the period ending December 31, 2005, these contracts covered approximately 97% of fuel purchased. North American’s overall fuel exposure~~ is limited ~~to scheduled service operations~~, ~~which represented~~the ~~approximately~~Company ~~26%~~has ofto ~~its~~date ~~block~~chosen ~~hours~~not ~~from April 28~~ to ~~December 31,~~purchase ~~2005. Notwithstanding~~fuel ~~this~~under ~~limited~~long-term ~~exposure,~~contracts ~~substantial~~or ~~increases~~enter ininto ~~the~~futures ~~price~~ or ~~the unavailability of aviation~~ fuel ~~could~~swap ~~have a material adverse effect on the Company~~contracts.

The Company’s primary sources of aviation fuel are major oil companies serving commercial airports and United States military organizations at military bases. The Company’s current fuel purchasing policy provides for the purchase of fuel within seven days in advance of all flights based on current prices set by individual suppliers. The Company annually solicits quotes for prices of aviation fuel from a group of suppliers at commercial airports. Since the Company’s exposure to fuel is limited, the Company has to date chosen not to purchase fuel under long-term contracts or enter into futures or fuel swap contracts.

Regulatory Matters

~~Both~~ World Airways and North American ~~have~~are ~~been~~subject ~~authorized~~ to ~~engage in commercial air~~ ~~transportation~~the byjurisdiction of the ~~Department~~Federal ofAviation ~~Transportation~~Administration (“~~DOT~~FAA”) orwith ~~its~~respect ~~predecessor agencies. World Airways is currently authorized~~ to ~~engage~~aircraft inmaintenance, ~~scheduled~~flight ~~and~~operations, ~~charter~~equipment, ~~air~~aircraft ~~transportation~~noise, toground ~~provide combination~~facilities, ~~(persons~~dispatch, ~~property~~communications, ~~and~~training, ~~mail)~~weather ~~and~~observation, ~~all-cargo~~flight ~~services between all points in the U.S.~~time, ~~its~~ ~~territories~~crew ~~and possessions. It also holds worldwide charter authority for both combination and all-cargo operations. In addition~~qualifications, ~~World~~aircraft ~~Airways~~registration ~~is authorized to conduct scheduled combination services to the foreign points listed in its DOT certificate~~ and ~~also~~other ~~holds~~matters ~~certificates~~affecting ~~of authority~~air ~~to engage in scheduled all-cargo services to a number of foreign destinations~~safety. ~~World Airways does not operate any scheduled service on its own behalf.~~

~~North~~The ~~American~~Company isbelieves ~~currently~~World ~~authorized~~Airways toand ~~engage~~North American are in ~~scheduled~~compliance in ~~and~~all ~~charter~~material ~~air~~respects ~~transportation~~with ~~to provide~~all ~~combination~~requirements ~~(persons,~~necessary ~~property~~to ~~and~~maintain ~~mail)~~in ~~services~~good ~~between~~standing ~~all~~their ~~points~~operating inauthorities granted by the U.S., ~~its territories~~Department ~~and~~of ~~possessions.~~Transportation It(“DOT”) ~~also~~and ~~holds~~the ~~worldwide~~air ~~charter~~carrier ~~authority~~operating ~~for~~certificates ~~combination~~issued ~~services~~by the FAA. A Inmodification, ~~addition~~suspension, ~~North~~or ~~American~~revocation isof ~~authorized~~any toof ~~conduct~~either ~~scheduled~~airline’s ~~combination~~DOT ~~services~~or toFAA authorizations or certificates could have a material adverse effect on the ~~foreign~~Company. The airlines are also subject to state and local laws and regulations at locations ~~points~~where ~~listed~~they inoperate ~~its~~and ~~certificate~~the orregulations asof ~~otherwise~~various ~~approved~~local byauthorities that operate the ~~DOT~~airports each airline serves. ~~North~~Certain ~~American~~airport ~~operates~~operations ahave adopted local regulations that, among other things, impose curfews and noise abatement regulations. ~~limited~~While ~~number~~the Company believes both airlines are currently in compliance in all material respects with all appropriate standards and have all required licenses and authorities, any material non-compliance with such standards, or the revocation or suspension of ~~scheduled~~licenses ~~services~~or onauthorities, ~~its~~could ~~own~~have ~~behalf~~a material adverse effect on the Company.

~~World~~Several ~~Airways~~aspects ~~and~~of ~~North~~airline ~~American~~operations are subject to regulation ~~the~~or ~~jurisdiction~~oversight ofby ~~the~~ Federal ~~Aviation Administration~~agencies ~~(“FAA”)~~other ~~with~~than ~~respect~~the toDOT ~~aircraft~~or ~~maintenance,~~FAA. ~~flight~~In ~~operations~~addition, ~~equipment,~~the ~~aircraft noise,~~Company ~~ground~~is ~~facilities,~~subject ~~dispatch,~~to ~~communications,~~the ~~training,~~jurisdiction ~~weather~~of ~~observation,~~other ~~flight~~governmental ~~time~~entities, ~~crew~~ ~~qualifications~~including, ~~aircraft~~without ~~registration~~limitation: ~~and~~(i) the ~~other~~Department ~~matters~~of ~~affecting~~Homeland ~~air~~Security ~~safety. The FAA~~regarding ~~requires~~aviation ~~air~~security ~~carriers~~matters, tothe ~~obtain~~Transportation anSecurity ~~operating~~Administration, ~~certificate~~and Customs and ~~operations~~Border ~~specifications~~Protection, ~~authorizing~~ (ii) the ~~carriers~~Federal toCommunications ~~operate~~Commission ~~approved~~regarding ~~services~~its touse ~~particular~~of ~~airports~~radio ~~using~~facilities ~~specified~~pursuant ~~equipment.~~to ~~These certificates~~the ~~and~~Federal ~~operations~~Communications ~~specifications~~Act ~~are~~of ~~subject to amendment~~1934, ~~suspension~~as amended, ~~revocation, or termination by~~ (iii) the ~~FAA.~~Commerce ~~In addition~~Department, ~~all~~and of the ~~Company’s~~Animal ~~aircraft~~and ~~must~~Plant ~~have~~Health ~~certificates~~Inspection Service of ~~airworthiness~~ ~~issued or approved by~~ the ~~FAA.~~Department ~~World~~of ~~Airways~~Agriculture ~~and~~regarding ~~North~~the ~~American~~Company’s ~~maintain~~international ~~separate FAA air carrier operating certificates and~~ operations, ~~specifications under Part~~(iv) ~~121 of~~ the ~~Federal Aviation~~Environmental ~~Regulations.~~Protection ~~The~~Agency ~~FAA~~regarding compliance ~~has~~with ~~the~~standards ~~authority~~for toaircraft ~~suspend~~exhaust ~~temporarily~~emissions orand ~~revoke permanently~~ the ~~authority~~ disposition of ~~either~~hazardous ~~certificate~~materials, ~~holder~~and or(v) the ~~its~~Department ~~licensed~~of ~~personnel~~Justice ~~for~~regarding ~~failure~~certain tomerger ~~comply~~and ~~with regulations~~acquisition ~~promulgated~~transactions. byThe ~~the~~Company ~~FAA~~believes ~~and~~it tois ~~assess~~in ~~civil~~substantial ~~penalties~~compliance with ~~for~~all ~~such~~applicable ~~failures~~regulatory requirements.

The Company’s ~~believes~~international ~~World~~operations ~~Airways and North American~~ are ingenerally ~~compliance~~governed ~~in all material respects with all requirements necessary to maintain in good standing their operating authorities granted~~ by ~~the~~a ~~DOT~~network ~~and~~of ~~the~~bilateral civil air ~~carrier~~transport ~~operating~~agreements ~~certificates~~providing ~~issued~~for by the ~~FAA.~~exchange ~~A modification, suspension, or revocation~~ of ~~any of~~traffic ~~either~~rights ~~airline’s~~between ~~DOT~~governments, orwhich ~~FAA~~then ~~authorizations~~select orand ~~certificates~~designate ~~could~~air ~~have~~carriers aauthorized ~~material~~to ~~adverse~~exercise ~~effect upon~~such ~~the Company~~rights. ~~The~~Bilateral ~~airlines~~provisions ~~are~~pertaining ~~also subject~~ to ~~state~~the ~~and~~Company’s ~~local~~wet ~~laws~~lease ~~and~~services ~~regulations at~~vary ~~locations~~considerably ~~where~~depending ~~they~~on ~~operate and~~ the ~~regulations~~particular ofcountry. ~~various~~Most ~~local~~bilateral ~~authorities~~agreements ~~that~~into ~~operate~~which the ~~airports~~ ~~that each airline serves~~U.S. ~~Certain~~has ~~airport~~entered ~~operations~~permit ~~have~~either ~~adopted~~country ~~local~~to ~~regulations~~terminate ~~that, among~~the ~~other~~agreement ~~things,~~with ~~impose~~one ~~curfews~~year’s ~~and~~notification ~~noise~~to ~~abatement~~the ~~regulations~~other. ~~While~~In the ~~Company~~event ~~believes~~a ~~both airlines~~bilateral ~~are~~agreement ~~currently in compliance in all material respects with all appropriate standards and~~is ~~have~~terminated, ~~all~~international ~~required~~air ~~licenses~~service ~~and~~between ~~authorities,~~the ~~any~~affected ~~material~~countries ~~non-compliance~~is ~~with~~governed ~~such~~by ~~standards, or~~ the ~~revocation~~ orprinciples ~~suspension~~ of ~~licenses~~comity orand ~~authorities, could have a material adverse effect on the Company~~reciprocity.

~~Several~~As ~~aspects~~a matter of ~~airline~~regulatory policy, ~~operations~~the ~~are~~DOT ~~subject~~has tostated ~~regulation~~that orit ~~oversight~~would bynot ~~Federal~~permit ~~agencies other~~aggregate ~~than~~equity ~~the~~ownership ~~DOT~~of ora ~~FAA.~~US ~~For~~air ~~instance,~~carrier ~~labor~~by ~~relations~~foreign citizens in ~~the~~an ~~air~~amount ~~transportation~~in ~~industry~~excess ~~are generally~~of ~~regulated~~49% ~~under~~(25% where the ~~Railway~~foreign ~~Labor~~investors ~~Act,~~are ~~which~~nationals ~~vests~~of ~~the~~a ~~National~~country ~~Mediation~~that ~~Board~~does ~~(“NMB”)~~not have an open skies ~~with~~aviation ~~certain~~bilateral ~~regulatory~~agreement ~~powers~~with ~~relating~~the toU.S.). ~~disputes between~~The ~~airlines~~Company ~~and~~believes ~~labor~~it ~~unions~~fully ~~that~~complies ~~arise~~as ~~under~~of ~~collective~~the ~~bargaining~~date ~~agreements~~hereof with U.S Incitizen ~~addition, the~~ownership ~~Company~~requirements. is

8Due to their participation in the CRAF program of the USAF, World Airways and North American are subject to inspections by the military approximately every two years as a condition of retaining their eligibility to perform military charter flights. The last such inspection at World Airways occurred in 2005, and it met the requirements for continued participation in the CRAF program. The next inspection at World Airways is anticipated to occur in 2007. The last such inspection at North American occurred in 2006, and it also met the requirements for continued participation in the CRAF program. The next inspection at North American is anticipated to occur in 2008.

subject to the jurisdiction of other governmental entities, including (i) the Department of Homeland Security regarding aviation security matters and Customs and Border Protection, (ii) the Federal Communications Commission regarding its use of radio facilities pursuant to the Federal Communications Act of 1934, as amended, (iii) the Commerce Department, and the Animal and Plant Health Inspection Service of the Department of Agriculture regarding the Company’s international operations, (iv) the Environmental Protection Agency regarding compliance with standards for aircraft exhaust emissions and the disposition of hazardous materials, and (v) the Department of Justice regarding certain merger and acquisition transactions. The Company believes it is in substantial compliance with all applicable regulatory requirements.

The Company’s international operations are generally governed by a network of bilateral civil air transport agreements providing for the exchange of traffic rights between governments, which then select and designate air carriers authorized to exercise such rights. In the absence of a bilateral agreement, such international air services are governed by principles of comity and reciprocity. Bilateral provisions pertaining to the Company’s wet lease services vary considerably depending on the particular country. Most bilateral agreements into which the U.S. has entered permit either country to terminate the agreement with one year’s notification to the other. In the event a bilateral agreement is terminated, international air service between the affected countries is governed by the principles of comity and reciprocity.

Pursuant to federal law, no more than 25% of the voting interest in the Company, or either of its primary airline subsidiaries, may be owned or controlled by foreign citizens. In addition, under existing precedent and the applicable statutory requirements, actual control of the Company must reside with U.S. citizens. As a matter of regulatory policy, the DOT has stated that it would not permit aggregate equity ownership of a domestic air carrier by foreign citizens in an amount in excess of 49% (25% where the foreign investors are nationals of a country that does not have an open skies aviation bilateral agreement with the U.S.). The Company believes it fully complies as of the date hereof with U.S citizen ownership requirements.

Due to their participation in the CRAF program of the USAF, World Airways and North American are subject to inspections by the military approximately every two years as a condition of retaining their eligibility to perform military charter flights. The last such inspection at World Airways occurred in 2005, and it met the requirements for continued participation in the CRAF program. The next inspection at World Airways is anticipated to occur in 2007. The last such inspection at North American occurred in 2004, and it also met the requirements for continued participation in the CRAF program. The next inspection at North American is anticipated to occur in 2006. The USAF may terminate its contract with either of the Company’s operating airlines if (i) either airline fails to pass such inspection or otherwise fails to maintain satisfactory performance levels, (ii) either airline loses its airworthiness certificate, or (iii) the aircraft pledged to the contracts lose their U.S. registry or are leased to unapproved carriers.

Employees

As of December 31, ~~2005~~2006, the Company had approximately 2,104 full-time equivalent employees.

The World Airways cockpit crewmembers and flight attendants are represented by the International Brotherhood of Teamsters (“IBT”) and are subject to separate collective bargaining agreements. The World Airways aircraft dispatchers, who are represented by the Transport Workers Union (“TWU”), are also subject to a collective bargaining agreement.

In January 2004, the North American cockpit crewmembers voted to be represented by the IBT. In August 2005, the North American flight attendants also voted to be represented by the IBT. Neither group has ~~agreed~~finalized tothe terms of an initial ~~contract~~collective bargaining agreement.

~~The~~7 Company is unable to predict whether any of its employees not currently represented by a labor union will elect to be represented by a labor union or a collective bargaining unit. However, the Company is not aware of any other parties or group of employees who have indicated any intent of petitioning for such an election.

Profit Sharing

Employees of the Company are part of an annual profit sharing or incentive compensation program. Individual bonus payments at World Airways and North American are based on the financial results of the specific airline while payments for employees of World Air Holdings are based on the consolidated financial results of the Company.

~~Risk~~Profit ~~Factors~~ Sharing

Employees of the Company participate in an annual profit sharing or incentive compensation program. Individual bonus payments at World Airways and North American are based on the financial results of the specific airline while payments for employees of World Air Holdings are based on the consolidated financial results of the Company.

Item 1A.

Risk Factors

The Company cautions the reader that the risk factors discussed below may not be exhaustive. The Company operates in a continually changing business environment and new risk factors emerge from time to time. The Company cannot predict such new risk factors nor can it assess the impact, if any, of such new risk factors on the Company’s business or the extent to which any factor or combination of factors may cause actual results to differ materially from those expressed in any forward-looking statement.

~~The~~If the Company~~’s substantial~~ ~~operating~~loses ~~lease~~the ~~obligations~~USAF ~~and~~as ~~debt~~a ~~limit its ability to fund general corporate requirements~~customer, ~~limit~~ its ~~flexibility~~business ~~in responding~~would tobe ~~competitive~~materially ~~developments~~adversely ~~and increase its vulnerability to adverse economic and industry conditions~~affected.

The Company ~~has~~is ~~significant long-term~~highly ~~obligations~~dependent ~~relating~~on torevenues ~~operating~~from ~~leases~~the inUSAF. ~~connection~~Revenues ~~with its~~from ~~aircraft~~the ~~and~~USAF ~~spare~~represented ~~engines~~67.4% and ~~its~~73.8% ~~leased~~of ~~real~~the ~~property.~~Company’s Attotal revenues for the years ended December 31, 2006 and 2005, respectively. The Company provides transportation services to the USAF under annual contracts. If the Company loses these contracts with the USAF, or if the USAF reduces substantially the amount of business it awards ~~obligations~~to ~~totaled~~the ~~$507.1 million~~Company ~~through~~in ~~2010~~a given year, the Company may not be able to replace the lost business and ~~$213~~ its financial condition and results of operations could be materially adversely affected.~~7 million~~ ~~thereafter~~The Company believes that the USAF will continue to contribute a significant portion of the Company’s total revenues in 2007, ~~which~~but ~~includes~~the ~~lease~~lessening ~~extensions~~of military activities in connection with the conflicts in Iraq and ~~aircraft~~ ~~commitments~~Afghanistan ~~signed~~could byreduce the USAF’s demand for transportation services, which could negatively effect the Company’s asresults of ~~June 30,~~operations ~~2006~~in 2007 and beyond.

AtThe ~~December 31,~~Company’s ~~2005,~~AMC ~~the~~charter ~~Company~~business is dependent ~~had~~on ~~$24.0 million~~its ofparticipation ~~debt~~in ~~outstanding~~a ~~under~~team accredited to participate in the ~~$30~~CRAF program.~~0 million term~~ ~~loan~~If (one of the ~~“ATSB~~team ~~Loan”).~~members Onwithdraws ~~March 30~~from the program, ~~2006~~or if one of the Company’s ~~prepaid~~competitors commit additional aircraft to this program, the ~~remaining~~Company’s ~~principal~~share ~~balance~~ of AMC ~~$24.0 million~~flying ~~under~~may ~~the~~decline, ~~ATSB~~which ~~Loan~~could ~~with~~have ~~funding~~a ~~from~~material ~~its~~adverse ~~working~~effect ~~capital~~on the results of operations and financial condition.

~~Additionally~~Each ~~on March 30~~year, ~~2006,~~the ~~World~~Air ~~Airways~~Mobility ~~and~~Command ~~North~~grants ~~American~~a ~~entered~~certain ~~into~~portion of its AMC charter business to different airlines based on a ~~Loan~~point system that is determined by the amount and ~~Security~~type of aircraft pledged to the CRAF program. The Company participates in the CRAF program ~~Agreement~~through a teaming arrangement with ~~Wachovia~~other ~~Bank,~~airlines. The ~~National~~formation ~~Association~~of ~~(“Wachovia”)~~competing teaming arrangements, ~~for~~an increase by other air carriers in their commitment of aircraft to the ~~issuance~~program, the withdrawal of ~~loans~~our ~~and~~team’s current partners, or a ~~letters~~reduction of ~~credit~~the upnumber toof ~~$50.0 million~~aircraft ~~subject~~pledged to ~~certain~~the ~~terms,~~CRAF ~~conditions~~program by our team could adversely affect the volume of our revenues from our AMC Charter business, ~~and~~which ~~limitations.~~could ~~There are~~have noa ~~amounts~~material ~~outstanding~~adverse effect on ~~this~~our ~~facility.~~business, results of operations and financial condition.

The ~~covenants contained in the~~ Company’s ~~loan~~substantial ~~agreements~~operating ~~and~~lease obligations limit its ~~operating leases~~ability ~~may~~to fund general corporate requirements, limit ~~the~~its ~~Company’s~~flexibility ~~financial~~in responding to competitive developments and ~~operating~~increase ~~flexibility~~its vulnerability to adverse economic and industry conditions.

The ~~ATSB~~Company ~~and~~has ~~Wachovia~~significant ~~loan~~long-term ~~agreements and~~obligations ~~the~~relating to operating leases ~~relating~~in toconnection ~~some~~with ofits ~~the Company’s~~ aircraft, ~~contain~~spare ~~restrictive~~engines ~~covenants that impose significant operating~~ and ~~financial~~its ~~restrictions on~~leased ~~the~~real ~~Company~~property. ~~Under~~At ~~these~~December 31, ~~loan agreements~~2006, ~~the~~these ~~Company~~obligations istotaled ~~subject~~$504.0 tomillion ~~certain~~through ~~covenants~~2011 ~~pursuant~~and to$132.8 ~~which~~million ~~the~~thereafter, ~~Company~~which ~~must~~includes ~~satisfy~~lease ~~various~~extensions ~~financial~~and ~~covenants~~aircraft ~~requiring~~commitments itsigned toby ~~comply~~the ~~with certain financial ratios and capital expenditures restrictions~~Company.

~~The~~To ~~Company~~provide isadditional ~~subject~~available toliquidity, ~~the~~on ~~following~~March 30, ~~restrictions~~2006, ~~related~~World toAirways ~~its~~and ~~debt~~North American entered into a Loan and ~~lease~~Security Agreement (as amended) with Wachovia Bank, National Association (“Wachovia Loan”), for the issuance of loans and letters of credit up to $50.0 million ~~arrangements:~~ subject to certain terms, conditions, and limitations. The Company had no borrowing at December 31, 2006.

•Due ~~The Company is limited in its ability~~ to ~~obtain~~our ~~additional financing. Prior to the prepayment of the ATSB Loan, the Company was~~ limited fleet ~~in its ability to obtain additional financing. Its indebtedness outstanding under the $30.0 million ATSB Loan was secured by substantially all of the Company’s assets. In addition~~size, ~~the~~if ~~ATSB Loan contained restrictive provisions that required prepayments in the event the Company sold~~ any ~~significant assets, received proceeds from future borrowings from other sources or the issuances~~ of ~~certain~~our ~~securities,~~aircraft orbecomes received net proceeds from insurance or condemnation. The Company’s indebtedness under the Wachovia Loan and Security Agreement is secured by substantially all of the Company’s accounts receivables and other assets. In additionunavailable, the ~~Wachovia agreement contains restrictive provisions from future borrowings from other sources or issuances of certain securities, or receipts of net proceeds from insurance or condemnation. • The~~ Company’s ~~ability to fund general corporate requirements, including capital expenditures,~~ may besuffer ~~impaired.~~greater ~~The~~damage ~~Company has substantial obligations~~ to ~~pay principal and interest on~~ its ~~debt~~service, ~~lease~~reputation ~~payments,~~ and ~~other~~profitability ~~recurring~~than ~~fixed~~airlines costs. Accordingly, the Company may have to use its working capital to fund such payments and other recurring fixed costs instead of funding general corporate requirements. • The Company’s ability to respond to competitive developments and adverse conditions may be limited. With a restricted ability to obtain additional financing and with ~~substantial~~larger ~~fixed costs, the Company may not be able to fund the capital expenditures required to remain competitive or to withstand prolonged adverse economic conditions~~fleets.

~~These~~As ~~restrictions~~of ~~and~~December 31, ~~requirements may~~2006, ~~limit~~ the Company’s ~~financial~~operates ~~and~~a ~~operating~~fleet ~~flexibility~~of 26 aircraft. ~~In addition,~~Given ifthe limited number of aircraft the Company ~~fails~~operates, toif ~~comply~~an ~~with~~aircraft ~~these~~becomes ~~restrictions~~unavailable ordue to ~~satisfy~~unscheduled ~~these requirements~~maintenance, ~~its~~ ~~obligations~~repairs ~~under~~or other reasons, the ~~loan agreements~~Company could suffer greater adverse financial and ~~its~~reputational ~~operating~~impact ~~leases~~than ~~may~~larger beairlines ~~accelerated~~if the flights are delayed or canceled due to the absence of replacement aircraft. ~~The~~If the Company ~~cannot~~is ~~assure~~unable ~~that~~to itoperate ~~would~~those ~~be able~~aircraft tofor ~~satisfy~~a prolonged ~~all~~period of ~~these~~time ~~obligations~~for ~~upon~~reasons ~~their~~outside ~~acceleration.~~of ~~The~~its ~~failure~~control, for example, due to ~~satisfy~~catastrophic ~~these obligations~~event ~~would~~or ~~materially~~ a terrorist act, the financial condition and results of operations could be disproportionately adversely affected.

10 8

~~adversely~~Any ~~affect~~inability ~~the~~to ~~Company’s~~secure ~~business,~~and ~~operations~~maintain additional compatible aircraft, ~~financial~~engines ~~results~~ or ~~liquidity~~spare asparts, ~~well~~on terms asfavorable to the ~~value~~Company ofor ~~the~~at ~~Company’s~~all, ~~common~~would ~~stock~~increase its operating costs and could adversely affect profitability.

~~Fluctuations~~Any increase in ~~interest~~demand ~~rates~~for the ~~could~~types ~~adversely~~of ~~affect~~aircraft the Company’s ~~liquidity~~flies (B-757, ~~non~~ B-~~operating~~767, ~~expenses~~MD-11, and ~~financial~~DC-10’s), ~~results~~or may fly in the future, could impact its ability to obtain additional aircraft, engines or spare parts. The Company may be unable to obtain additional suitable aircraft, engines or spare parts on satisfactory terms or at the time needed for its operations or for the implementation of its growth plans.

Under the Wachovia loan agreement, the Company’s borrowings bear interest at fluctuating rates. The applicable rate is determined by either the bank’s base lending rate, the Federal Funds Rate, the Eurodollar or London Interbank Offered Rate (“LIBOR”) plus an applicable percentage. The rates applicable to outstanding borrowings fluctuate based on many factors including, but not limited to, general economic conditions, and general interest rates, including the prime rate, and the supply of and demand for credit in the London interbank market. The Company has not hedged its interest rate exposure and, accordingly, the Company’s interest expense for any particular period may fluctuate. To the extent these rates increase, the Company’s interest expense will increase, in which event the Company may have difficulties making interest payments and funding its other fixed costs, and its available cash flow for general corporate requirements may be adversely affected.

If the Company loses the USAF as a customer, its business would be significantly adversely affected.

The Company is highly dependent on revenues from the USAF. Revenues from the USAF represented 73.8% and 77.5% of the Company’s total revenues for the years ended December 31, 2005 and 2004, respectively. The Company provides transportation services to the USAF under annual contracts. If the Company loses these contracts with the USAF, or if the USAF reduces substantially the amount of business it awards to the Company in a given year, the Company may not be able to replace the lost business and its financial condition and results of operations could be materially adversely affected. The Company believes that the USAF will continue to contribute a significant portion of the Company’s total revenues in 2006, but the lessening of military activities in connection with the conflicts in Iraq and Afghanistan could reduce the USAF’s demand for transportation services, which could negatively affect the Company’s results of operations in 2006 and beyond.

The Company’s non-military customers may cancel or default on their contracts with the Company.

Non-military customers that have contracted with the Company may cancel or default on their contracts, and the Company may not be able to obtain other business to replace the resulting loss in revenues. For the year ended December 31, 2005, the Company’s five largest non-military customers accounted for approximately 16.0% of its total operating revenues. If these contract customers cancel or default on their obligations and the Company is not able to obtain other business, its financial position, results of operations and liquidity could be materially adversely affected.

The Company’s business is dependent on the price and availability of aircraft fuel.

The cost of fuel is largely unpredictable and, while most of the Company’s contracts ~~cover~~limit the Company’s exposure to changes in the cost of fuel, certain scheduled service business is subject to the impact of fuel price increases. Due to competition, the Company cannot always increase fares on these routes sufficiently to cover fuel price increases. Additionally, significant disruptions in the supply of aircraft fuel could have a ~~negative~~ ~~impact~~material adverse effect on the Company’s operations and operating results.

If the Company’s mix of business creates lower yields relative to the cost per block hour, the Company’s business will suffer.

Due to the high fixed costs of leasing and maintaining the Company’s aircraft and the costs for cockpit crewmembers and flight attendants, each of the Company’s contracts must achieve an appropriate balance between utilization of the aircraft and yield in order to operate profitably. The Company looks to expand contracts with existing customers while at the same time searching for new opportunities that will allow the Company to increase both utilization and yields. The Company’s current contracts do not fully utilize all aircraft each day. New customer needs may not fit with the available time on each aircraft. The Company may not be able to charge a rate sufficient to cover the total cost of providing the service including overhead. The Company’s financial position, results of operations or liquidity could be materially adversely affected by periods of low aircraft utilization and low yields.

The Company may not be able to execute customer contracts that match aircraft lease lives to customer contract terms.

Although the Company’s preferred strategy is to enter into long-term contracts with its customers, the terms of the Company’s existing customer contracts are in most cases substantially shorter than the terms of the Company’s lease obligations with respect to its aircraft. The Company cannot provide assurance that it will be able to enter into additional contracts with new or existing customers or that the Company will be able to obtain enough additional business to fully utilize each aircraft over the remaining term of the Company’s leases for said aircraft. The Company’s financial position, results of operations or liquidity could be materially adversely affected by the mismatch of aircraft lease obligations and customer contracts.

In the event of an aircraft accident, the Company may incur substantial losses that may not be entirely covered by insurance.

The Company may incur substantial losses in the event of an aircraft accident. These losses may include the repair or replacement of a damaged aircraft, the consequent temporary or permanent loss of the aircraft from service, loss of business due to negative publicity, and claims of injured passengers and others and claims of persons for damaged or destroyed cargo.

The Company is required by company policy, the DOT, and contractual obligations with lessors, ~~and the DOT~~ to carry liability insurance. The Company currently maintains liability insurance for passengers and third party damages, excluding those caused by war or terrorist attacks, in the amount of $12.5 0 billion for each occurrence. In addition, the Company currently maintains for World Airways liability insurance provided by the U.S. Government for incidents caused by war or terrorist attacks with per occurrence policy limit for passenger, crew and property liability in the amount of $1.5 billion and third party ~~damages~~liability in the amount of $3.0 billion, subject to a $3.0 billion policy aggregate. Also, the Company currently maintains for North American liability insurance provided by the U.S. Government for incidents caused by war or terrorist attacks inwith per occurrence policy limit for passenger, crew and property liability in the amount of $1.5 0 billion ~~per~~and ~~occurrence~~third ~~with~~party anliability ~~annual~~in ~~aggregate~~the ~~limit~~amount of $32.0 billion, subject to a $2. 0 billion policy aggregate. Additionally, the Company carries aircraft hull, aircraft spare parts and leased engines insurance in in amounts required by company policy and contractual obligations.

Although the Company believes its insurance coverage is adequate, it cannot provide assurance that the amount of its insurance coverage will not change or that the Company will not be forced to bear substantial losses from accidents or war or terrorist attacks. Substantial claims resulting from an accident could have a material adverse effect on the Company’s business, operations, financial results of operations and liquidity and could seriously inhibit customer acceptance of its services.

Additionally, should the Company experience an aircraft accident or if the U.S. Government were to discontinue war risk coverage, either event could cause the cost of insurance to increase substantially which could have a material adverse effect on its financial condition, results of operations or liquidity.

The Company’s aircraft could become more expensive to maintain, which may affect its profitability.

World Airways and North American are subject to regulation by the FAA, with respect to aircraft maintenance and other matters affecting air safety. Manufacturer Service Bulletins (“MSBs”) and FAA Airworthiness Directives (“ADs”) could cause aircraft operators to be subject to extensive aircraft inspections and/or modifications. It is possible that MSBs or ADs applicable to the types of aircraft or engines included in the Company’s fleet could be issued in the future. The Company cannot estimate the cost of possible compliance with new MSBs and/or ADs, but they could be substantial and could have a material adverse effect on the Company’s financial condition, results of operations or liquidity.

The failure of the Company’s contractors to provide essential services could harm its business.

World Airways and North American have agreements with contractors, including other airlines, to provide certain facilities and services required for its operations, including all of the Company’s off-wing engine maintenance and most airframe maintenance. The Company also has agreements with contractors to provide security, ground handling and personnel training. The failure of these contractors to provide essential services that are not otherwise entirely within the Company’s control could have a material adverse effect on its financial condition, results of operations or liquidity.

Many of the Company’s employees are represented by unions, and a prolonged dispute with the Company’s employees could have an adverse impact on its operations.

The cockpit crewmembers and flight attendants at both World Airways and North American are represented by the IBT.

The World Airways ~~flight~~cockpit ~~attendants~~crewmembers are subject to a collective bargaining agreement that will ~~become~~ become amendable in ~~August 2006.~~March ~~Negotiations are expected to begin prior to the amendable date~~2009.

12The World Airways flight attendants are subject to a collective bargaining agreement that became amendable in August 2006. Negotiations began in mid-August 2006 with the IBT.

The World Airways aircraft dispatchers, who are represented by the TWU, are subject to a collective bargaining agreement that will become amendable December 31, 2008. Fewer than 15 World Airways employees are covered by this collective bargaining agreement.

~~The~~North ~~World~~American ~~Airways~~and ~~aircraft dispatchers, who are represented by~~ the ~~TWU,~~IBT are ~~subject~~presently toin anegotiations ~~collective bargaining~~with ~~agreement~~the ~~that~~assistance ~~became~~of ~~amendable~~the ~~December 31,~~National ~~2003.~~Mediation ~~Fewer~~Board (“NMB”) ~~than~~to 15conclude ~~World~~an ~~Airways employees~~initial ~~are~~cockpit ~~covered~~crewmembers ~~by this~~ collective bargaining agreement. InThe ~~December 2005~~North American flight attendants, ~~World~~who ~~Airways reached~~voted ato ~~Tentative~~be ~~Agreement~~represented ~~with~~by the ~~TWU,~~IBT ~~which~~in ~~was~~August ~~subsequently~~2005, ~~ratified~~are bypresently ~~the~~in ~~dispatchers.~~negotiations ~~The agreement~~with ~~will~~to ~~become~~conclude ~~amendable~~an ~~December 31,~~initial collective ~~2008~~bargaining agreement.

~~North~~The ~~American~~Company ~~and~~is ~~the~~not ~~IBT~~aware ~~are~~of ~~presently~~any insubstantive ~~negotiations~~effort ~~with~~to ~~the~~organize ~~assistance~~any ofother ~~the~~employee ~~NMB~~group and is unable to ~~conclude~~predict whether anany ~~initial~~of ~~cockpit~~its ~~crewmembers~~other employees not currently represented by a labor union will elect to be represented by a labor union or collective bargaining ~~agreement~~unit. The ~~North~~election ~~American~~of ~~flight~~such employees for union representation could result in employee compensation and ~~attendants,~~working ~~who~~condition ~~voted~~demands tothat becould ~~represented~~have bya material adverse effect on the ~~IBT~~Company’s infinancial ~~August 2005~~condition, ~~have~~results ~~yet~~of operations or liquidity. The Company is unable to ~~begin~~predict ~~negotiations on~~when an initial ~~contract.~~agreement will be reached with the North American cockpit crewmembers and flight attendants and whether the World Airways flight attendants will choose to renew their collective bargaining agreement in 2007.

The Company is not aware of any active effort to organize any other employee group and is unable to predict whether any of its other employees not currently represented by a labor union will elect to be represented by a labor union or collective bargaining unit. The election of such employees for union representation could result in employee compensation and working condition demands that could have a material adverse effect on the Company’s financial condition, results of operations or liquidity. The Company is unable to predict when an initial agreement will be reached with the North American cockpit crewmembers and flight attendants and whether the World Airways flight attendants will choose to renew their collective bargaining agreement in 2006.

The Company is subject to significant and increasing government regulation and oversight that can materially affect its ability to maintain or increase the level of air operations.

The Company is subject to government regulation and control under the laws of the United States and the various other countries in which it ~~operates~~does business. The Company is also governed by bilateral air transport services agreements between the U.S. and the countries to which the Company provides airline services. The Company is subject to Title 49 of the United States Code under which the DOT and the FAA exercise regulatory authority. Additionally, foreign governments assert jurisdiction over air routes and fares to and from the U.S., airport operation rights and to access ~~facilities. Due~~ to World Airways’ and North American’s participation in the CRAF, both airlines are subject to inspections approximately every two years by the USAF as a condition of retaining their eligibility to provide military charter flightsfacilities. ~~The USAF may terminate its contract with either airline if the carrier fails to pass such inspection or otherwise fails to maintain satisfactory performance levels.~~

Due to World Airways’ and North American’s ~~periodically~~participation ~~receive~~in ~~correspondence~~the ~~from~~CRAF, ~~the~~both ~~FAA~~airlines ~~with~~are ~~respect~~subject to ~~minor~~ ~~noncompliance~~inspections ~~matters.~~approximately ~~While~~every ~~the~~two ~~Company~~years ~~believes~~by ~~that~~the ~~both~~USAF ~~World~~as ~~Airways~~a ~~and~~condition ~~North~~of ~~American are~~retaining ~~currently~~their ineligibility ~~compliance~~to provide inmilitary ~~all~~charter ~~material~~flights. ~~respects~~The ~~with~~USAF ~~all~~may ~~appropriate~~terminate ~~FAA~~its ~~standards~~contract ~~and~~with ~~have obtained~~either ~~all~~airline ~~required~~if ~~licenses~~the ~~and~~carrier ~~authorities,~~fails ~~any~~to ~~material~~pass ~~non-compliance with~~ such ~~standards~~inspection or ~~the~~ ~~revocation~~otherwise orfails ~~suspension~~to ofmaintain ~~licenses~~satisfactory orperformance ~~authorities could have a material adverse effect on the Company’s financial condition, results of operations or liquidity~~levels.

~~The~~World Airways and North American periodically receive correspondence from the FAA and DOT with respect to minor noncompliance matters. While the Company’s ~~operating~~believes ~~costs~~that both ~~could~~World ~~increase~~Airways asand aNorth ~~result~~American ofare ~~past~~currently in compliance in all material respects with all appropriate FAA standards and have obtained all required licenses and authorities, ~~current~~any material non-compliance with such standards or the revocation ~~new~~or ~~regulations~~suspension ~~that~~of ~~impose~~licenses ~~additional~~or ~~requirements~~authorities ~~and~~could ~~restrictions~~have a material adverse effect on ~~air transportation~~the Company’s financial condition, results of operations or liquidity.

The air transportation industry is heavily regulated. Both federal and state governments from time to time propose laws and regulations that impose additional requirements and restrictions on air transportation operations. Implementing these measures, such as aviation ticket taxes and passenger safety regulations, have increased operating costs for the Company and the air transportation industry as a whole. In addition, new security measures imposed by the Aviation and Transportation Security Act (the “Security Act”) or otherwise by the FAA as a result of terrorist attacks, are expected to continue to increase costs for the Company and the air transportation industry as a whole. Depending on the implementation of these and other laws and regulations, the Company’s operating costs could increase significantly. Certain governmental agencies, such as the DOT and the FAA, have the authority to impose mandatory orders, such as ADs, related to the Company’s aircraft, and impose civil penalties for violations of applicable laws and regulations, each of which can result in material costs and adverse publicity. The Company cannot predict which laws and regulations will be adopted or what other actions regulators might take. Accordingly, the Company cannot guarantee that future legislative and regulatory acts will not have a material impact on its operating results.

The air transportation industry and the markets the Company serves are highly competitive.

The market for outsourcing air passenger and cargo ACMI services, full service charter business and scheduled passenger services is highly competitive. The Company believes that the most important factors for competition in the ACMI outsourcing business are the passenger, payload and cubic capacities of the aircraft, the price, flexibility, quality and reliability of the air transportation services provided, and the age of the aircraft fleet,. The Company’s competitors in the passenger charter market include Omni Air International, ~~payload~~Miami Air and ~~cubic~~ATA ~~capacities~~Airlines ofand in the cargo charter market include Atlas Air (including Polar Air Cargo), Gemini Air Cargo, Evergreen International Airlines and Centurion Air Cargo, as well as scheduled and non-scheduled passenger carriers that have substantial belly capacity. The Company’s ability to continue to grow depends upon its success in influencing major international airlines that outsourcing some portion of their passenger and cargo business remains more cost-effective than undertaking passenger or cargo operations with their own incremental capacity and resources.

aircraft, and the price, flexibility, quality and reliability of the air transportation services provided. The Company’s competitors in the passenger charter market include Omni Air International, Miami Air and ATA Airlines and in the cargo charter market include Atlas Air (including Polar Air Cargo), Gemini Air Cargo, Evergreen and Centurion Air Cargo, as well as scheduled and non-scheduled passenger carriers that have substantial belly capacity. The Company’s ability to continue to grow depends upon its success in convincing major international airlines that outsourcing some portion of their passenger and cargo business remains more cost-effective than undertaking passenger or cargo operations with their own incremental capacity and resources.

The allocation of military air transportation contracts by the USAF is based upon the number and type of aircraft a carrier, alone or through a teaming arrangement, makes available for use in times of peace and national emergencies. The formation of competing teaming arrangements composed of larger partners than those sponsored by the Company, an increase by other air carriers in their commitment of aircraft to the CRAF program, or the withdrawal of the Company’s current partners, could adversely affect the size of the USAF contracts that may be awarded to the Company in future years.

The Company depends on the expertise of its management team. If key individuals leave unexpectedly, the Company’s business and operations could suffer.

Many of the Company’s executive officers are key to the management of the Company’s business and operations. The Company’s future success depends on its ability to retain these officers and other capable managers. Although the Company believes that it could replace key personnel given adequate prior notice, the unexpected departure of key executive officers could cause substantial disruption to the Company’s business and operations. In addition, the Company may not be able to retain and recruit talented personnel without incurring substantial costs.

The Company’s business is sensitive to general economic conditions, unforeseen events and seasonal fluctuations. As a result, the Company’s prior performance is not necessarily indicative of its future results.

The air travel business historically fluctuates on a seasonal basis and in response to general economic conditions. In addition, the airline industry is highly susceptible to unforeseen events that result in declines in revenues or increased costs, such as political instability, regional hostilities, terrorist attacks, recession, fuel price escalation, inflation, adverse weather conditions, consumer preferences, labor instability or regulatory oversight. Also, the Company’s results of operations for interim periods are not necessarily indicative of those for an entire year and the Company’s prior results are not necessarily indicative of its future results.

~~The~~10 ~~airline industry has incurred significant losses resulting in airline restructurings and bankruptcies, which could result in changes in our industry.~~

In 2005, the domestic airline industry as a whole reported its fifth consecutive year of losses, which is causing fundamental and permanent changes in the industry. These losses have resulted in airlines renegotiating or attempting to renegotiate labor contracts, reconfiguring flight schedules, furloughing or terminating employees, as well as considering other efficiency and cost-cutting measures. Despite these actions, several airlines have sought reorganization under Chapter 11 of the U.S. Bankruptcy Code permitting them to reduce labor rates, restructure debt, terminate pension plans and generally reduce their cost structure. It is foreseeable that further airline reorganizations, bankruptcies or consolidations may occur, the effects of which the Company is unable to predict. The Company cannot provide assurance that the occurrence of these events, or potential changes resulting from these events, will not have a material adverse effect on the Company’s financial condition, results of operations or liquidity.

The U.S. government ceasing to provide adequate war risk insurance could increase our operating costs and result in service delays and disruptions.

The U.S. government currently provides insurance coverage for certain claims resulting from acts of terrorism, war or similar events. Should this coverage no longer be offered, the coverage that may be available to the Company through commercial aviation insurers may have substantially less desirable terms, result in higher costs and not be adequate to protect the Company’s risk, any of which could have a material adverse effect on the Company’s financial condition, results of operations or liquidity.

The market price for the Company’s Common Stock is volatile.

The market price of the Company’s common stock has been subject to significant fluctuations in response to the Company’s operating results and other factors. The market price of the shares of the Company’s common stock has varied significantly and may be volatile depending on news announcements and changes in general market conditions. In particular, news announcements regarding quarterly results of operations, competitive developments, litigation or governmental regulatory actions impacting the Company may adversely affect the price of the Company’s common stock. In addition, the sale of a substantial number of shares of common stock in a short period of time could adversely affect the market price of the common stock. Also, the stock market has from time to time experienced extreme price and volume volatility. These fluctuations may be unrelated to the operating performance of particular companies whose shares are traded. Market fluctuations may adversely affect the market price of the Company’s common stock. The Company cannot assure its stockholders that the market price of its common stock will not decline in the future.

In May 2006, the common stock of the Company was delisted from the Nasdaq National Market and the Company’s common stock began trading on the Pink Sheets under the ticker symbol “OTC:WLDA.PK”. The Company has appealed the delisting decision. However, there is no assurance that the Company will prevail in its appeal of the delisting decision.

At June 15, 2006, there were outstanding warrants to purchase an aggregate of 2,156,001 shares of the Company’s common stock. Sales in the public market of shares issued upon the exercise of the Company’s outstanding warrants could adversely affect the market value of the Company’s stock.

Delaware law, as well as the Company’s Certificate of Incorporation and Bylaws, contain anti-takeover provisions that may indirectly affect the value of the Company’s Common Stock.

Certain provisions of Delaware law and the Company’s Certificate of Incorporation and Bylaws could have the effect of making it more difficult for a third party to acquire, or of discouraging a third party from attempting to acquire, control of the Company. Certain of these provisions allow the Company to issue preferred stock with rights senior to those of the common stock without any further vote or action by the holders of common stock. The issuance of preferred stock could decrease the amount of earnings and assets available for distribution to the holders of common stock or could adversely affect the rights and powers, including voting rights, of the holders of the Company’s common stock. In certain circumstances, such issuance could have the effect of decreasing the market price of the Company’s common stock. In addition, the Company’s Certificate of Incorporation provides for its Board of Directors to be divided into three classes of directors serving staggered three-year terms. Classification of the Company’s Board of Directors expands the time required to change the composition of a majority of directors and may tend to discourage an acquisition proposal for the Company.

FAA regulations restrict ownership of the Company’s Common Stock by non-U.S. citizens, which may lessen demand for the Company’s stock.

Because World Airways and North American are U.S. certificated airlines, under applicable regulatory restrictions, no more than 25% of the Company’s voting stock may be owned or controlled, directly or indirectly, by persons who are not U.S. citizens. The Company’s Certificate of Incorporation and Bylaws provide that no shares of capital stock may be voted by or at the direction of persons who are not U.S. citizens unless such shares are registered on a separate foreign stock record. No shares of common stock owned by persons who are not U.S. citizens will be registered on the Company’s foreign stock record to the extent that the aggregate ownership by persons who are not U.S. citizens reflected in the foreign stock record would exceed 25% of the Company’s outstanding shares of common stock.

Item 2.

Properties.

The Company leases office space in Peachtree City, Georgia, for its corporate headquarters and substantially all of the administrative employees of World Air Holdings and World Airways. ~~The Company~~Additionally, ~~was~~the ~~obligated~~Company ~~under~~leases ~~a lease for~~ office space in ~~Herndon~~Jamaica, ~~Virginia,~~New York for the ~~location~~administrative employees of ~~its former~~North ~~headquarters~~American. See Note 56 of the “Notes to Consolidated Financial Statements” in Item 8 for additional information. ~~The Company leases office space in various other locations around the world.~~

Item 3.

Legal Proceedings.

~~Prior~~For tocompetitive ~~the~~and ~~acquisition~~economic reasons, byeffective ~~World~~as ~~Air~~of ~~Holdings~~January 2005, North American ~~was~~unilaterally areduced ~~defendant~~cockpit increwmember awages ~~legal~~and ~~action pending~~other benefits in ~~California~~addition ~~brought~~to bymodifying acertain ~~former~~work ~~pilot~~rules. The IBT thereafter filed suit against North American in the United States District Court for ~~various~~the ~~causes~~Northern District of ~~action~~California (San Francisco Division) seeking, ~~including~~among ~~wrongful termination~~other things, a preliminary injunction against North American. InSubsequently, ~~May 2006~~the court ruled in North American’s favor and the ~~plaintiff~~IBT ~~agreed~~ has appealed to ~~settle~~the ~~this~~Ninth Circuit ~~matter~~Court ~~with~~of aAppeals. ~~full release,~~North inAmerican ~~exchange~~will ~~for~~continue ~~$2.3 million~~to ~~cash~~vigorously ~~consideration~~defend itself. ~~This~~However, ~~amount~~the ~~was~~Company ~~accrued~~cannot atgive ~~December 31, 2005~~any ~~and~~assurance ~~was~~that ~~paid~~an adverse result in ~~May 2006.~~this litigation will not have a material adverse effect on its financial condition, results of operations, or liquidity.

~~For~~In ~~competitive~~the ~~and~~ordinary ~~economic~~course ~~reasons, effective as~~ of ~~January 2005 and February 2005~~business, ~~North American~~the ~~unilaterally~~Company ~~reduced~~is ~~cockpit~~party ~~crewmember~~to ~~wages~~various ~~and~~ other ~~benefits~~legal inproceedings ~~addition~~and toclaims ~~modifying certain~~which ~~work~~it ~~rules.~~believes ~~The IBT thereafter filed suit against North American in the United States~~are ~~District~~incidental ~~Court~~to ~~for~~ the ~~Northern~~operations ~~District~~ of ~~California~~our ~~(San Francisco Division) seeking, among other things, a preliminary injunction against North American~~business. ~~Subsequently,~~Management ~~the~~believes ~~judge~~that ~~issued a written decision in North American’s favor. The IBT has appealed to~~ the ~~Ninth~~ultimate ~~Circuit~~outcome ~~Court~~ of ~~Appeals.~~ ~~North~~these ~~American~~proceedings ~~will continue~~ to ~~vigorously~~which ~~defend itself. However,~~ the Company ~~cannot give~~is ~~any~~currently ~~assurance~~a ~~that~~party ~~an adverse result in this litigation~~ will not have a material adverse effect on ~~its~~the Company’s financial condition, results of operations, or liquidity.

In the ordinary course of business, the Company is party to various other legal proceedings and claims which we believe are incidental to the operations of our business. Management believes that the ultimate outcome of these proceedings to which the Company is currently a party will not have a material adverse effect on the Company’s financial condition, results of operations or liquidity.

Item 4.

Submission of Matters to Vote of Security Holders.

No matters were submitted to a vote of our security holders during ~~2005~~2006.

PART II

Item 5.

Market For Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

The Company’s common stock traded on the Nasdaq National Market (“Nasdaq”) of The Nasdaq-Amex Market GroupSM under the symbol “WLDA” until the Company was notified by Nasdaq that effective May 22, 2006 the common stock of the Company would be delisted from the Nasdaq National ~~Market.~~ ~~This action was the result of a Nasdaq hearing panel determining that the Company had not met the requirement that it be current in its required reporting obligations under Nasdaq~~ Market Place Rule 4310(c)(14), principally because of the Company’s failure to make timely filings of its annual report on Form 10-K for the year ended December 31, 2005 and its quarterly report on Form 10-Q for the first quarter of 2006. The ~~hearing panel determined not to grant the~~ Company’s request for further extensions to file such reports. The Company appealed the decision of the hearing panel immediately to the Nasdaq Listing and Hearing Review Council. However, there is no assurance that the Company will prevail in its appeal of the delisting decision. Pending such appeal, the Company’s common stock began trading on May 22, 2006, on the Pink Sheets under the ticker symbol “OTC:WLDA.PK”.

The high and low bid prices of the Company’s common stock, as reported by Nasdaq through May 22, 2006 and the Pink Sheets thereafter, for each quarter in the last two years isare as follows:

	Common Stock
	High		Low	~~Low~~
2005
2006
Fourth Quarter	$	119.9225	$	$7.00	~~9.21~~
Third Quarter		139.8930		7.05	~~9.11~~
Second Quarter		1110.9035		7.79	~~5.85~~
First Quarter		810.4525		8.15	~~5.63~~
2004
2005
Fourth Quarter		711.1592		9.21	~~5.01~~
Third Quarter		713.3789		9.11	~~2.56~~
Second Quarter		411.2490		5.85	~~2.68~~
First Quarter		48.2745		5.63	~~3.24~~

16The number of stockholders of record at December 31, 2006 was 210 and the Company estimates that at such date approximately 4,500 stockholders held its common stock in street name.

~~The~~Stock ~~Company~~Performance has not declared or paid any cash dividends or distributions on its common stock since 1992. The Company currently intends to retain future earnings to fund the development and growth of its business and, therefore, does not anticipate paying any cash dividends in the foreseeable future. Any future decision concerning the payment of dividends on its common stock will depend upon the results of operations, financial condition, liquidity, capital expenditure plans of the Company, provisions of certain financing instruments as well as such other factors as the Board of Directors, in its sole discretion, may consider relevant.

The ~~approximate~~graph ~~number~~below ofcompares ~~shareholders~~the performance of ~~record~~an atinvestment in the Company’s common stock and the Russell 2000 Index, the Dow Jones Airline Index, and the Dow Jones Delivery Services Index for the period from December 31, ~~2005~~2001 through ~~was 221~~December 31, ~~which~~2006. ~~number~~The ~~does not~~comparison ~~include~~assumes ~~those~~that ~~shareholders~~the ~~who~~value ~~hold~~of ~~shares~~the ininvestment ~~street~~and ~~name~~of oreach ~~nominee~~index ~~accounts~~was $100 at December 31, 2001 and that all dividends were reinvested.

LOGO


	Dec-01		Dec-02		Dec-03		Dec-04		Dec-05		Dec-06
World Air Holdings	$	100	$	157	$	722	$	1,380	$	2,091	$	1,917

Russell 2000	$	100	$	80	$	117	$	139	$	145	$	171

Dow Jones Delivery Services Index	$	100	$	111	$	135	$	172	$	169	$	175

Dow Jones Airline Index	$	100	$	57	$	74	$	69	$	75	$	85

Item 6.

Selected Financial Data

The following selected financial data have been derived from the audited consolidated financial statements of the Company. The data should be read in conjunction with Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the Consolidated Financial Statements and notes thereto.

	Year Ended December 31
	Year Ended December 31,
	2005*			2004			2003				2002				2001
	2006 (1)			2005 (2)		2004			2003 (3)				2002
	(in thousands except per share data)
Results of operations:
Operating revenues	$	~~787~~825,~~138~~656		$	~~503~~787,~~900~~138	$	$503,900	~~474,850~~	$	474,850	$	~~384,489~~	$	384,489	$	~~317,866~~
Operating expenses		~~730~~826,~~522~~436			~~463~~730,~~617~~522		463,617	~~446,422~~		446,422		~~377,367~~		377,367		~~338,595~~
Operating income (loss)		~~56,616~~(780	)		4056,~~283~~616		40,283	~~28,428~~		28,428		~~7,122~~		7,122		~~(20,729~~	)
Earnings (loss) before income taxes		51(2,~~601~~647	)		3451,~~032~~601		34,032	~~19,123~~		19,123		~~2,041~~		2,041		~~(26,037~~	)
Income tax expense		19,973			8,445			3,802				—				—
Income tax expense/(benefit)		(355	)		19,973		8,445			3,802				—
Net earnings (loss)	$	31(2,~~628~~292	)	$	2531,~~587~~628	$	$25,587	~~15,321~~	$	15,321	$	~~2,041~~	$	2,041	$	~~(26,037~~	)
Basic earnings (loss) per common share:	$	1(0.4010	)	$	1.9540	$	$1.95	~~1.37~~	$	1.37	$	~~0.18~~	$	0.18	$	~~(2.42~~	)
Basic weighted average common shares outstanding		2223,~~588~~643			1322,~~095~~588		13,095	~~11,224~~		11,224		~~11,073~~		11,073		~~10,755~~
Diluted earnings (loss) per common share	$	1(0.1910	)	$	1.0919	$	$1.09	~~0.95~~	$	0.95	$	~~0.18~~	$	0.18	$	~~(2.42~~	)
Diluted weighted average common shares outstanding		2623,~~824~~643			2426,~~591~~824		24,591	~~17,783~~		17,783		~~11,073~~		11,073		~~10,775~~
Financial Position:
Cash and cash equivalents	$	46,202		$	16,306		$	30,535			$	20,839			$	18,878
Total assets	$	198,750		$	260,646	$	179,317		$	157,301			$	117,262
Restricted cash, current and non-current		7,092			4,926			23,290				665				662
Notes payable and long-term debt including current maturities		—			24,000		49,879			76,534				57,641
Total assets		260,646			179,317			157,301				117,262				112,229
Stockholders’ equity (deficiency)	$	67,131		$	86,838	$	30,398		$	(8,030	)		$	(28,867	)
Notes payable and long-term debt including current maturities		24,000			49,879			76,534				57,641				62,396
Stockholders’ equity (deficiency)	$	86,838		$	30,398		$	(8,030	)		$	(28,867	)		$	(31,104	)

*(1) Financial data ~~above~~include ~~includes~~ the full year results of North American ~~from~~for ~~April 28, 2005 to December 31, 2005~~2006.

~~The~~(2) ~~following~~On ~~table~~April ~~provides~~27, ~~statistical data~~2005, ~~used~~the byCompany ~~management~~completed ~~in evaluating~~ the ~~operating performance~~acquisition of ~~World~~North ~~Airways~~American for approximately $34.8 million in cash. The financial data includes the ~~years~~results ~~ended~~of ~~December 31~~North American from April 28, 2005, ~~2004~~to ~~and~~December ~~2003:~~ 31, 2005.

World Airways	2005		2004		2003
Block hours		58,515		47,759		44,072
Operating aircraft at year end		17		16		18
Average available aircraft per day		16.6		16.0		16.9
Average daily utilization (block hours flown per day per aircraft)		9.7		8.1		7.1

(3)	Includes the impact of a $3.0 million loss on debt extinguishment.

~~The~~13 ~~following table provides statistical data, used by management in evaluating the operating performance of North American for the period April 28, 2005 through December 31, 2005:~~

North American	2005
Block hours		17,175
Operating aircraft at year end		8
Average available aircraft per day		8.0
Average daily utilization (block hours flown per day per aircraft)		8.7

Item 7.

Management’s Discussion and Analysis Of Financial Condition and Results Of Operations.

Management’s Discussion and Analysis of Financial Condition and Results of Operations presented below relates to the business, operations, financial results of operations and liquidity of World Air Holdings as reflected in its consolidated financial statements.

Critical Accounting Policies and Estimates

The preparation of the financial statements requires the Company to make estimates and judgments that affect the reported amount of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities at the date of the financial statements. Actual results may differ from these estimates under different assumptions or conditions.

Critical accounting policies are those that are both most important to the portrayal of the Company’s financial condition and results of operations, and that require management to make the most difficult, subjective, or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain.

The following are explanations of the Company’s critical accounting policies, the judgments and uncertainties affecting the application of these policies, and the likelihood that materially different amounts would be reported under different conditions or using different assumptions.

Accounting for Aircraft Repair and Maintenance Costs

The Company’s maintenance costs, including Manufacturers Service Bulletins (“MSBs”) and FAA Airworthiness Directives (“ADs”), are expensed as incurred. Under this method, costs are recognized when maintenance services are completed and as nonrefundable maintenance payments required by lease agreements and when maintenance contracts with outside maintenance providers become due.

The Company’s aircraft are maintained by outside maintenance providers. In certain cases, aircraft maintenance costs are covered by maintenance “reserve” payments made to the lessors of the Company’s aircraft. In these cases, the Company is required to set aside funds monthly through nonrefundable payments to lessors to cover future maintenance work. After qualifying maintenance is completed, the Company records a maintenance receivable from the lessors and is reimbursed for amounts paid from the funds held by the lessors. The result of this arrangement is that the Company recognizes maintenance costs each month based on the amount of nonrefundable maintenance reserves required to be paid to its lessors (usually based on a rate per hour flown). In other cases, maintenance work does not qualify for reimbursement from lessor reserves. This may be due to the type of maintenance performed or whether the aircraft component being maintained is covered by a lease agreement. For maintenance that is not covered by lessor reserves, the Company recognizes the costs when maintenance services are completed. Therefore, these maintenance costs will fluctuate from period to period as scheduled maintenance work comes due or in the event unscheduled maintenance work must be performed. It is also important to note that aggregate maintenance reserves paid to each of the Company’s lessors may not be sufficient to cover actual maintenance costs incurred. In these cases, the Company incurs the cost of any shortfall when the maintenance services are completed and the costs are determinable.

Under certain circumstances, such as an accident or foreign object damage to an aircraft’s engine, the Company’s insurance providers cover a portion of the repair costs. The Company had $4.9 million and $4.7 million of accounts receivable related to insurance claims as of December 31, 2005 and 2004, respectively. These amounts are recorded only when it is probable that the Company will collect insurance proceeds.

Losses on Contractual Lease Agreements

The Company was obligated through April 2006 under an operating lease for office space at its former headquarters in Herndon, Virginia, which it vacated in May 2001. The Company received rental income sufficient to offset its lease expense through March 2002, after which time no rental income was received except $0.4 million in 2003. The Company recognized a $1.1 million liability at December 31, 2004 for the costs that would continue to be incurred, without economic benefit to the Company, over the remaining term of its lease of this office space. During 2005, the Company reviewed its estimates and determined that an additional $1.0 million charge should be recorded to fully accrue for the remaining lease obligations, resulting in a $0.4 million balance at December 31, 2005. The liability is included in other accrued liabilities on the accompanying Consolidated Balance Sheets, and the expense is included in sales, general and administrative on the accompanying Consolidated Statements of Income.

Impairment of Long-Lived Assets

The Company reviews its long-lived assets for impairment whenever events or circumstances indicate that the carrying amount of an asset may not be recoverable. To the extent that the future undiscounted net cash flows expected to be generated from an asset are less than the carrying amount of the asset, an impairment loss will be recognized based on the difference between the asset’s carrying amount and its estimated fair market value. In the third quarter of 2004, the Company analyzed the commercial resale market for DC-10 aircraft parts. In conjunction with this, the Company also completed a study to identify excess spare DC-10 aircraft parts as a result of a reduced DC-10 aircraft fleet, as well as further anticipated returns of DC-10 aircraft to lessors. Based on the findings, a $1.5 million asset impairment of DC-10 parts was recorded during 2004.

Assets to be disposed of are reclassified as assets held for sale at the lower of their carrying amount or fair value less cost to sell. Assets held for sale at December 31, 2005 represent primarily excess DC-10 parts. Assets held for sale are expected to be disposed of by selling the assets within the next 12 months.

At December 31, 2005, management was not aware of any events or circumstances indicating the Company’s long-lived assets would not be recoverable.

Goodwill and Intangible Assets

Under the purchase method of accounting, the total purchase price was allocated to North American’s net tangible and intangible assets based upon their estimated fair value at the date of acquisition with any amount paid in excess of the fair value of net assets recorded as goodwill. Intangible assets from the North American acquisition included the trademark, aircraft leases at market rates in excess of rental rates, Extended Range Two Engine Operations (“ETOPs”) and goodwill (see Item 8, Note 7 of the “Notes to Consolidated Financial Statements”). The Company accounted for the intangible assets of North American in accordance with Statement of Financial Accounting Standards No. 142 (“SFAS No. 142”), Goodwill and Other Intangible Assets. Pursuant to SFAS No. 142, goodwill and indefinite-lived intangibles, such as the trademark and ETOPS, are not amortized but are subject to periodic impairment reviews. The Company performed an annual impairment test as of October 1, 2005 for goodwill and indefinite-lived intangibles. This test indicated that goodwill and indefinite-lived intangibles were not impaired as of December 31, 2005.

American acquisition. Accumulated amortization was $0.7 million at December 31, 2005. For the years ending December 31, 2006 and 2007, the annual amortization expense is estimated to be $1.1 million and $1.0 million, respectively.

Legal Accruals

The Company is subject to various legal proceedings and claims, the outcomes of which are subject to significant uncertainty. In the normal course of business, the Company is required to assess the likelihood of any adverse judgments or outcomes to these matters, as well as potential ranges of possible losses. A determination of the amount of the accrued liabilities required, if any, for these contingencies is based on a careful analysis of each individual issue with the assistance of outside legal counsel. The required accruals may change in the future due to new developments in each matter or changes in approach such as a change in a settlement strategy in dealing with these matters.

Allowance for Doubtful Accounts and Bad Debt Expense

In the normal course of business, the Company reviews its accounts receivable and uses judgment to assess its ability to collect receivables. Based on this assessment, an allowance for doubtful accounts is maintained for specifically identified accounts receivable deemed to be uncollectible. For those receivables not specifically identified, an allowance is maintained based upon the Company’s historical collection experience and current economic conditions. If the financial condition of the Company’s customers were to deteriorate and result in an impairment of their ability to make payments, additional allowances may be required.

During the year ended December 31, 2005, the Company recorded $1.0 million in bad debt expense related to accounts receivable from Gemini Air Cargo, Inc. which filed for bankruptcy on March 15, 2006. During the year ended December 31, 2004, the Company recorded $2.5 million in bad debt expense related to accounts receivable from TM Travel Services, Inc. (“TM Travel”), as the Company determined that TM Travel would not be able to meet its financial obligations and its accounts receivable from TM Travel were uncollectible. During the year ended December 31, 2003, the Company recorded $1.9 million of bad debt expense associated with air services provided to Ritetime Aviation Services and Travel, Inc. (“Ritetime”), as the Company determined that the accounts receivable from Ritetime would be uncollectible.

Employee Benefit Plans

The Company provides a range of benefits to its employees and certain retired employees, including retirement plans, post-retirement health care and life insurance benefits. The annual amounts recorded within the Consolidated Financial Statements relating to these plans are determined by using various actuarial assumptions, such as discount rates, assumed rates of return on plan assets, compensation increases, turnover rates and health care cost trend rates. The Company reviews its actuarial assumptions on an annual basis and makes modifications to the assumptions based on current rates and trends when it is deemed appropriate to do so. The Company believes that the assumptions utilized in recording its obligations under its plans, which are presented in Item 8, Note 8 of the “Notes to Consolidated Financial Statements”, are reasonable based on advice from its actuaries.

Income Taxes

The Company’s effective tax rate is based on historical and anticipated future taxable income, statutory tax rates and tax planning opportunities available to the Company. Significant judgment is required in determining the effective tax rate and in evaluating the Company’s tax positions. Tax regulations require items to be included in the tax returns at different times than the items are reflected in the financial statements. As a result, the Company’s effective tax rate reflected in the Consolidated Financial Statements is different than that reported in its income tax returns. Deferred tax assets generally represent items that can be used as a tax deduction or credit in the Company’s tax returns in future years for which it has already recorded the tax benefit in the Consolidated Financial Statements. Deferred tax liabilities generally represent tax expense recognized in the Consolidated Financial Statements for which payment has been deferred, or expense for which a deduction has already been taken on the Company’s income tax returns but has not yet been recognized as an expense in the Consolidated Financial Statements.

dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based upon the level of historical taxable income and projections for future taxable income over the periods in which the deferred tax assets are deductible, management believes it is more likely than not that the Company will realize the benefits of these deductible differences, net of the existing valuation allowance, at December 31, 2005. The amount of the deferred tax asset considered realizable, however, could be reduced in the near term if estimates of future taxable income during the carryforward period are reduced.

The Company’s effective tax rate approximated 38.7%, 24.8% and 19.9% for the years ended December 31, 2005, 2004, and 2003, respectively. The change in the tax rate for 2005 was a result of a minimal change in the valuation allowance for the deferred tax assets as compared to a significant reduction in the valuation allowance in 2004.

Overview and Results of Operations

Overview

The Company’s consolidated net ~~earnings~~loss was ~~were~~ $312.6 3 million for the year ended December 31, ~~2005~~2006, as compared to net earnings of $2531.6 million for the year ended December 31, ~~2004~~2005, and net earnings of $1525.3 6 million for the year ended December 31, ~~2003~~2004.

The Company’s consolidated net earnings for 2005 increased significantly from 2004 due to the increase in block hours at World Airways and the acquisition of North American effective April 27, 2005.

Results for each of these years were negatively impacted by various significant matters as summarized below:

2005

• The California legal matter with a settlement cost of $2.1 million was accrued in 2005 (See Item 3. Legal Proceeding). • Approximately $5.6 million in professional fees associated with the acquisition of North American, including closing costs, legal, audit, and accounting fees and fees to outside consultants for post-acquisition resolution of issues, and costs related to the re-audit of North American’s financial statements for the year ended December 31, 2004, which are not included in the Company’s consolidated financial statements for the year ended 2004, tax guidance, staff augmentation, amendment and restatement of the Company’s Form 10-Q for the quarter ended June 30, 2005, preparation of the Form 10-Q for the quarter ended September 30, 2005 and other services. Additionally, approximately $1.4 million of professional fees were capitalized as part of the direct acquisition costs. • $1.8 million of costs associated with Sarbanes-Oxley compliance. • $1.2 million of non-cash charges related to the write-off and disposal of certain World Airways non-rotable fixed assets. • A $1.6 million non-cash adjustment for costs associated with post-retirement and life insurance benefits. • $1.0 million of bad debt expense associated with the bankruptcy filing of Gemini Air Cargo, Inc. • An increase in the Company’s effective tax rate from 24.8% to 38.7%. • $1.0 million liability for estimated losses based on contractual lease costs for the remaining term of the Company’s lease agreement for office space at its former headquarters in Herndon, Virginia.

2004

• $2.6 million in legal expense related to a claim of a German tour operator from 1996. • $2.5 million of bad debt expense associated with air services provided to TM Travel. • $1.5 million related to asset impairment of DC-10 parts. • $1.1 million of personnel costs primarily associated with contractual obligations arising from the retirement of the Company’s former Chairman/CEO on May 6, 2004. • An increase in the Company’s effective tax rate from 19.9% to 24.8%. • $0.5 million liability for estimated losses based on contractual lease costs for the Company’s lease arrangement for office space at its former headquarters in Herndon, Virginia.

2003

• Recording a loss on debt extinguishment of $3.0 million due to the issuance, on December 30, 2003, of $25.5 million principal amount of the Company’s 8% Convertible Senior Subordinated Debentures due 2009 (the “Debentures”) in exchange for $22.5 million principal amount of then outstanding 8.0% Convertible Senior Subordinated Debentures due 2004 (the “Old Debentures”) and $3.0 million in cash. This represented the difference between the fair value of the Debentures and the carrying amount of the Old Debentures extinguished. • $1.9 million of bad debt expense associated with air services provided to Ritetime. • A $1.7 million liability for estimated losses based on contractual lease costs (reduced by estimated sub-lease rentals) for the remaining term of the Company’s lease agreement for office space at its former headquarters in Herndon, Virginia. • $1.3 million paid for fees and expenses associated with the termination of the Wells Fargo Foothill, Inc. loan facility (“Foothill Loan Facility”). • A $0.5 million write-off of deferred issuance fees related to the Foothill Loan Facility.

The Company accomplished the following achievements in 2005:

• Completed the formation of a holding company structure with World Air Holdings formally established in January 2005, allowing flexibility for potential growth and development. • Completed the all cash acquisition of North American effective April 27, 2005. • Consolidated revenue surpassed $787 million, representing a 56.2% increase over 2004. • Increased block hours for World Airways by 22.5% over 2004. • Increased ACMI cargo block hours at World Airways by 74.8% over 2004. • Increased average daily aircraft utilization to 9.7 hours in 2005 compared to 8.1 hours per day in 2004 for World Airways. • Converted all Debentures to equity.

Results of Operations

The following table sets forth selected information for the years indicated:


	Year Ended December 31
	2006			2005^*			2004
	(in thousands)
Operating revenue
World Airways	$	559,809		$	623,719		$	503,900
North American Airlines		267,195			163,333			—
World Air Holdings, World Risk Solutions and Eliminations		(1,348	)		86			—

Total operating revenue		825,656			787,138			503,900

Operating expense
World Airways		557,211			570,059			463,617
North American Airlines		271,144			162,201			—
World Air Holdings, World Risk Solutions and Eliminations		(1,919	)		(1,738	)		—

Total operating expense		826,436			730,522			463,617

Operating income/(loss)		(780	)		56,616			40,283

Total other income/(expense)		(1,867	)		(5,015	)		(6,251	)

Earnings/(loss) before income tax expense		(2,647	)		51,601			34,032
Income tax expense/(benefit)		(355	)		19,973			8,445

Net earnings/(loss)	$	(2,292	)	$	31,628		$	25,587

*	Financial data include the results of North American from April 28, 2005 to December 31, 2005.

The following table sets forth selected key metrics related to World Airways and North American Airlines financial and statistical performance:


	Year Ended December 31,
	2006		2005^*		2004
Block Hours
World Airways		56,102		58,515		47,759
North American Airlines		27,475		17,175		—

Total		83,577		75,690		47,759

Revenue per Block Hour
World Airways	$	9,978	$	10,659	$	10,551
North American Airlines	$	9,725	$	9,510	$	—
Total	$	9,879	$	10,400	$	10,551

Operating Expense per Block Hour
World Airways	$	9,932	$	9,742	$	9,707
North American Airlines	$	9,869	$	9,444	$	—
Total	$	9,888	$	9,652	$	9,707

Operating aircraft at year end
World Airways		17		17		16
North American Airlines		9		8		—

Average available aircraft per day
World Airways		16.6		16.6		16.0
North American Airlines		8.8		8.0		—

Average daily utilization (block hours flown per day per aircraft)
World Airways		9.3		9.7		8.1
North American Airlines		8.6		8.7		—

*	Financial and statistical data include the results of North American from April 28, 2005 to December 31, 2005.

Year Ended December 31, 2006 Compared to Year Ended December 31, 2005

Operating revenues increased $38.6 million, or 4.9%, to $825.7 million in 2006 from $787.1 million in 2005. The increase was primarily driven by the full year impact of North American offset by a decline in revenues at World Airways. The decline at World Airways was driven by lower flying under the World Airways contract with the USAF of $78.9 million partially offset by an increase of $16.4 million in full service and ACMI cargo and passenger flying. The majority of the decrease in USAF flying at World Airways was due to being placed on penalty status by the AMC during the second quarter. This occurred due to World Airways failing to maintain minimum performance standards in the prior quarter. AMC capacity was further reduced by the conversion of an aircraft from passenger to freighter service and the curtailment of troop movement during the fourth quarter of 2006.

Operating expenses increased $96.0 million or 13.1% to $826.5 million in 2006 from $730.5 million in 2005.

Flight operation expenses include all costs related directly to the operation of the aircraft other than maintenance, aircraft rent, insurance and fuel. Flight operations expense increased $15.5 million, or 7.1%, in 2006 to $234.0 million from $218.5 million in 2005. The full year impact of North American operations was partially offset by a cost decrease at World Airways of $16.5 million primarily due to an overall decrease in total block hours. The decrease in expense at World Airways was partially offset by a $2.6 million signing bonus paid to the cockpit crewmembers under the terms of the amended collective bargaining agreement.

Maintenance expenses increased $33.4 million in 2006, or 29.3% to $147.2 million compared to $113.8 million in 2005. Maintenance cost at World Airways increased $19.9 million mainly driven by incremental vendor-based maintenance events and related parts and material costs which included airworthiness directive compliance costs primarily related to MD-11 engines and significant maintenance required on the airframe of a purchased DC-10 aircraft.

Aircraft costs, which include aircraft rent and insurance, increased $11.5 million, or 10.5%, to $121.1 million in 2006 compared to $109.6 million in 2005. The full year impact of North American operations was partially offset by lower hull liability insurance rates and a decrease in certain lease restructuring fees payable to a lessor.

Fuel expenses increased $26.0 million, or 15.4%, to $194.5 million in 2006 from $168.5 million in 2005. Total gallons consumed decreased 2.3 million and the average price per gallon of fuel increased 18.4% to $2.20. World Airways’ contracts with its customers provided for a pass-through of fuel costs of approximately 96% of fuel gallons purchased. North American’s exposure to fluctuations in fuel prices is limited to scheduled service operations, which accounted for approximately 24% of North American’s block hours.

Commissions increased $1.8 million, or 5.0%, to $38.1 million in 2006 compared to $36.3 million in 2005. The increase in overall block hours primarily drove the increase in commissions as they represent a percentage of revenue.

Sales, general and administrative expenses increased $7.7 million, or 10.6%, to $80.3 million in 2006 from $72.6 million in 2005. The increase was primarily due to the impact of a full year of North American, and additional stock compensation expense. As a percent of total revenue, sales, general and administrative expenses increased from 9.2% to 9.7%.

Operating income/loss decreased $57.4 million to a $0.8 million loss compared to a $56.6 million income in 2005.

Other income (expense), net decreased $3.1 million or 62.0% to a $1.9 million expense in 2006 compared to a $5.0 million expense in 2005. As a result of the prepayment of the Company’s loan (the “ATSB Loan”) from the Air Transportation Stabilization Board (“ATSB”), the Company recorded approximately $2.3 million in additional interest expense, representing the write-off of unamortized debt issuance, warrant costs and guarantee fees associated with this loan during the first quarter of 2006 which was offset by a $3.1 million reduction in interest expense for the remainder of 2006, a $0.5 million increase in interest income and a $1.8 million decrease in miscellaneous other expense due to the lower losses from disposal of assets.

Income tax expense decreased $20.3 million to $0.4 million benefit in 2006 from $19.9 million expense in 2005. Tax expense includes a benefit from a decrease in state income taxes based on actual and expected state activity, partially offset by an increase in foreign taxes. The effective tax rate for the year ended December 31, 2006 was 13.4% compared to an effective tax rate of 38.7% for the year ended December 31, 2005.

Year Ended December 31, 2005 Compared to Year Ended December 31, 2004

The consolidated financial statements for the Company include North American’s results from April 28 through December 31, 2005. The comparative financial information shown below is derived from World Air Holdings consolidated financial statements for the year ended December 31, 2005.

~~Operating Revenues.~~Total ~~Operating~~consolidated operating revenues increased $283.2 million, or 56.2%, to $787.1 million in 2005 from $503.9 million in 2004. North American revenues were $163.3 million. The higher operating revenue was primarily attributable to a an $86.9 million increase in flying under the World Airways contract with the USAF, as well as an increase of $39.5 million in commercial cargo ACMI flying. These increases were offset by lower commercial full- service cargo revenue of $3.1 million and commercial passenger revenue of $5.3 million than in 2004. ~~Additionally, North American revenues were $163.3 million.~~

~~Two~~Total ~~key~~consolidated ~~variables~~operating ~~that~~expenses ~~impact~~increased ~~World~~$266.9 ~~Airways’~~million ~~operating~~or ~~revenues~~57.6% ~~are~~to ~~total~~$730.5 ~~block~~million ~~hours~~in 2005 ~~and~~from ~~revenue per~~$463.6 ~~block~~million ~~hour:~~ in 2004.

					Increase/		%
World Airways	2005		2004		(Decrease)		Change
Total block hours		58,515		47,759		10,756		22.5	%
Revenue per block hour	$	10,659	$	10,551	$	108		1.0	%

Flight expense increased $61.4 million, or 39.1%, in 2005 to $218.5 million from $157.1 million in 2004. The impact of North American on flight expense for 2005 was $44.5 million. The higher flight costs for World Airways are directly attributable to the overall increase in total block hours.

~~The revenue~~Maintenance ~~per~~expenses ~~block~~increased ~~hour~~$37.8 ~~increased~~million onin ~~average~~2005, ~~due~~or 49.7% to a$113.8 ~~slightly~~million ~~higher AMC~~compared ~~mix~~to ~~than~~$76.0 million in 2004. North American represented $19.7 million of the increase. World Airways incurred higher maintenance expenses principally due to the increase in overall block hours and $8.8 million in incremental engine overhaul expense.

23Aircraft costs, which include aircraft rent and insurance, increased $32.4 million, or 42.0%, to $109.6 million in 2005 compared to $77.2 million in 2004. The increase reflects $22.5 million of cost related to North American and an increase of $9.9 million related to World Airways. This is primarily due to the three additional MD-11 aircraft added to the fleet in late 2004 and in 2005, as well as short-term leasing of additional spare engines during 2005.

Fuel expenses increased $94.0 million, or 126.2%, to $168.5 million in 2005 from $74.5 million in 2004. The inclusion of North American in consolidated results accounted for $40.4 million of the increase. Total gallons consumed increased due to the overall increase in block hours flown. Fuel prices increased 45.2% in 2005 compared to 2004. However, fluctuations in the price of fuel did not have a significant impact on operating income in 2005 because World Airways’ contracts with its customers provided for a pass-through of fuel costs of 97.2% of fuel purchased. North American’s exposure to fuel prices is limited to scheduled service operations, which accounted for 25.6% of North American’s block hours since its acquisition on April 27, 2005.

~~North~~Commissions ~~American’s~~increased ~~total~~$12.9 ~~block~~million, ~~hours~~or ~~and~~55.1%, ~~revenue~~to ~~per~~$36.3 ~~block~~million ~~hour~~in ~~for~~2005 ~~the~~compared ~~period~~to ~~April 28~~$23.4 tomillion ~~December~~in 2004. The increase ~~31,~~in ~~2005~~overall ~~are~~block hours primarily drove the increase in commissions as ~~follows:~~ they represent a percentage of revenue.

North American
Total block hours		17,175
Revenue per block hour	$	9,510

Sales, general and administrative expenses increased $24.3 million, or 50.3%, to $72.6 million in 2005 from $48.3 million in 2004. The increase reflects $26.6 million of cost related to North American and a decrease of $2.3 million of costs related to World Air Holdings, World Airways, and World Risk Solutions. These decreases were partially offset by professional fees and other costs associated with the acquisition of North American, increased audit fees, and costs associated with Sarbanes-Oxley compliance efforts. Also, included in 2004 were $1.1 million of personnel costs associated primarily with contractual obligations arising from the retirement of the Company’s former Chairman/CEO on May 6, 2004.

Operating Expenses

Total consolidated operating expenses increased $266.9 million or 57.6% to $730.5 million in 2005 from $463.6 million in 2004. Below is the Company’s operating expense per block hour:

World Airways		2005				2004				Increase/ (Decrease)				% Change
Operating expense per block hour		$	9,742			$	9,707			$	35				0.3	%

North American Operating expense per block hour $9,444

Flight Operations

Flight operation expenses include all costs related directly to the operation of the aircraft other than maintenance, aircraft rent, insurance and fuel. Also included are expenses related to flight dispatch and flight operations administration. Consolidated flight expense increased $61.4 million, or 39.1%, in 2005 to $218.5 million from $157.1 million in 2004. The impact of North American on flight expense for 2005 was $44.5 million. World Airways flight costs were higher by $16.9 million primarily due to increases in the following areas:

• $6.7 million in cockpit crew costs; • $3.6 million related to catering costs; • $2.6 million in flight attendant costs; • $1.3 million in passenger liability insurance expense; • $1.1 million in flight communication cost; and • $1.6 million is non-cash cost associated with the post-retirement and life insurance benefits.

The higher flight costs for World Airways are directly attributable to the overall increase in total block hours. In addition, flight attendant block hours increased 4.0% year over year, and pilot and flight attendant headcount also increased. Catering costs were also impacted by a change in layover location on almost all AMC expansion flights through Europe. Previously, the military had facilitated operations through Germany with a lower cost supplier, but the military no longer supports commercial operations through Frankfurt, Germany. As a result, most AMC expansion flights through Europe now stop in Shannon, Ireland, where the cost structure is more expensive.

Maintenance

Consolidated maintenance expenses increased $37.8 million in 2005, or 49.7% to $113.8 million compared to $76.0 million in 2004. North American represented $19.7 million of the increase. World Airways incurred higher maintenance expenses principally due to the following:

	•		$6.9 million in engine maintenance reserve expense due to higher block hours; and
	•		$8.8 million in engine overhaul expense.

In 2004, World Airways’ maintenance expense included a $1.5 million charge due to the impairment charges relating to DC-10 parts.

Aircraft Rent and Insurance

Consolidated aircraft costs, which include aircraft rent and insurance, increased $32.4 million, or 42.0%, to $109.6 million in 2005 compared to $77.2 million in 2004. The increase reflects $22.5 million of cost related to North American and an increase of $9.9 million related to World Airways. This is primarily due to the three additional MD-11 aircraft added to the fleet in late 2004 and in 2005, as well as short-term leasing of additional spare engines during 2005.

Fuel

Consolidated fuel expenses increased $94.0 million, or 126.2%, to $168.5 million in 2005 from $74.5 million in 2004. The inclusion of North American in consolidated results accounted for $40.4 million of the increase. For World Airways, a majority of this increase is due to more full service military flying for the USAF. Fuel prices increased 45.2% in 2005 compared to 2004. However, fluctuations in the price of fuel did not have a significant impact on operating income in 2005 because World Airways’ contracts with its customers provided for a pass-through of fuel costs of 97.2% of fuel purchased. North American’s exposure to fuel prices is limited to scheduled service operations, which accounted for 25.6% of North American’s block hours since its acquisition on April 27, 2005.

Commissions

Consolidated commissions increased $12.9 million, or 55.1%, to $36.3 million in 2005 compared to $23.4 million in 2004. North American represented $4.7 million of this increase. The Company pays commissions on scheduled passenger service for North American to credit card companies and travel agencies. Commissions for World Airways are based on a percentage of military revenues and are paid to the AMC team. World Airways’ commissions increased $8.2 million primarily due to more military revenue associated with the USAF contracts in 2005.

Sales, General and Administrative

Consolidated sales, general and administrative expenses increased $24.3 million, or 50.3%, to $72.6 million in 2005 from $48.3 million in 2004. The increase reflects $26.6 million of cost related to North American and a decrease of $2.3 million of costs related to World Air Holdings, World Airways, and World Risk Solutions. This was primarily due to certain events related to 2004:

	•		$1.4 million lower bad debt expense due to better accounts receivable management; and
	•		$2.1 million lower fringe benefit expense, group insurance and workers’ compensation due to negotiations with insurance and benefit providers.

These decreases were partially offset by professional fees and other costs associated with the acquisition of North American, increased audit fees, and costs associated with Sarbanes-Oxley compliance efforts. Also, included in 2004 were $1.1 million of personnel costs associated with contractual obligations arising from the retirement of the Company’s former Chairman/CEO on May 6, 2004.

Legal Expense — California Matter

The Company recorded legal expense of $2.1 million in 2005 representing the settlement in 2006 of a wrongful termination lawsuit brought by a former pilot at North American.

~~Other~~ Income ~~(Expense)~~tax expense increased $11.5 million to $19.9 million in 2005 from $8.4 million in 2004. The effective tax rate for the year ended December 31, 2005 was 38.7% compared to an effective tax rate of 24.8% for the year ended December 31, 2004. For further information regarding this matter, see Item 8, Note 12 of the “Notes to Consolidated Financial Statements”. The change in the tax rate for 2005 was a result of a minimal change in the valuation allowance for deferred tax assets as compared to a significant reduction in the valuation allowance for 2004.

Consolidated other income (expense) net, decreased $1.3 million to $5.0 million in 2005 compared to $6.3 million in 2004. The decrease in 2005 for World Airways was due to the following:

	•		$0.8 million interest expense due to the conversion of the Debentures; and
	•		$0.5 million interest income due to higher interest rates.

Income Tax Expense

Consolidated income tax expense increased $11.5 million to $19.9 million in 2005 from $8.4 million in 2004. The effective tax rate for the year ended December 31, 2005 was 38.7% compared to an effective tax rate of 24.8% for the year ended December 31, 2004. For further information regarding this matter, see Item 8, Note 9 of the “Notes to Consolidated Financial Statements”. The change in the tax rate for 2005 was a result of a minimal change in the valuation allowance for deferred tax assets as compared to a significant reduction in the valuation allowance for 2004.

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

The comparative financial information shown below is derived from World Air Holdings’ consolidated financial statements for the year ended December 31, 2004, which does not include the results of operations for North American.

Operating Revenues. Consolidated operating revenues increased $29.1 million, or 6.1%, to $503.9 million in 2004 from $474.8 million in 2003. The higher operating revenue was primarily attributable to a $36.0 million increase in flying under contracts with the USAF, as well as an increase of $27.4 million in commercial cargo ACMI flying. These increases were offset by lower commercial full-service cargo revenue of $19.7 million and commercial passenger revenue of $13.9 million. Two key variables that impact the amount of operating revenues are listed below:

World Airways	2004		2003		Difference			% Change
Total block hours		47,759		44,072		3,687			8.4	%
Revenue per block hour	$	10,551	$	10,774	$	(223	)		(2.1	)%

The revenue per block hour decreased on average due to the growth of ACMI cargo as a percentage of total block hours flown.

Operating Expenses.

Consolidated operating expenses increased to $463.6 million in 2004 from $446.4 million in 2003, or 3.9% year over year. Below is information on the Company’s operating expense per block hour:

World Airways		2004				2003				Increase/ (Decrease)				% Change
Operating expense per block hour		$	9,707			$	10,129			$	(422	)			(4.2	%)

Flight Operations

Flight operations expenses include all expenses related directly to the operation of the aircraft other than maintenance, aircraft rent, insurance and fuel. Also included are expenses related to flight dispatch and flight operations administration. Flight expenses increased $13.5 million, or 9.4%, in 2004 to $157.1 million from $143.6 million in 2003. Flight costs were higher primarily due to increases in the following areas:

	•		$9.1 million in flight attendant costs; and
	•		$6.2 million in cockpit crew costs.

These increases were partially offset by a net $2.8 million decrease in catering/passenger/landing/handling expenses.

These higher flight costs are directly attributable to the overall increase in total block hours. In addition, flight attendant block hours increased 15.9% year over year, in addition to pilot and flight attendant headcount increases. Flight costs in 2004 also included $4.6 million of expense for crew profit sharing bonuses, which is stipulated in the union contracts, compared to $3.7 million in 2003.

Maintenance

Consolidated maintenance expenses stayed level at $76.0 million in 2004 compared to $75.5 million in the same period of 2003. The Company had decreases in the following areas:

• $2.6 million in MD-11 engine overhaul expense;

	•		$1.4 million in MD-11 landing gear overhaul expense; and
	•		$1.3 million in lower aircraft parts rental.

These decreases were offset by higher expenses related to:

• $2.5 million for higher maintenance reserve payments; • $1.6 million in mechanics’ wages and personnel costs; • $1.5 million for asset impairment related to DC-10 aircraft parts; and • $0.8 million for thrust reverser overhauls.

Aircraft Rent and Insurance

Consolidated aircraft costs decreased $8.2 million, or 9.6%, in 2004 to $77.2 million from $85.5 million in 2003. This decrease was due to the restructuring of several MD-11 leases, as well as the return of two DC-10 cargo aircraft in the first half of 2004. This decrease was partially offset by aircraft rent expense associated with two additional MD-11 aircraft. One aircraft was added at the end of the first quarter of 2003, and the other was added later in the year. Both are under power-by-the-hour operating leases.

Fuel

Consolidated fuel expenses decreased $2.0 million, or 2.6%, in 2004 to $74.5 million from $76.5 million in 2003. This decrease was primarily due to lower military cargo block hours, compared to the previous year, coupled with the fact that military cargo block hours were contractually set at a higher rate per gallon. Fuel expense did increase in the fourth quarter of 2004 compared to the previous year. The FY 2005 AMC contract, which began on October 1, 2004, specified that fuel costs would be set at a higher rate per gallon than the prior year’s contract. Fluctuations in the price of fuel did not have a significant impact in 2004 because the Company’s contracts with its customers covered 95% of fuel purchased and thereby limited the Company’s exposure to increases in fuel prices.

Commissions

Consolidated commissions increased $5.9 million, or 34.0%, to $23.4 million in 2004 compared to $17.4 million in 2003. This increase was due to more military flying in 2004. In 2003, the Company was not required to pay commissions on USAF missions flown under the CRAF activation order.

Sales, General and Administrative

Consolidated sales, general and administrative expenses increased $8.1 million, or 20.2%, to $48.3 million in 2004 from $40.2 million in 2003. The increase in 2004 was primarily attributable to the following:

• $4.4 million (net) of higher wages and benefits due primarily to:

- July 2003 salary increases;

- Increased headcount;

- Higher worker’s compensation expense; and

- Additional medical claims paid or accrued for administrative employees.

• $2.6 million provision for litigation related to a claim of a German tour operator from 1996; • $2.5 million of bad debt expense related to air services provided to TM Travel; • $1.1 million higher accrual for profit sharing payments to administrative employees; and • $1.1 million of personnel costs primarily associated with contractual obligations arising from the retirement of the Company’s former Chairman/CEO on May 6, 2004.

These increases in 2004 were partially offset by the $0.9 million credit associated with a reduction in the accrued liability related to costs of exiting the former office space in Herndon, Virginia. In 2003, the Company recorded $1.9 million of bad debt expense associated with air services provided to Ritetime in the fourth quarter of 2003.

Other Income (Expense)

Consolidated other income (expense) net, decreased by $3.1 million in 2004 compared with 2003. In 2003, the Company recorded the following:

• A loss on debt extinguishment of $3.0 million due to the restructuring of the Company’s convertible senior subordinated debentures, which represented the difference between the fair value of the Debentures and the carrying amount of the Old Debentures extinguished; • Fees and expenses of $1.3 million paid due to termination of the Foothill loan facility; and • Write-off of $0.5 million of deferred issuance fees related to the Foothill loan facility.

These decreases were offset by $1.4 million of expense in 2004 related to the amortization of guarantee fees, which are associated with the $30.0 million ATSB Loan closed on December 30, 2003.

Liquidity and Capital Resources

At December 31, ~~2005~~2006, the Company had $4731.0 2 million of cash and cash equivalents and short-term investments compared to $5047.0 million at December 31, ~~2004~~2005. ~~The~~Restricted ~~acquisition~~cash ofwas ~~North~~$1.1 ~~American~~million ~~in April~~at December ~~2005~~31, ~~represented~~2006, arepresenting ~~cash~~prepayments ~~cost~~from ofcustomers ~~$36.2 million~~for offlights ~~World~~that ~~Air~~are ~~Holdings,~~scheduled ~~less~~to ~~North~~be ~~American’s~~flown within 30 to ~~unrestricted~~60 ~~cash~~days of $8the balance sheet date (unearned revenue).~~6 million.~~ Restricted cash, current and non-current, was $7.1 million at December 31, 2005, which consisted of $4.2 million for letters of credit that had to be collateralized, $2.1 million of prepayments from customers for flights that are scheduled to be flown within 30 days of the balance sheet date (unearned revenue) and approximately $0.8 million held by the courts in the Dominican Republic. ~~Restricted~~The ~~cash~~acquisition ~~was $4.9 million at December 31, 2004, which consisted~~ of ~~$4.8 million~~North ~~for~~American ~~letters~~in ~~of credit and $0.1 million related to unearned~~April ~~revenue.~~2005 ~~The~~represented ~~restricted~~a cash ~~balance~~cost atof ~~December 31, 2004 included a~~ $136.0 2 million ~~letter of credit that was issued on behalf of TM Travel and provided~~ to anWorld ~~insurance~~Air ~~company~~Holdings, toless ~~support~~North ~~surety~~American’s ~~bonds issued~~unrestricted tocash ~~the Department~~ of ~~Transportation (“DOT”) and the State of Hawaii~~$8.6 ~~No monies were drawn from the two surety bonds, and they expired in July 2004~~million. ~~The letters of credit were cancelled in the first quarter of 2005, and the cash collateral was reclassified to unrestricted cash.~~

Cash Flows from Operating Activities

Operating activities provided $3336.9 1 million in cash for the year ended December 31, ~~2005~~2006 as compared to $2533.9 million in 2005. The cash provided in 2006 principally reflects the $2 .3 million net loss, a $8.9 million decrease in ~~2004~~cash due to changes in operating assets and liabilities other than trade accounts receivable, a $13.0 million increase from net non-cash charges, and a $34.3 million increase due to a reduction in trade accounts receivable. The cash provided in 2005 principally reflects the $31.6 million net earnings, a $5.1 million increase in cash due to changes in operating assets and ~~liabilities~~ liabilities other than trade accounts receivable, and net non-cash statement of operations charges of $12.2 million, offset by a $15.0 million decrease due to an increase in trade accounts receivable.

Cash Flows from Investing Activities

Investing activities used $17.1 5 million in cash for the year ended December 31, ~~2005~~2006, compared to using $211.6 1 million in ~~2004. In~~ 2005~~, $26~~.~~9 million~~ ~~in net cash was used by the Company to acquire North American.~~ Cash flow from investing activities ~~also~~ includes the proceeds from disposals of equipment and property of $0.2 6 million and the sale and purchase of of short-term investments, which ~~decreased~~increased by a net amount of $320.8 million during ~~2005~~2006 compared to ~~an increase~~a decrease of $1932.6 8 million in the prior year. In addition, during 2005, $26.9 million in net cash was used by the Company to acquire North American.

World Air Holdings’ capital expenditures for ~~2005~~2006 were approximately $78.2 9 million, principally for the purchase of aircraft-related assets. Expenditures included the installation of satellite communication equipment in all of World Airways’ MD-11 aircraft, which will totally automate voice and data exchange from the aircraft to the operations center and data bases. The Company financed these capital expenditures through internally generated funds.

In April 2005, World Air Holdings purchased North American for approximately $34.8 million in an all-cash transaction plus direct acquisition costs of $1.4 million. ~~Although this was a significant use of cash, the Company believes that it will be able to provide sufficient cash from operations in order to meet normal funding requirements.~~ See Item 8, Note 710 of the “Notes to Consolidated Financial Statements” for additional information.

~~The~~17 ~~following is a reconciliation of the purchase price paid for North American to the net acquisition cost:~~

The following is a reconciliation of the purchase price paid for North American to the net acquisition cost:


Cash paid for acquisition of North American	$	34,750
Direct acquisition cost		1,408

Total cash cost		36,158
Less:
North American cash and cash equivalents at April 27, 2005		(8,640	)
Adjustment to distribution made to Seller to cover tax payments as provided in Stock Purchase Agreement		(565	)

Total cash used to acquire North American	$	26,953

Cash Flows from Financing Activities

Financing activities used $243.9 6 million in cash for the year ended December 31, ~~2005~~2006. This was principally due to the use of $120.7 8 million of cash tofor ~~pay~~the ~~contractual~~repurchase ~~aircraft~~of ~~rent~~2.22 million ~~obligations~~shares toof the aCompany’s ~~lessor~~common stock and a $624.0 million principal repayment of the ATSB Loan. These amounts were partially offset by proceeds and related tax benefits from the exercise of ~~warrants and~~ stock options of $21.5 7 million and $20.3 5 million, ~~respectively~~in debt issuance cost associated with the Wachovia Loan. For the year ended December 31, ~~2004~~2005, financing activities used $32.7 9 million, which was primarily due to the $71.2 7 million used to repay the contractual aircraft rent obligations to a lessor, and a $6.0 million principal repayment of the ATSB Loan. These amounts were partially offset by proceeds ~~related~~from to the exercise of warrants and stock options of $2.5 million and $12.5 3 million, respectively.

In the first quarter of 2005, The Boeing Company exercised warrants to purchase 1,000,000 shares of common stock at $2.50 per share. In addition, the ATSB exercised warrants to purchase 111,111 shares, and pursuant to the net exercise provisions of the warrants, received 76,345 shares of the Company’s common stock.

On February 22, 2005, World Air Holdings issued a notice of redemption of its Debentures, giving the holders until March 22, 2005 to exercise their conversion rights at a conversion price of $3.20 per share. The holders converted all of the Debentures outstanding by March 22, 2005. Future annual interest expense has been reduced by approximately $2.0 million due to the conversion of all of the Debentures.

At December 31, 2005, the Company’s current assets were $156.2 million and its current liabilities were 148.0 million. The ratio of the Company’s current assets to its current liabilities (“current ratio”) was approximately 1.1:1.

Description of Certain Indebtedness

On December 30, 2003, the Company ~~issued~~secured ~~$25.5 million~~a ~~aggregate principal amount of the Debentures in exchange for~~ $2230.~~5 million aggregate principal amount of the then outstanding Old Debentures and $3.~~0 ~~million~~ ~~in cash. The Company called for redemption the remainder, or $18.0~~ million ~~aggregate principal~~ATSB ~~amount, of the Old Debentures and redeemed the Old Debentures on January 28, 2004~~Loan. ~~Interest~~ onAt ~~the Debentures was payable semi-annually on June 30 and~~ December ~~30 of each year. The Debentures were convertible~~31, ~~at any time~~2005, ~~into~~ the Company’s indebtedness ~~common~~of ~~stock~~$24.0 atmillion aoutstanding ~~conversion~~under ~~price~~its of $330.200 ~~per~~million ~~share.~~ATSB ~~The~~Loan ~~Debentures~~was ~~were~~secured ~~redeemable~~ by ~~the~~substantially ~~Company~~all ~~at 100%~~ of the ~~principal amount on or after December 30, 2004 if the average closing price of the~~ Company’s ~~common~~assets. ~~stock~~On ~~was equal to or greater than 200% of the conversion price for 20 of 30 consecutive trading days, and on or after December~~March 30, ~~2005~~2006 if the ~~average closing price of the~~ Company’s ~~common~~prepaid ~~stock was equal to or greater than 150% of~~ the ~~conversion~~remaining ~~price~~principal ~~for~~balance 20 of ~~30 consecutive trading days~~$24.0 Onmillion orunder ~~after December 30, 2006,~~ the ~~Debentures~~ATSB Loan ~~were~~with ~~redeemable~~working atcapital. ~~any~~The ~~time~~Company athad ~~100%~~recorded of the ~~principal amount regardless of the stock price~~$24.0 Inmillion ~~February 2005,~~outstanding ~~after~~balance ~~satisfying~~as ~~the~~a ~~requirement~~current ~~applicable~~liability toas ~~the redemption~~ of ~~the Debentures on or after~~ December 3031, ~~2004,~~2005 ~~World~~in ~~Air Holdings issued notice to~~ the ~~holders~~ ofConsolidated ~~its~~Balance ~~debentures~~Sheets ~~that~~due ~~it had elected~~ to ~~redeem~~covenant ~~for~~violations. ~~cash~~As ~~all~~a result of ~~the~~this ~~outstanding Debentures on March 24~~prepayment, ~~2005,~~during ~~plus any accrued and unpaid interest. The holders of~~ the ~~Debentures had until~~ ~~the~~first ~~close~~quarter of ~~business on March 22~~2006, ~~2005~~the toCompany ~~exercise~~expensed ~~their conversion rights at a conversion price of~~ $32.203 ~~per~~million ~~share,~~in ~~plus~~unamortized ~~any~~debt ~~accrued~~issuance cost and ~~unpaid~~unamortized ~~interest.~~warrant ~~All~~costs ofassociated with the ~~outstanding Debentures~~ATSB ~~were converted by March 22, 2005~~Loan.

InAdditionally ~~addition~~ on ~~December~~March 30, ~~2003~~2006, ~~the~~World ~~Company~~Airways ~~closed~~and ~~the~~North ~~$30.0 million~~American ~~ATSB~~entered ~~Loan~~a ~~of which 90.0% (“Tranche A~~ Loan”) ~~was~~and ~~guaranteed~~Security byAgreement ~~the~~with ~~ATSB~~Wachovia ~~and 10.0%~~ (“~~Tranche~~Wachovia B Loan”), ~~was~~for ~~guaranteed~~the ~~by another~~issuance ~~third~~of ~~party.~~loans ~~The~~and ~~Company’s~~letters ~~obligations~~of ~~under~~credit ~~the~~up ~~loan~~to ~~agreement~~$50.0 ~~were~~million ~~secured~~subject byto certain ~~substantially~~terms, ~~all~~conditions, ofand ~~the~~limitations. ~~assets~~The offacility ~~the~~matures ~~Company~~in ~~and~~March ~~its subsidiaries~~2008. The ~~Tranche~~Wachovia A Loan ~~bore~~agreement ~~an interest~~contains ~~rate~~restrictive ~~equal~~covenants tothat ~~the~~impose ~~lender’s~~significant ~~weighted~~operating ~~average~~and ~~cost~~financial ofrestrictions ~~issuing~~on ~~commercial~~the ~~paper~~Company. ~~plus~~Under ~~0.5%~~the ~~per annum.~~Wachovia ~~The~~Loan ~~Tranche~~agreement, Bthe Company’s ~~Loan~~borrowings ~~bore~~bear interest at afluctuating ~~rate~~rates. ~~equal~~The toapplicable ~~LIBOR~~rate ~~plus~~is ~~1.0%~~determined ~~per~~by ~~annum.~~either ~~Interest on~~ the ~~ATSB~~bank’s ~~Loan~~base ~~was~~lending ~~payable~~rate, ~~semi-annually~~the onFederal ~~June 12~~Funds ~~and December 12 of each year. At December 31~~Rate, ~~2005,~~ the ~~blended~~Eurodollar ~~rate~~or onLondon ~~both~~Interbank ~~Tranches~~Offered ~~approximated~~Rate ~~4.5%.~~(“LIBOR”) ~~The~~plus ~~Company was required to pay~~an ~~semi-annually~~applicable inpercentage. ~~advance~~There ~~guarantee~~were ~~fees~~no ~~commencing~~amounts outstanding on ~~the~~this ~~date~~loan offacility ~~the~~at ~~closing~~December 31, of2006. ~~the ATSB Loan~~ (~~a) to~~See ~~the~~Item 8, ~~ATSB~~Note ~~at an annual rate of 4.~~5% of the ~~principal~~“Notes ~~amount~~to of the ~~Tranche~~Consolidated AFinancial ~~Loan~~Statements”). ~~scheduled to be~~

outstanding for the interest periods ending on June 12 and December 12, 2004, increasing by 0.5% each year for subsequent semi-annual interest periods through December 12, 2008; and (b) to the guarantor of the Tranche B Loan at an annual rate of 3.0% of the principal amount of the Tranche B Loan scheduled to be outstanding for the interest periods ending on June 12 and December 12 through December 12, 2008.

On December 31, 2005, the Company’s indebtedness of $24.0 million outstanding under its $30.0 million ATSB Loan was secured by substantially all of the Company’s assets. The ATSB Loan contained restrictive covenants that imposed significant operating and financial restrictions on the Company. Under the agreement governing the ATSB Loan, the Company was subject to certain covenants requiring it to maintain a certain amount of unrestricted cash or cash equivalents and to comply with certain financial ratios as well as certain negative covenants.

In order to complete the acquisition of North American in April 2005, the Company was required to seek a waiver of certain restrictions under the ATSB Loan. In exchange for the waiver, the Company agreed to certain modifications including changing the minimum cash covenant and a revised principal repayment schedule. The new schedule required payments of $6.0 million in December 2005 (which was made), $5.0 million each in June and December 2006 and 2007 respectively, and a final payment of $4.0 million in June 2008.

During the third and fourth quarters of 2005 and subsequently in 2006, the Company obtained waivers of violations of covenants under the ATSB Loan related to the failure to timely file an amended Current Report on Form 8-K/A to provide 2004 audited results for North American, for filing the second quarter Form 10-Q without a completed SAS 100 review by the Company’s independent auditors and for failing to timely file the third quarter Form 10-Q. The amended Current Report on Form 8-K/A providing 2004 audited results for North American was subsequently filed on October 20, 2005. The second and third quarter Form 10-Q filings were subsequently filed on February 21, 2006. The Company also obtained waivers with respect to violations of covenants related to (i) its failure to timely deliver monthly officer’s certificates and financial statements, and (ii) failure to maintain balances in certain bank accounts below the permitted aggregate maximum balance. The waiver for these violations expired on March 15, 2006. The Company also obtained a waiver of its earlier violation of investment limitations and related cash equivalent requirements, and failure to obtain certain bank account control agreements.

On March 30, 2006 the Company prepaid the remaining principal balance of $24.0 million under the ATSB Loan with working capital. The Company has recorded the $24.0 million outstanding balance as a current liability as of December 31, 2005 in the Consolidated Balance Sheets due to covenant violations. As a result of this prepayment, during the first quarter of 2006, the Company will expense $2.3 million in unamortized debt issuance cost and unamortized warrant costs associated with the ATSB Loan.

Additionally on March 30, 2006, World Airways and North American entered a Loan and Security Agreement with Wachovia, for the issuance of loans and letters of credit up to $50.0 million subject to certain terms, conditions, and limitations. The facility matures in March 2008. The Wachovia loan agreement contains restrictive covenants that imposed significant operating and financial restrictions on the Company. Under the Wachovia loan agreement, the Company’s borrowings bear interest at fluctuating rates. The applicable rate is determined by either the bank’s base lending rate, the Federal Funds Rate, the Eurodollar or London Interbank Offered Rate (“LIBOR”) plus an applicable percentage. The rates applicable to outstanding borrowings fluctuate based on many factors including, but not limited to, general economic conditions, and general interest rates, including the prime rate, and the supply of and demand for credit in the London interbank market. There are no amounts outstanding on this facility. (See Item 8, Note 4 of the “Notes to the Consolidated Financial Statements”).

Contractual Cash Obligations and Other Commitments and Contingencies

The Company has significant long-term obligations relating to operating leases for aircraft and spare engines. In 2002 and 2001, the Company paid amounts less than its original contractual aircraft rent obligations pursuant to agreements with its lessors that amended the terms of the original aircraft lease agreements to provide for the ~~future~~ repayment of the unpaid contractual rent obligations. In April 2005, the Company made a final payment of $1.7 million related to these ~~unpaid~~ unpaid contractual aircraft rent obligations. In the first quarter of 2004, the Company reached an agreement with one of its MD-11 aircraft lessors to restructure certain leases. In exchange for reduced fixed monthly lease rates and a reduction in the lease term, the Company agreed to an annual restructuring fee based on net income. Payments commenced in 2005 based on 2004 results, and continue through the lease terminations in 2011, which will be paid in 2012. Over the term of the agreement, the total obligation of the Company is limited to $24.2 million on a cumulative basis. In individual years, the cash payment is ~~capped~~limited atto $1.6 million infor 2005, $3.6 million per year for 2006 through and including 2011, and $1.0 million in 2012. Although cash disbursements are ~~capped~~ limited each year, due to the cumulative nature of the agreement, expense recognized in a given year may differ from the related cash obligation to be disbursed in the following year. During the second quarter of 2005, the Company and the lessor agreed to a definitive methodology used to calculate the restructuring fee. As a result, the Company recognized a credit of $0.7 million related to the expense recorded during 2004. ~~Also~~The ~~in April 2005, the~~ Company paid $3.6 million and $1.6 million of this liability ~~based~~in onthe ~~2004~~third ~~results~~quarter of 2006 and second quarter of 2005, respectively.

30 18

Due to ~~significant~~its ~~operating~~bankruptcy ~~losses~~filing, asDelta ofAir ~~September 1~~Lines rejected and terminated certain subleases with World Airways, as lessee, for three MD-11 aircraft. In October 2005, ~~North~~World ~~American~~Airways ~~discontinued~~signed ~~its scheduled~~a ~~service~~forbearance ~~between~~agreement, ~~Oakland~~to extend the leases, ~~California~~with ~~and~~the ~~Hawaii~~Indenture ~~and~~Trustee, ~~therefore~~who represented the owners of the aircraft, into ~~October~~prevent the repossession of the aircraft until November 30, 2005, ~~North American~~and ~~closed~~this ~~its~~forbearance ~~Oakland~~agreement ~~base~~was subsequently extended until March 31, 2006. ~~Certain~~The ~~immaterial~~lease ~~costs~~payments prior to the bankruptcy were ~~incurred~~based toon ~~close~~block ~~office locations~~hours flown, ~~move~~while ~~equipment,~~the ~~facilitate~~maximum ~~employee~~monthly ~~relocations~~lease ~~and~~payment ~~accommodate~~during ~~passengers~~the ~~affected~~interim byperiod ~~the~~was ~~discontinuance~~$0.3 ofmillion ~~service~~per aircraft. ~~Refunds~~On ~~were~~March 31, ~~issued~~2006, toWorld ~~all~~Airways ~~passengers~~signed ~~holding~~lease ~~tickets~~agreements with the new owner for ~~flights~~two of the three aircraft, which will keep the aircraft in the World Airways fleet through February 2008 and March 2008, ~~after~~respectively. ~~September~~On May 12, ~~2005~~2006, ~~and~~World Airways signed a lease agreement with the new owner for the remaining MD-11 aircraft, ~~were~~with ~~reassigned~~a tolease ~~more~~term ~~profitable~~expiring ~~military~~in ~~business~~December 2007.

~~Due~~The toCompany’s ~~its~~aircraft ~~bankruptcy~~leases ~~filing,~~require ~~Delta~~the ~~Air~~Company ~~Lines~~to ~~rejected~~pay ~~and terminated~~ certain ~~subleases~~maintenance ~~with~~reserves ~~World Airways~~for airframes, ~~as lessee~~engines, ~~for~~auxiliary ~~three~~power ~~MD-11~~units ~~aircraft.~~and Inlanding ~~October 2005,~~gears ~~World~~based ~~Airways~~on ~~signed~~flight ahours. ~~forbearance agreement,~~Certain toreturn ~~extend~~conditions ~~the~~also ~~leases,~~must ~~with~~be met ~~the~~prior ~~Indenture~~to ~~Trustee,~~returning ~~who represented~~ the ~~owners of the~~ aircraft, to ~~prevent~~ the ~~repossession~~lessor. ofThe ~~the~~Company ~~aircraft~~also ~~until~~pays ~~November 30,~~maintenance ~~2005~~fees ~~and~~to ~~this~~certain ~~forbearance agreement~~maintenance ~~was~~providers ~~subsequently~~for ~~extended~~auxiliary ~~until~~power ~~March 31,~~units ~~2006. The lease payments prior to the bankruptcy were~~ based on ~~block~~flight hours. ~~flown,~~The ~~while~~aggregate ~~the~~amount ~~maximum monthly lease payment during~~ the ~~interim~~ ~~period~~Company ~~was~~paid ~~$0.3 million~~and ~~per~~expensed ~~aircraft.~~in ~~On March 31~~2006, ~~2006~~2005, ~~World~~and ~~Airways signed lease~~2004 ~~agreements~~for ~~with~~maintenance ~~the~~reserves ~~new owner~~ for ~~two of the three aircraft~~airframes, ~~which will keep the aircraft in the World Airways fleet through March 2008. On May 2~~engines, ~~2006~~auxiliary ~~World~~power ~~Airways~~units ~~signed~~and alanding ~~lease~~gears ~~agreement~~and ~~with the~~maintenance ~~new~~fees ~~owner~~ for ~~the~~auxiliary ~~remaining~~power ~~MD-11~~units ~~aircraft,~~was ~~with~~$50.5 amillion, ~~lease~~$45.3 ~~term~~million, ~~expiring~~and in$29.8 ~~December 2007~~million, respectively.

~~North~~The ~~American~~following ~~was~~table apresents ~~defendant~~aggregated ininformation aabout ~~legal~~the ~~action~~Company’s ~~pending~~contractual ~~in California brought by a former pilot for various causes of action~~obligations, ~~including~~excluding ~~wrongful~~contingent ~~termination.~~rentals Inrelated ~~May 2006, North American and the plaintiff agreed~~ to ~~settle~~maintenance ~~this matter with a full release~~reserve payments, inat ~~exchange~~the ~~for~~date ~~$2.3 million~~ of ~~cash consideration.~~issuance: ~~The Company recorded $2.1 million of expense in 2005, and payment of $2.3 million was made in May 2006.~~

The following table presents aggregated information about the Company’s contractual obligations at the date of issuance:


	Payment Due by Period
Contractual Obligations	Total		1 Year		2-3 Years		4-5 Years		More than 5 Years
	(in thousands)
Operating leases	$	636,738	$	124,980	$	214,551	$	164,441	$	132,766
Accrued post-retirement benefits		6,138		353		873		1,112		3,800

Total	$	642,876	$	125,333	$	215,424	$	165,553	$	136,566

	Payment Due by Period
Contractual			1		2-3		4-5		More than
Obligations	Total		Year		Years		Years		5 Years
	(in thousands)
ATSB Loan	$	24,000	$	24,000	$	—	$	—	$	—
Operating leases		720,785		111,911		224,473		170,694		213,707
Accrued post-retirement benefits		7,709		421		1,166		1,616		4,506
Total	$	752,494	$	136,332	$	225,639	$	172,310	$	218,213

Contractual obligations include lease extensions and aircraft commitments signed by the Company as of December 31, 2006.

Under the Wachovia Loan agreement, certain restrictions and requirements may limit the Company’s financial and operating ~~Contractual~~ flexibility. In addition, if the Company fails to comply with these restrictions or to satisfy these requirements, its obligations ~~include~~under ~~lease~~the ~~extensions~~loan agreement and ~~aircraft~~its ~~commitments~~operating ~~signed~~leases may be accelerated. The Company cannot assure its stockholders that byit would be able to satisfy all of these obligations upon acceleration. The failure to satisfy these obligations would materially adversely affect the Company’s business, operations, financial results or liquidity as well as the value of ~~June~~the Company’s common stock. There were no amounts outstanding on this loan facility at December 3031, 2006.

~~The~~Although ~~Company’s~~there ~~aircraft~~can ~~leases~~be ~~require~~no ~~the~~assurances, the Company tobelieves ~~pay~~that ~~certain~~the ~~maintenance~~combination ~~reserves~~of ~~for airframes,~~its ~~engines,~~existing ~~auxiliary~~contracts ~~power units~~ and ~~landing~~additional ~~gears~~business ~~based~~that onit ~~flight~~expects ~~hours. Certain return conditions also must be met prior~~ to ~~returning~~obtain, ~~the~~along ~~aircraft~~with toits ~~the~~existing ~~lessor.~~cash ~~The~~and ~~Company~~financing ~~also~~arrangements, ~~pays maintenance~~will ~~fees~~be sufficient to ~~certain~~allow ~~maintenance providers for auxiliary power units based on flight hours. The aggregate amount~~ the Company ~~paid~~to ~~and~~meet ~~expensed~~its incash ~~2005~~requirements ~~for maintenance~~related ~~reserves~~to ~~for~~operating ~~airframes, engines, auxiliary power units~~ and ~~landing gears~~capital ~~and~~requirements ~~maintenance~~through ~~fees for auxiliary power units was $45~~2007.~~3 million.~~

~~The~~Critical ~~ATSB~~Accounting ~~Loan~~Policies and ~~certain~~Estimates of the Company’s aircraft operating leases contain restrictive covenants that impose significant operating and financial restrictions. Under the agreement governing the ATSB Loan, the Company was subject to certain covenants requiring it to maintain a certain amount of unrestricted cash or cash equivalents and to comply with certain financial ratios. In addition, the agreement governing the ATSB Loan also contained a number of negative covenants, including, but not limited to, restrictions on:

•The ~~Granting~~preparation ~~additional~~of ~~liens~~the onCompany’s ~~its~~financial ~~property~~statements orin ~~making~~conformity ~~significant~~with ~~investments;~~generally •accepted ~~Paying~~accounting ~~dividends,~~principles ~~redeeming~~requires ~~capital~~management ~~stock,~~to ~~repricing~~make ~~outstanding~~estimates ~~stock~~and assumptions ~~options~~that oraffect ~~repaying~~the ~~indebtedness~~amount ~~other~~reported ~~than~~in the ~~ATSB~~consolidated ~~Loan;~~financial •statements ~~Liquidating,~~and ~~winding~~accompanying ~~up,~~notes. ~~dissolving~~The orCompany ~~engaging~~believes inits ~~certain~~estimates ~~acquisitions~~and orassumptions ~~certain~~are ~~sale-leaseback transactions~~reasonable; •however, ~~Engaging~~actual inresults ~~certain~~and ~~transactions~~the ~~with~~timing ~~affiliates~~of orthe ~~certain~~recognition ~~asset~~of ~~sales;~~such •amounts could ~~Engaging~~differ infrom ~~any~~those ~~business~~estimates. ~~unrelated~~The ~~to the~~ Company’s ~~existing~~significant ~~business;~~accounting •policies ~~Consolidating,~~are ~~merging~~described ~~with~~in orItem 8, ~~into~~Note ~~another~~1 ~~entity or selling substantially all~~ of ~~its~~the ~~assets~~“Notes ~~unless~~to ~~certain~~Consolidated ~~conditions~~Financial ~~are~~Statements”. ~~satisfied; and~~

31The following are explanations of the Company’s critical accounting policies, the judgments and uncertainties affecting the application of these policies, and the likelihood that materially different amounts would be reported under different conditions or using different assumptions.

Accounting for Aircraft Repair and Maintenance Costs

• funds ~~Amending~~monthly through nonrefundable payments to lessors to cover future maintenance work. After qualifying maintenance is completed, the ~~terms~~Company records a maintenance receivable from the lessors and is reimbursed for amounts paid from the funds held by the lessors. The result of ~~agreements~~this ~~relating~~arrangement is that the Company recognizes maintenance costs each month based on the amount of nonrefundable maintenance reserves required to be paid to its ~~indebtedness~~lessors (usually based on a rate per hour flown). In some cases, maintenance work does not qualify for ~~borrowed~~reimbursement ~~money~~from maintenance reserves held by the lessor. This could be due to the type of maintenance performed or ~~granting~~whether the aircraft component being maintained is covered by a lease agreement. For maintenance that is not covered by lessor reserves, the Company recognizes the costs when maintenance services are completed. Therefore, maintenance costs will fluctuate from period to period as scheduled maintenance work comes due or in the event unscheduled maintenance work must be performed. It is also important to note that aggregate maintenance reserves paid to each of the Company’s lessors may not be sufficient to cover actual maintenance costs incurred. In these cases, the Company incurs the cost of any ~~additional~~shortfall ~~negative~~when ~~pledges~~the maintenance services are completed and the costs are determinable.

~~Additionally~~Impairment ~~on March 30, 2006, World Airways and North American entered into a Loan and Security Agreement with Wachovia, for the issuance~~ of ~~loans~~Long-Lived ~~and~~Assets ~~letters of credit up to $50.0 million subject to certain terms, conditions, and limitations, including, but not limited to, restrictions on:~~

•The ~~Liens on the~~ Company’s ~~property~~reviews orits long-lived ~~Company~~assets ~~guarantees,~~for ~~subject~~impairment towhenever ~~certain~~events ~~conditions;~~or •circumstances ~~Paying~~indicate ~~cash~~that ~~dividends,~~the ~~issuing~~carrying ~~capital~~amount ~~stock,~~of ~~warrants,~~an orasset ~~options~~may ~~for~~not ~~cash,~~be ~~except~~recoverable. asTo ~~otherwise~~the ~~permitted;~~extent •that ~~Certain~~appraisals ~~sale~~of long-~~leaseback~~lived ~~transactions;~~assets •or ~~Engaging~~the infuture ~~certain~~undiscounted ~~transactions~~net ~~with~~cash ~~affiliates~~flows orexpected ~~certain~~to ~~asset~~be generated ~~sales;~~from •an ~~Engaging~~asset inare ~~any~~less ~~business~~than ~~unrelated to~~ the ~~Company’s~~carrying ~~existing~~amount ~~business;~~of •the ~~Consolidating~~asset, ~~merging~~an ~~with~~impairment orloss ~~into~~will ~~another~~be ~~entity~~recognized orbased ~~selling~~on ~~substantially~~the ~~all~~difference ofbetween the ~~Company~~asset’s ~~assets~~carrying ~~unless~~amount ~~certain~~and ~~conditions~~its ~~are~~estimated ~~satisfied;~~fair •market ~~Amending~~value. ~~any~~Assets ~~material~~to ~~contract~~be ~~that~~disposed ~~would~~of ~~result~~are reclassified inas aassets ~~material~~held ~~adverse~~for ~~effect;~~sale ~~and~~at •the ~~The~~lower ~~creation~~ of ~~any~~their ~~lien~~carrying amount or ~~contract~~fair ~~impairing~~value ~~the~~less ~~lender’s~~cost ~~right~~ to ~~recover collateral during an event of default~~sell.

~~These~~Goodwill ~~restrictions~~ and ~~requirements~~Intangible ~~may limit the Company’s financial and operating~~Assets flexibility. In addition, if the Company fails to comply with these restrictions or to satisfy these requirements, its obligations under the loan agreement and its operating leases may be accelerated. The Company cannot assure its stockholders that it would be able to satisfy all of these obligations upon acceleration. The failure to satisfy these obligations would materially adversely affect the Company’s business, operations, financial results or liquidity as well as the value of the Company’s common stock. There are no amounts outstanding on this facility.

~~Although~~Under ~~there~~the ~~can~~purchase bemethod noof ~~assurances~~accounting, the ~~Company~~total ~~believes~~purchase ~~that~~price was allocated to North American’s net tangible and intangible assets based upon their estimated fair value at the ~~combination~~date of ~~its~~acquisition ~~existing contracts~~with ~~and~~any ~~additional~~amount ~~business~~paid ~~that~~in itexcess ~~expects~~of tothe ~~obtain~~fair value of net assets recorded as goodwill. Intangible assets from the North American acquisition included the trademark, ~~along~~aircraft ~~with~~leases ~~its~~at ~~existing~~market rates ~~cash~~in excess of rental rates, Extended Range Two Engine Operations (“ETOPs”) and ~~financing~~ ~~arrangements~~goodwill (see Item 8, ~~will~~Note be10 ~~sufficient~~of the “Notes to ~~allow~~Consolidated ~~the~~Financial Statements”). The Company toaccounted ~~meet~~for ~~its~~the ~~cash~~intangible ~~requirements~~assets of North ~~related~~American in accordance with Statement of Financial Accounting Standards No. 142 (“SFAS No. 142”), Goodwill and Other Intangible Assets. Pursuant to ~~operating~~SFAS No. 142, goodwill and ~~capital~~indefinite-lived ~~requirements~~intangibles, ~~through~~such as the trademark and ETOPs, are not amortized but are subject to periodic impairment reviews. The Company performed an annual impairment test as of October 1, 2006 for goodwill and indefinite-lived intangibles. This test indicated that goodwill and indefinite-lived intangibles were not impaired as of such date.

The ~~FAA~~aircraft ~~has~~leases ~~issued~~at ~~and~~net ~~proposed~~market rates in excess of rental rates of $2.8 million are being amortized on a ~~number~~straight-line basis over a weighted average of ~~Airworthiness~~31 ~~Directives~~months, ~~(“ADs”)~~which ~~that~~was ~~will~~the ~~require~~average remaining life of the aircraft leases at the date of the North American acquisition. The Company toexpensed ~~make~~$0.9 ~~modifications~~million and $0.7 million in 2006 and 2005, respectively. For the years ending December 31, 2007, 2008, and 2009, the annual amortization expense is estimated to ~~its~~be ~~aircraft~~$0.6 ~~They~~million, ~~are~~$0.5 asmillion, ~~follows:~~ and $0.1 million, respectively.

	•		the modification of thrust reversers on the Company’s DC-10-30 aircraft by October 2006 that is estimated to cost approximately $0.7 million per aircraft and is scheduled on two DC-10 aircraft; and
	•		the modification of the high pressure compressor with “ring case configuration” on the Company’s MD-11 engines, which at December 31, 2005 were 52% complete. The first compliance deadline is to have 66% of the fleet operating engines completed by August 31, 2006 with the remaining engines to be completed by June 2009. These modifications are expected to cost approximately $0.3 million per engine.

Allowance for Doubtful Accounts and Bad Debt Expense

~~The~~In ~~Company~~the normal ~~expects~~course toof ~~finance~~business, the ~~cost~~Company ofreviews ~~compliance~~its ~~with~~accounts ~~ADs~~receivable ~~through~~and ~~internally~~uses ~~generated~~judgment ~~funds~~to assess its ability to collect receivables. Based on this assessment, an allowance for doubtful accounts is maintained for specifically identified accounts ~~The~~receivable ~~estimated~~deemed ~~future~~to ~~total~~be ~~cost~~uncollectible. ofFor ~~these~~those ~~modifications~~receivables not specifically identified, an allowance is maintained based onupon the Company’s ~~current~~historical ~~fleet~~collection isexperience $7and current economic conditions.9 If the financial condition of the ~~million~~Company’s ascustomers were to deteriorate and result in an impairment of ~~December 31~~their ability to make payments, ~~2005~~additional allowances may be required.

During the year ended December 31, 2006, the Company recorded $0.3 million in bad debt expense related to accounts receivable. During the year ended December 31, 2005, the Company recorded $1.6 million in bad debt expense, including $1.0 million related to accounts receivable from Gemini Air Cargo, Inc. which filed for bankruptcy on March 15, 2006. During the year ended December 31, 2004, the Company recorded $2.5 million in bad debt expense related to accounts receivable from TM Travel Services, Inc. (“TM Travel”), as the Company determined that TM Travel would not be able to meet its financial obligations and its accounts receivable from TM Travel were uncollectible.

Employee Benefit Plans

The Company provides a range of benefits to its employees and certain retired employees, including retirement plans, post-retirement health care and life insurance benefits. The annual amounts recorded within the Consolidated Financial Statements relating to these plans are determined by using various actuarial assumptions, such as discount rates, assumed rates of return on plan assets, compensation increases, turnover rates and health care cost trend rates. The Company reviews its actuarial assumptions on an annual basis and makes modifications to the assumptions based on current rates and trends when it is deemed appropriate to do so. The Company believes that the assumptions utilized in recording its obligations under its plans, which are presented in Item 8, Note 11 of the “Notes to Consolidated Financial Statements”, are reasonable based on advice from its actuaries.

On December 31, 2006 the Company adopted Statement of Financial Accounting Standards No. 158 (“SFAS 158”), Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans”. SFAS 158 required the Company to recognize the funded status of its pensions and postretirement plans in the Consolidated Balance Sheet as of December 31, 2006 with a cumulative-effect adjustment of $0.2 million to accumulated other comprehensive income (loss).

Aircraft Leases

The majority of the Company’s aircraft are leased from third parties. In order to determine the proper classification of its leased aircraft as either operating leases or capital leases, the Company must make certain estimates at the inception of the lease relating to the economic useful life and the fair value of an asset as well as select an appropriate discount rate to be used in discounting future lease payments. These estimates are utilized by management to determine whether the lease is classified as an operating lease or a capital lease. All of the Company’s aircraft leases have been classified as operating leases, which results in rental payments being charged to expense over the terms of the related leases. The Company recognizes lease expense on a straight-line basis over the expected term of the lease. Additionally, operating leases are not reflected in our Consolidated Balance Sheet and accordingly, neither a lease asset nor an obligation for future lease payments is reflected in our Consolidated Balance Sheet. Deferred gains realized in connection with the sale-leaseback of aircraft and equipment are amortized over the periods of the respective leases.

Income Taxes

The Company’s effective tax rate is based on historical and anticipated future taxable income, statutory tax rates and tax planning opportunities available to the Company. Tax regulations require items to be included in the tax returns at different times than the items are reflected in the financial statements. As a result, the Company’s effective tax rate reflected in the Consolidated Financial Statements is different than that reported in its income tax returns. Deferred tax assets generally represent items that can be used as a tax deduction or credit in the Company’s tax returns in future years for which it has already recorded the tax benefit in the Consolidated Financial Statements. The Company provides a valuation allowance for deferred tax assets when it is more likely than not that some portion, or all of its deferred tax assets, will not be realized. In assessing the realizability of the deferred tax assets, management considers whether it is more likely than not that some portion, or all of the deferred tax assets, will be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income (including reversals of deferred tax liabilities) during the periods in which those temporary difference will become deductible. Deferred tax liabilities generally represent tax expense recognized in the Consolidated Financial Statements for which payment has been deferred, or expense for which a deduction has already been taken on the Company’s income tax returns but has not yet been recognized as an expense in the Consolidated Financial Statements.

In June 2003, the Georgia Department of Revenue approved the Company’s application for the Georgia Headquarters Job Tax Credit (the “HQC”). The HQC is available for corporate taxpayers (a) establishing or relocating their headquarters to Georgia, (b) investing a minimum of $1 million in certain property, and (c) employing a minimum number of new full-time employees in the State of Georgia that pay at or above a required wage level. This credit may be used for either corporate state income tax or payroll withholding tax. The Company utilized $765,000, $655,000 and $590,000 of tax credits in 2006, 2005 and 2004, respectively, which reduced the Company’s payroll tax expense. If the Company continues to meet the statutory requirements for each year that it is eligible, its total potential future net estimated benefit could be in excess of $1.4 million on a pre-tax basis.

Recently Issued Accounting Standards

~~Statement~~In September ~~of Financial Accounting Standards No. 123(R)~~2006, ~~Share-Based~~the ~~Payments~~FASB ~~(“SFAS~~issued ~~No. 123R”) supersedes~~FASB ~~Accounting~~Staff ~~Principal~~Position ~~Board~~AUG AIR-1 (the “~~APB~~FSP”) ~~Opinion No. 25~~, “Accounting for ~~Stock~~Planned ~~Issued~~Major ~~to Employees~~Maintenance ~~(“APB No. 25~~Activities”) ~~and~~that ~~revises~~eliminates ~~guidance~~the accrue-in-advance ~~Statement~~method as an acceptable method of ~~Financial~~accounting ~~Accounting~~for ~~Standards~~planned ~~No.~~major ~~123,~~maintenance ~~Accounting~~activities. ~~for~~The ~~Stock-Based~~FSP ~~Compensation~~is ~~(“SFAS~~applicable ~~No. 123”).~~to ~~Among~~fiscal ~~other~~years ~~things,~~beginning ~~SFAS~~after ~~No.~~December ~~123(R) requires~~15, ~~that~~2006 ~~compensation~~and ~~expense~~requires beretrospective ~~recognized~~application into ~~the~~all financial statements ~~for~~presented. ~~share-based~~The ~~awards based~~Company ondoes ~~the~~not ~~grant~~believe ~~date~~the ~~fair~~impact ~~value~~ of ~~those awards. It will also require~~ the ~~benefits~~adoption ~~associated with tax deductions in excess~~ of ~~recognized~~this ~~compensation~~FSP will ~~cost~~have ~~to be reported as~~ a ~~financing~~material ~~cash flow~~impact ~~rather~~on ~~than~~its asfinancial ~~an operating cash flow as currently required~~statements. ~~The Company adopted SFAS No. 123(R) on January 1, 2006. Consequently, the Company will use the modified prospective~~

32In July 2006, the FASB, issued FASB Interpretation No. (“FIN”) 48, “Accounting for Uncertainty in Income Taxes” which clarifies the accounting and disclosure requirements for uncertainty in tax positions, as defined. This interpretation is effective for fiscal years beginning after December 15, 2006. FIN 48 requires a two-step approach to evaluate tax positions and determine if they should be recognized in the financial statements. The two-step approach involves recognizing any tax positions that are “more likely that not” to occur and then measuring those positions to determine if they are recognizable in the financial statements. The Company will adopt FIN 48 effective January 1, 2007 and does not believe its adoption will result in a material cumulative-effect adjustment.

method and therefore will not restate its prior period results. SFAS No. 123(R) will apply to new share-based awards and to unvested stock options outstanding on the effective date and issuances under the Company’s stock purchase plan. Unrecognized non-cash stock compensation expense related to unvested options outstanding as of December 31, 2005 was approximately $0.4 million and will be recorded over the remaining vesting period of approximately two years. The Company currently utilizes the Black-Scholes option pricing model to estimate the fair value for the above pro forma calculations. The Company intends to continue to use the Black-Scholes model upon adoption on January 1, 2006.

In May 2005, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 154 (“SFAS 154”), “Accounting Changes and Error Corrections.” SFAS 154 requires that, when a company changes its accounting policies, it must apply the change retrospectively to all prior periods presented, unless impracticable, instead of a cumulative effect adjustment in the period of the change. SFAS 154 may also apply when the FASB issues new rules requiring changes in accounting. However, if the new rule allows cumulative effect treatment, it would take precedence over SFAS 154.

Other Matters

Inflation

The Company believes that neither inflation nor changing prices have had a material effect on the Company’s results of operations during the past three years.

Corporate Headquarters

In 2004, the Company that owned the building containing World Air Holdings’ corporate headquarters, with respect to which World Airways’ previous Chairman and CEO was a principal, sold the building to a real estate investment trust. In conjunction with this transaction, the Company executed a new 15-year lease that provides for reduced rental rates and increased flexibility for expansion. Before approving the terms of the new lease, the Company’s Board of Directors retained an independent law firm to provide a comparative analysis and a national, commercial real estate firm to independently verify that the new lease terms did not have a material incremental financial impact on the Company. Obligations for rent under the lease aggregating $11.3 million at December 31, 2005 are included with the future lease payments for operating leases in Note 5 of the “Notes to Consolidated Financial Statements” in Item 8. The Company incurred $1.2 million of rental expense in 2005, $1.1 million of rental expense in 2004, and $1.3 million of rental expense in 2003, related to the lease.

In June 2003, the Georgia Department of Revenue approved the Company’s application for the Georgia Headquarters Job Tax Credit (the “HQC”). The HQC is available for corporate taxpayers (a) establishing or relocating their headquarters to Georgia, (b) investing a minimum of $1 million in certain property, and (c) employing a minimum number of new full-time employees in the State of Georgia that pay at or above a required wage level. This credit may be used for either corporate state income tax or payroll withholding tax. The Company recorded $655,000 and $760,000 of tax credits in 2005 and 2004, respectively which reduced the Company’s payroll tax expense. If the Company continues to meet the statutory requirements for each year that it is eligible, its total potential future net estimated benefit could be in excess of $2.0 million on a pre-tax basis.

Item 7A.

Quantitative and Qualitative Disclosures About Market Risk

The Company is subject to certain market risks, including commodity prices (i.e., aircraft fuel) and interest rates. The adverse effects of certain changes in these markets pose a potential loss as discussed below. The sensitivity analyses do not consider the effects that such adverse changes may have on overall economic activity, nor do they consider additional actions that the Company may take to mitigate its exposure to such changes. Actual results may differ. See Item 8, “Notes to Consolidated Financial Statements”, for a description of the Company’s policies and additional information.

Aircraft fuel: North American’s results of operations are affected by changes in the price and availability of aircraft fuel. Based on the Company’s ~~2006~~2007 projected fuel consumption for scheduled service and maintenance ferries, a 10% increase in the average price per gallon of fuel would increase fuel expense for ~~2006~~2007 by approximately $27.2 0 million annually. The Company does not currently purchase fuel under long-term contracts or enter into futures or swap contracts.

World Airways is not exposed to commodity price risks except with respect to the purchase of aircraft fuel. Fluctuations in the price of fuel have not had a significant impact on World Airways’ operations in recent years because, in general, World Airways’ charter contracts with its customers limit the Company’s exposure to increases in fuel prices.

Interest rates: Under the ~~ATSB~~Wachovia Loan agreement, ~~based~~the onCompany’s ~~the~~borrowings ~~balance~~bear ~~outstanding~~interest at ~~December 31,~~fluctuating ~~2005,~~rates. ~~each~~The ~~1% change~~applicable inrate is determined by either the ~~benchmark~~bank’s ~~interest~~base lending rate, ~~would~~the ~~have~~Federal ~~increased~~Funds Rate, the Eurodollar or ~~decreased~~London ~~the~~Interbank ~~Company’s~~Offered ~~pre-tax annual~~Rate ~~interest~~(“LIBOR”) ~~cost~~plus byan ~~approximately~~applicable ~~$300,000~~percentage. AtThe ~~December 31,~~rates ~~2005,~~applicable ~~the~~to ~~scheduled~~outstanding ~~remaining required~~borrowings ~~payments~~fluctuate ~~were~~based ~~$5.0 million~~on ~~each~~many infactors ~~June~~including, but ~~and~~not ~~December 2006~~limited to, general economic conditions and ~~2007~~interest rates, ~~respectively~~including the prime rate, and ~~a final~~the ~~payment~~supply of ~~$4.0 million~~and indemand ~~June 2008.~~for Oncredit ~~March 30,~~in ~~2006~~ the ~~Company~~London ~~prepaid~~interbank ~~the~~market. ~~remaining principal~~There ~~balance~~were ofno ~~$24.0 million~~amounts ~~under~~outstanding ~~the~~on ~~ATSB~~this ~~Loan~~loan ~~with~~facility ~~working~~at ~~capital~~December 31, 2006.

Additionally on March 30, 2006, World Airways and North American entered into a Loan and Security Agreement with Wachovia, for the issuance of loans and letters of credit up to $50.0 million subject to certain terms, conditions, and limitations. Under the Wachovia loan agreement, the Company’s borrowings bear interest at fluctuating rates. The applicable rate is determined by either the bank’s base lending rate, the Federal Funds Rate, the Eurodollar or London Interbank Offered Rate (“LIBOR”) plus an applicable percentage. The rates applicable to outstanding borrowings fluctuate based on many factors including, but not limited to, general economic conditions, and general interest rates, including the prime rate, and the supply of and demand for credit in the London interbank market. There are no amounts outstanding on this facility.

Foreign currency exchange rate risks: Although some of the Company’s revenues are derived from foreign customers, all revenues and substantially all expenses are denominated in U.S. dollars. The Company maintains minimal balances in foreign bank accounts to facilitate the payment of expenses.

34 22

Item 8.

Financial Statements and Supplementary Data

WORLD AIR HOLDINGS, INC.

CONSOLIDATED BALANCE SHEETS

	December 31,
	2005			2004
	2006		2005
	(in thousands)
ASSETS
Current assets
Cash and cash equivalents	$	4631,~~202~~198	$	$46,202	~~16,306~~
Restricted cash		61,~~262~~087		6,262	~~4,926~~
Short-term investments		~~827~~—		827	~~33,650~~
Trade accounts receivable, less allowance for doubtful accounts of $1,643 at December 31, 2005 and $209 at December 31, 2004		57,235			43,280
Trade accounts receivable, less allowance for doubtful accounts of $1,623 at December 31, 2006 and $1,643 at December 31, 2005		27,944		57,235
Other receivables		2116,~~564~~112		21,564	~~9,102~~
Prepaid expenses and other current assets		2019,~~246~~697		20,246	~~8,335~~
Deferred tax assets		31,~~846~~261		3,846	~~6,685~~
Total current assets		~~156~~97,~~182~~299		156,182	~~122,284~~
Equipment and property
Flight and other equipment		8184,~~206~~048		81,206	~~84,514~~
Less: accumulated depreciation and amortization		4748,~~480~~613		47,480	~~51,321~~
Net equipment and property		3335,~~726~~435		33,726	~~33,193~~
Goodwill and other intangible assets
Goodwill		25,370		25,370	—
Other intangible assets, net of accumulated amortization of $740 at December 31, 2005		7,355			—
Other intangible assets, net of accumulated amortization of $1,614 at December 31, 2006 and $740 at December 31, 2005		6,481		7,355
Net goodwill and other intangible assets		3231,~~725~~851		32,725	—
Long-term deposits		28,~~298~~481		28,298	~~18,237~~
Other assets and deferred charges, net of accumulated amortization of $3,558 at December 31, 2005 and $2,019 at December 31, 2004		9,715			5,603
Other assets and deferred charges, net of accumulated amortization of $185 at December 31, 2006 and $3,558 at December 31, 2005		5,684		9,715
Total assets	$	~~260~~198,~~646~~750	$	$260,646	~~179,317~~

35 23

WORLD AIR HOLDINGS, INC. ~~CONSOLIDATED~~ ~~BALANCE SHEETS~~

	December 31,
	2005			2004
	(in thousands except share
	amounts)
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Current maturities of long-term debt	$	24,000		$	6,000
Accounts payable		50,757			35,482
Current portion of accrued rent		4,700			5,489
Current portion of deferred rent		2,455			3,242
Unearned revenue		16,512			6,293
Accrued maintenance		9,739			4,179
Accrued salaries, wages and profit sharing		25,576			20,463
Accrued taxes		5,534			8,482
Other accrued liabilities		8,727			1,861
Total current liabilities		148,000			91,491
Long-term debt, net of current maturities		—			43,879
Deferred gain from sale-leaseback transactions, net of accumulated amortization of $4,857 at December 31, 2005 and $4,269 at December 31, 2004		650			1,645
Accrued post-retirement benefits		6,995			4,081
Accrued and deferred rent, net of current portion		14,551			5,615
Deferred income taxes		3,612			2,208
Total liabilities		173,808			148,919
Stockholders’ equity
Preferred stock, $.001 par value (5,000,000 shares authorized; no shares issued or outstanding)		—			—
Common stock, $.001 par value (100,000,000 shares authorized; 25,002,645 shares issued and 23,921,402 shares outstanding at December 31, 2005; 17,430,023 shares issued and 16,348,780 shares outstanding at December 31, 2004)		25			18
Additional paid-in capital		67,770			42,712
Retained earnings		32,153			525
Deferred stock-based compensation		(253	)		—
Treasury stock, at cost (1,081,243 shares at December 31, 2005 and 2004)		(12,857	)		(12,857	)
Total stockholders’ equity		86,838			30,398
Commitments and contingencies (Note 12)		—			—
Total liabilities and stockholders’ equity	$	260,646		$	179,317

CONSOLIDATED BALANCE SHEETS


	December 31,
	2006		2005
	(in thousands except share amounts)
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Current maturities of long-term debt	$	—	$	24,000
Accounts payable and other accrued expenses		52,372		59,484
Current portion of accrued rent		3,945		4,700
Current portion of deferred rent		2,007		2,455
Unearned revenue		18,163		16,512
Accrued maintenance		14,504		9,739
Accrued salaries, wages and profit sharing		15,814		25,576
Accrued taxes		6,413		5,534

Total current liabilities		113,218		148,000

Long-term debt, net of current maturities		—		—
Deferred gain from sale-leaseback transactions, net of accumulated amortization of $5,263 at December 31, 2006 and $4,857 at December 31, 2005		244		650
Accrued post-retirement benefits		7,804		6,995
Accrued and deferred rent, net of current portion		9,128		14,551
Deferred income taxes		1,225		3,612

Total liabilities		131,619		173,808

Stockholders’ equity
Preferred stock, $.001 par value (5,000,000 shares authorized; no shares issued or outstanding)		—		—
Common stock, $.001 par value (100,000,000 shares authorized; 22,367,317 shares issued and outstanding at December 31, 2006; 25,002,645 shares issued and 23,921,402 shares outstanding at December 31, 2005)		22		25
Additional paid-in capital		37,021		67,770
Retained earnings		29,861		32,153
Deferred stock-based compensation		—		(253	)
Treasury stock, at cost (1,081,243 shares at December 31, 2005)		—		(12,857	)
Other comprehensive income		227		—

Total stockholders’ equity		67,131		86,838

Commitments and contingencies (Note 14)		—		—

Total liabilities and stockholders’ equity	$	198,750	$	260,646

See accompanying Notes to Consolidated Financial Statements

36 24

WORLD AIR HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF ~~INCOME~~ OPERATIONS

	Years Ended December 31,
	2005			2004			2003
	2006			2005			2004
	(in thousands except per share amounts)
Operating revenues
Flight operations	$	~~783~~824,~~939~~098		$	~~501~~783,~~698~~939		$	~~471~~501,~~824~~698
Other		31,~~199~~558			23,~~202~~199			32,~~026~~202
Total operating revenues		~~787~~825,~~138~~656			~~503~~787,~~900~~138			~~474~~503,~~850~~900
Operating expenses
Flight		~~218~~233,~~498~~951			~~157~~218,~~147~~498			~~143~~157,~~640~~147
Maintenance		~~113~~147,~~769~~241			76113,~~004~~769			7576,~~513~~004
Aircraft costs		~~109~~121,~~562~~114			77109,~~243~~562			8577,~~487~~243
Fuel		~~168~~194,~~526~~515			74168,~~474~~526			7674,~~488~~474
Flight operations subcontracted to other carriers		23,~~928~~759			12,~~812~~928			21,~~454~~812
Commissions		3638,~~265~~050			2336,~~352~~265			1723,~~433~~352
Depreciation and amortization		67,~~286~~514			56,~~283~~286			5,~~239~~283
Sales, general and administrative		7280,~~588~~292			4872,~~302~~588			4048,~~168~~302
Legal expense — California matter		~~2,100~~—			—2,100			—
Total operating expenses		~~730~~826,~~522~~436			~~463~~730,~~617~~522			~~446~~463,~~422~~617
Operating income		56,616			40,283			28,428
Operating income/(loss)		(780	)		56,616			40,283
Other income (expense)
Interest expense		(43,~~467~~657	)		(54,~~139~~467	)		(5,~~223~~139	)
Interest income		1,~~173~~655			~~584~~1,173			~~370~~584
Other, net		~~(1,721~~135	)		(1,~~696~~721	)		(41,~~452~~696	)
Total other income (expense)		(51,~~015~~867	)		(65,~~251~~015	)		(96,~~305~~251	)
Earnings before income tax expense		51,601			34,032			19,123
Earnings/(loss) before income tax expense		(2,647	)		51,601			34,032
Income tax expense		19,973			8,445			3,802
Income tax expense/(benefit)		(355	)		19,973			8,445
Net earnings	$	31,628		$	25,587		$	15,321
Net earnings/(loss)	$	(2,292	)	$	31,628		$	25,587
Basic earnings per share
Basic earnings/(loss) per share
Net earnings	$	1.40		$	1.95		$	1.37
Net earnings/(loss)	$	(0.10	)	$	1.40		$	1.95
Weighted average shares outstanding		2223,~~588~~643			1322,~~095~~588			1113,~~224~~095
Diluted earnings per share
Diluted earnings/(loss) per share
Net earnings	$	1.19		$	1.09		$	0.95
Net earnings/(loss)	$	(0.10	)	$	1.19		$	1.09
Weighted average shares outstanding		2623,~~824~~643			2426,~~591~~824			1724,~~783~~591

See accompanying Notes to Consolidated Financial Statements

37 25

WORLD AIR HOLDINGS, INC. ~~CONSOLIDATED~~ ~~STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT) (in thousands)~~

			Additional		Retained			Deferred Stock-			Treasury			Total
	Common		Paid-In		Earnings/			Based			Stock, at			Stockholders’
	Stock		Capital		(Deficit)			Compensation			Cost			Equity/(Deficit)
Balance at December 31, 2002	$	12	$	24,361	$	(40,383	)	$	—		$	(12,857	)	$	(28,867	)
Exercise of 344,100 stock options		1		298		—			—			—			299
Fair market value of warrants issued		—		4,792		—			—			—			4,792
Tax benefit of stock option exercises		—		240		—			—			—			240
Amortization of warrants		—		185		—			—			—			185
Net earnings and comprehensive earnings		—		—		15,321			—			—			15,321
Balance at December 31, 2003		13		29,876		(25,062	)		—			(12,857	)		(8,030	)
Exercise of 1,583,088 stock options		2		1,505		—			—			—			1,507
Exercise of warrants for 1,021,994 shares		1		2,499		—			—			—			2,500
Tax benefit of stock option exercises		—		1,221		—			—			—			1,221
Amortization of warrants		—		185		—			—			—			185
Issuance of 2,322,500 shares upon debt conversion		2		7,426		—			—			—			7,428
Net earnings and comprehensive earnings		—		—		25,587			—			—			25,587
Balance at December 31, 2004		18		42,712		525			—			(12,857	)		30,398
Exercise of 835,975 stock options		—		2,353		—			—			—			2,353
Exercise of warrants for 1,076,345 shares		1		2,499		—			—			—			2,500
Tax benefit of stock option exercises		—		1,465		—			—			—			1,465
Amortization of warrants		—		143		—			—			—			143
Issuance of 5,660,302 shares upon conversion of debt		6		18,119		—			—			—			18,125
Stock-based compensation-accelerated vesting		—		176		—			—			—			176
Award of deferred stock-based compensation		—		303		—			(303	)		—			—
Amortization of deferred stock-based compensation		—		—		—			50			—			50
Net earnings and comprehensive earnings		—		—		31,628			—			—			31,628
Balance at December 31, 2005	$	25	$	67,770	$	32,153		$	(253	)	$	(12,857	)	$	86,838

CONSOLIDATED STATEMENTS OF CHANGES

IN STOCKHOLDERS’ EQUITY (DEFICIT) AND COMPREHENSIVE INCOME (LOSS)

(in thousands, except share data)


	Common Stock			Additional Paid-In Capital			Retained Earnings/ (Deficit)			Deferred Stock-Based Compensation			Treasury Stock, at Cost			Accumulated Other Comprehensive Income		Total Stockholders’ Equity / (Deficit)
Balance at December 31, 2003	$	13		$	29,876		$	(25,062	)	$	—		$	(12,857	)	$	—	$	(8,030	)
Net earnings		—			—			25,587			—			—			—		25,587
Exercise of 1,583,088 stock options		2			1,505			—			—			—			—		1,507
Exercise of warrants for 1,021,994 shares		1			2,499			—			—			—			—		2,500
Tax benefit of stock option exercises		—			1,221			—			—			—			—		1,221
Amortization of warrants		—			185			—			—			—			—		185
Issuance of 2,322,500 shares upon debt conversion		2			7,426			—			—			—			—		7,428

Balance at December 31, 2004		18			42,712			525			—			(12,857	)		—		30,398
Net earnings		—			—			31,628			—			—			—		31,628
Exercise of 835,975 stock options		—			2,353			—			—			—			—		2,353
Exercise of warrants for 1,076,345 shares		1			2,499			—			—			—			—		2,500
Tax benefit of stock option exercises		—			1,465			—			—			—			—		1,465
Amortization of warrants		—			143			—			—			—			—		143
Issuance of 5,660,302 shares upon conversion of debt		6			18,119			—			—			—			—		18,125
Stock-based compensation-accelerated vesting		—			176			—			—			—			—		176
Award of deferred stock-based compensation		—			303			—			(303	)		—			—		—
Amortization of deferred stock-based compensation		—			—			—			50			—			—		50

Balance at December 31, 2005		25			67,770			32,153			(253	)		(12,857	)		—		86,838
Net loss		—			—			(2,292	)		—			—			—		(2,292	)
Cumulative effect adjustment resulting from the adoption of SFAS 158, net of tax of $125		—			—			—			—			—			227		227

Comprehensive loss																			(2,065	)
Exercise of 405,475 stock options		1			527			—			—			—			—		528
Tax benefit of stock option exercises		—			1,377			—			—			—			—		1,377
Amortization of warrants		—			135			—			—			—			—		135
Stock-based compensation		—			1,195			—			—			—			—		1,195
Reversal of award of deferred stock-based compensation		—			(303	)		—			303			—			—		—
Reversal of amortization of deferred stock-based compensation		—			—			—			(50	)		—			—		(50	)
Repurchase of 2,222,222 shares of common stock		(2	)		(20,825	)		—			—			—			—		(20,827	)
Retirement of 1,039,694 shares of treasury stock		(2	)		(12,855	)		—			—			12,857			—		—

Balance at December 31, 2006	$	22		$	37,021		$	29,861		$	—		$	—		$	227	$	67,131

See accompanying Notes to Consolidated Financial Statements

38 26

WORLD AIR HOLDINGS, INC. ~~CONSOLIDATED~~ ~~STATEMENTS OF CASH FLOWS~~

	Years Ended December 31,
	2005			2004			2003
	(in thousands)
Cash and cash equivalents at beginning of year	$	16,306		$	16,535		$	5,839
Cash flow from operating activities
Net earnings		31,628			25,587			15,321
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization		6,286			5,283			5,239
Deferred gain recognition		(588	)		(1,132	)		(1,132	)
Charges related to impairment of property and equipment		—			1,500			—
Loss on disposals of equipment and property		1,331			987			408
Tax benefit of stock option exercises		1,465			1,221			240
Amortization of warrants and debt issuance costs		2,024			2,019			943
Deferred income taxes		(463	)		(4,750	)		—
Provision for doubtful accounts		1,622			13			(59	)
Loss on debt extinguishment		(88	)		—			2,989
Other		676			(169	)		185
Changes in operating assets and liabilities, exclusive of acquisitions:
Accounts receivable		(15,187	)		(20,949	)		(2,996	)
Restricted cash		1,464			364			(22,625	)
Deposits, prepaid expenses and other assets		(18,825	)		(1,187	)		(1,461	)
Accounts payable, accrued expenses and other liabilities		21,742			13,616			7,289
Unearned revenue		768			2,747			2,570
Net cash provided by operating activities		33,855			25,150			6,911
Cash flows from investing activities
Purchases of equipment and property		(7,161	)		(2,034	)		(2,773	)
Net (purchases) and sales of short term investments		32,823			(19,650	)		1,000
Proceeds from disposals of equipment and property		192			35			18
Acquisition of North American, less cash acquired		(26,953	)		—			—
Net cash provided by (used in) investing activities		(1,099	)		(21,649	)		(1,755	)
Cash flows from financing activities
Decrease in notes payable		—			—			(17,096	)
Decrease in restricted cash due to repayment of debt		—			18,000			—
Repayment of debt		(6,000	)		(18,000	)		—
Proceeds from exercise of stock options		2,353			1,507			299
Proceeds from exercise of warrants		2,500			2,500			—
Proceeds from issuance of debentures due in 2009, net of debentures due in 2004 exchanged		—			—			3,000
Proceeds from ATSB guaranteed term loan		—			—			30,000
Payment of debt issuance costs		—			(541	)		(2,245	)
Repayment of aircraft rent obligations		(1,713	)		(7,196	)		(8,418	)
Net cash provided by (used in) financing activities		(2,860	)		(3,730	)		5,540
Net increase (decrease) in cash and cash equivalents		29,896			(229	)		10,696
Cash and cash equivalents at end of year	$	46,202		$	16,306		$	16,535
Supplemental information:
Interest paid	$	2,820		$	3,121		$	4,662
Income taxes paid	$	15,121		$	6,981		$	3,819
Conversion of the Company’s convertible senior subordinated debentures to common stock	$	18,125		$	7,428		$	—

CONSOLIDATED STATEMENTS OF CASH FLOWS


	Years Ended December 31,
	2006			2005			2004
	(in thousands)
Cash and cash equivalents at beginning of year	$	46,202		$	16,306		$	16,535
Cash flows from operating activities
Net earnings/(loss)		(2,292	)		31,628			25,587
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization		7,514			6,286			5,283
Amortization of deferred gain		(406	)		(588	)		(1,132	)
Charges related to impairment of property and equipment		—			—			1,500
Loss on disposals of equipment and property		1,055			1,331			987
Tax benefit of stock option exercises		—			1,465			1,221
Amortization of warrants and debt issuance costs		2,987			2,024			2,019
Deferred income taxes		53			(463	)		(4,750	)
Provision for doubtful accounts		335			1,622			13
Stock-based compensation		1,195			—			—
Loss on debt extinguishment		—			(88	)		—
Other		282			676			(169	)
Changes in operating assets and liabilities, exclusive of acquisitions:
Accounts receivable		34,358			(15,187	)		(20,949	)
Restricted cash		5,175			1,464			364
Deposits, prepaid expenses and other assets		1,724			(18,825	)		(1,187	)
Accounts payable, accrued expenses and other liabilities		(17,533	)		21,742			13,616
Unearned revenue		1,651			768			2,747

Net cash provided by operating activities		36,098			33,855			25,150

Cash flows from investing activities
Purchases of equipment and property		(8,924	)		(7,161	)		(2,034	)
Net (purchases) and sales of short term investments		827			32,823			(19,650	)
Proceeds from disposals of equipment and property		559			192			35
Acquisition of North American, less cash acquired		—			(26,953	)		—

Net cash used in investing activities		(7,538	)		(1,099	)		(21,649	)

Cash flows from financing activities
Decrease in restricted cash due to repayment of debt		—			—			18,000
Repurchase of common stock		(20,827	)		—			—
Repayment of debt		(24,000	)		(6,000	)		(18,000	)
Proceeds from exercise of stock options		528			2,353			1,507
Proceeds from exercise of warrants		—			2,500			2,500
Excess tax benefit from employee stock-based compensation plan		1,227			—			—
Payment of debt issuance costs		(492	)		—			(541	)
Repayment of aircraft rent obligations		—			(1,713	)		(7,196	)

Net cash used in financing activities		(43,564	)		(2,860	)		(3,730	)

Net increase (decrease) in cash and cash equivalents		(15,004	)		29,896			(229	)

Cash and cash equivalents at end of year	$	31,198		$	46,202		$	16,306

Supplemental information:
Interest paid	$	447		$	2,820		$	3,121
Income taxes paid	$	129		$	15,121		$	6,981
Conversion of the Company’s convertible senior subordinated debentures to common stock	$	—		$	18,125		$	7,428

See accompanying Notes to Consolidated Financial Statements

39 27

WORLD AIR HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Organization and Summary of Significant Accounting Policies

Organization

The Consolidated Financial Statements include the accounts of World Air Holdings, Inc. (“World Air Holdings” or the “Company”), and its wholly-owned subsidiaries, World Airways, Inc. (“World Airways”), North American Airlines, Inc. (“North American”), and World Risk Solutions, Ltd. (“World Risk Solutions”). World Airways Parts Company, LLC is a wholly-owned subsidiary of World Airways. The Company acquired North American, a privately held airline based in Jamaica, New York, on April 27, 2005. All significant inter-company accounts and transactions have been eliminated in consolidation.

Effective January 10, 2005, World Airways was reorganized into a holding company structure, which was effected through a merger conducted pursuant to Section 251(g) of the General Corporation Law of the State of Delaware, which does not require stockholder approval. All of the outstanding shares of common stock of World Airways, par value $.001 per share, were converted on a share-for-share basis into shares of common stock of World Air Holdings, par value $.001 per share (the “common stock”), and all stockholders of World Airways became stockholders of World Air Holdings through a non-taxable transaction. Stock certificates representing shares of common stock of World Airways are deemed to represent shares of common stock of World Air Holdings until exchanged in the ordinary course as a result of transfers for stock certificates bearing the name of World Air Holdings. Airline operations account for ~~99.9~~100% of World Air Holdings’ operating revenues.

World Airways was organized in March 1948 and is a U.S. certificated air carrier. Air transportation operations account for 100% of World Airways’ operating revenue. World Airways provides long-range passenger and cargo charter and wet-lease air transportation, serving the U.S. Government, international ~~passenger~~freight and ~~cargo~~passenger ~~air carriers~~airlines, tour operators, ~~international freight forwarders~~ and ~~cruise~~customers ~~ship~~requiring ~~companies~~specialized aircraft services. (see Note 1013).

North American was organized in April 1989 and is a U.S. certificated air carrier. Air transportation accounts for 100% of North American’s operating revenues. North American provides passenger charter and wet-lease air transportation serving the U.S. Government, tour operators, and other airlines. In addition, North American operates scheduled passenger service in ~~selected~~in select markets (see Note 1013).

World Risk Solutions, a Bermuda corporation, was formed in November 2004, with the objective of providing certain insurance cost savings, enhanced risk management programs, and better loss control practices to the Company.

Financial Statement Reclassifications

Certain items in prior year consolidated financial statements included herein have been reclassified to conform to the 2005 financial statement presentation.

The consolidated Company reclassified its investment in auction rate securities as short-term investments. These auction rate securities, for which interest rates reset in less than 90 days (7 days to 30 days) but the maturity date is greater than 90 days, were included in cash and cash equivalents before the reclassification. In the Consolidated Statement of Cash Flows for the period ended December 31, 2005, 2004 and 2003, changes in the amounts of “Short-term investments” are classified as cash flows from investing activities. The Company considers these short-term investments as available-for-sale.

Segment Information

management at the operating company level. Financial and other information for the year ended December 31, 2005 by reporting segment is set forth below (in thousands). North American’s financial results for the year ended December 31, 2005 have been included from April 28, 2005, the date following the acquisition of North American, to December 31, 2005.

	Year Ended December 31, 2005
					World Air
					Holdings, World
	World		North		Risk Solutions, and
	Airways		American		Eliminations			Total
Total revenue	$	623,719	$	163,333	$	86		$	787,138
Operating expense		570,059		162,201		(1,738	)		730,522
Operating income	$	53,660	$	1,132	$	1,824		$	56,616
Total assets	$	176,165	$	78,274	$	6,207		$	260,646
Depreciation and amortization expense	$	5,181	$	1,105	$	—		$	6,286
Capital expenditures	$	6,579	$	577	$	5		$	7,161
Total block hours		58,515		17,175		—			75,690

In 2004, the Company operated as a single segment. The Company acquired North American in 2005 and considered North American a separate segment.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. ~~Important~~Significant estimates include fixed asset useful lives, valuation allowances, (including but not limited to, those related to receivables, inventory, intangibles, and deferred taxes), income tax accounting, self-insured ~~insurance~~ employee benefits, and legal liabilities.

Cash, Cash Equivalents and Restricted Cash

The Company considers all liquid investments purchased with an original or remaining maturity of 90 days or less to be cash equivalents. At December 31, 2006, current restricted cash of $1.1 million represented prepayments from customers for flights that are scheduled to be flown within 30 to 60 days of the balance sheet date (unearned revenue). At December 31, 2005, current restricted cash of $6.3 ~~million~~ ~~consists~~million consisted of amounts required for letters of credit that ~~have~~had to be secured by cash collateral, and prepayments from charter customers for flights to be flown. Long-term restricted cash at December 31, 2005, ~~includes~~included approximately $0.8 million of funds held in escrow in the Dominican Republic for North American, which is reported on the Consolidated Balance Sheets in other assets and deferred charges, net. ~~At December 31, 2004, current restricted cash included $4.9 million required for letters of credit to be secured by cash collateral.~~

Concentration of Credit Risk

Financial instruments that potentially subject the Company to a concentration of credit risk consist principally of cash and cash equivalents. The Company places cash and cash equivalents with high-quality institutions. At times, such amounts are in excess of Federal Deposit Insurance Corporation (“FDIC”) insurance limits. As of December 31, ~~2005~~2006 and ~~2004~~2005, such excess over FDIC insurance limits amounted to approximately $5835.7 1 million and $5558.2 7 million, respectively.

~~Concentration~~28 of credit risk with respect to accounts receivable is limited due to the large number of scheduled passengers and the relatively small number of full service and ACMI customers the Company serves, including the U.S. military, which accounts for 73.8% of revenues.

Concentration of credit risk with respect to accounts receivable is limited due to the U.S. military business and the relatively small number of full service and ACMI customers the Company serves, which accounts for 78.7% of revenues.

Short-Term Investments

Short-term investments consist of auction rate securities with auction reset periods of less than 12 months, classified as available-for-sale securities and stated at fair value.

Trade Accounts Receivable and Other Receivables

Accounts receivable are due primarily from the U.S. Government, tour operators, major credit card processors, international passenger and cargo air carriers, and international freight forwarders ~~and cruise ship companies~~. Other receivables include insurance claims, maintenance reserve ~~billings~~receivables ~~to lessors~~ and other miscellaneous receivables. In the normal course of business, the Company reviews its accounts receivable and uses judgment to assess its ability to collect these receivables. Based on this assessment, an allowance for doubtful accounts is maintained for specifically identified accounts receivable deemed to be uncollectible. ~~Collateral is generally not required on accounts receivable.~~

Certain receivables and payables, without the right of offset, are recorded on the Consolidated Balance Sheets as gross amounts. This treatment applies to, but is not limited to, receivables from lessors, maintenance reserve reimbursements, and payables for the corresponding maintenance costs.

Fair Value of Financial Instruments

The following methods and assumptions were used to estimate the fair value of each class of financial instruments at December 31, 2006 and 2005.

•

Cash and cash equivalents; short-term investments; restricted cash; accounts receivable; accounts payable; and accrued expenses

Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash and cash equivalents, short-term investments and accounts receivable. The Company maintains cash and cash equivalents and short-term investments with various high credit-quality financial institutions or in short-duration, high quality ~~debt~~ debt securities. ~~Investments are stated at fair value, which approximates cost.~~ The ~~Company periodically evaluates the relative credit standing of those financial institutions that are considered in our investment strategy. The~~ estimated fair value of ~~accounts~~cash ~~receivable approximates~~and ~~their~~cash ~~carrying~~equivalents, ~~value. The estimated fair value of~~ short-term investments, ~~approximates their~~restricted ~~carrying value. There were no realized or unrealized gains or losses on the Company’s available-for-sale securities for the years ended December 31~~cash, ~~2005,~~accounts ~~2004 or 2003. The Company uses specific identification of securities for determining gains or losses. The Company held no available-for-sale securities at December 31~~receivable, ~~2005. The carrying value of~~ accounts payable, and accrued expenses ~~approximated~~approximate ~~fair~~their ~~value~~carrying ~~because of the short maturity of these financial instruments~~values.

• Long-~~term~~Term ~~Debt~~Deposits

~~The~~At ~~estimated~~December 31, ~~fair~~2006, ~~value~~long-term deposits of ~~the Company’s variable rate~~ $3028.0 5 million ~~term~~consisted ~~loan~~of ~~facility,~~aircraft ~~with~~and ~~an outstanding~~engine ~~balance~~deposits ~~at December 31, 2005~~ of $2427.0 6 million, ~~approximated~~and ~~the~~building ~~carrying~~and ~~value~~miscellaneous deposits of ~~the debt~~$0.9 ~~since~~million. ~~the~~Long-term ~~variable~~deposits ~~interest~~of ~~rates~~$28.3 ~~are~~million ~~market~~at ~~based~~December 31, ~~and~~2005 ~~the~~consisted ~~Company~~of ~~believes~~aircraft ~~such~~and ~~debt~~engine ~~could~~deposits of ~~have~~$27.2 ~~been~~million ~~refinanced~~and onbuilding ~~materially~~and ~~similar~~miscellaneous ~~terms~~deposits of $1. 1 million.

Note 4 to the Consolidated Financial Statements contains information about the carrying value and fair value determination at inception with respect to the Company’s 8.0% Convertible Senior Subordinated Debentures due in 2009 (the “Debentures”). The Debentures, in the principal amount of $25.5 million, were recorded at their estimated fair market value of $28.5 million at the time of their issuance in December 2003. During 2004, conversions reduced the principal amount of the outstanding Debentures by $7.4 million. In February 2005, World Air Holdings issued notice to the holders of the Debentures that it had elected to redeem for cash all of the Debentures. The debenture holders had to exercise their conversion rights by March 24, 2005 at a conversion price of $3.20 per share plus accrued and unpaid interest. All of the outstanding Debentures were converted by March 22, 2005. The $19.9 million carrying value of the Debentures at December 31, 2004 approximated the fair value of these financial instruments because of the short period of time to the date fixed for redemption.

Long-Term Operating Deposits

Long-term operating deposits of $28.3 million at December 31, 2005, consisted of aircraft and engine (flight equipment) deposits of $27.2 million and building and miscellaneous deposits of $1.1 million. At December 31, 2004, long-term operating deposits of $18.2 million consisted of aircraft and engine deposits of $17.8 million and building and miscellaneous deposits of $0.4 million.

Prepaid Expenses and Other Current Assets

Prepaid expenses and other current assets include insurance premiums, rent and fuel that are paid in advance as well as short-term deposits ~~and assets held for sale~~.

Additionally, prepaid expenses and other current assets include inventories consisting of expendable and recoverable aircraft spare parts. These items are stated at the lower of cost or market using the average cost method. Allowances for obsolescence are provided over the estimated useful life of the related aircraft and engines or the term of the related aircraft leases, whichever is shorter.

Equipment and Property

Equipment and property are stated at cost. Provisions for depreciation and amortization of equipment and property are computed over estimated useful lives or the expected term of the lease, if shorter, by the straight-line method, with estimated salvage values of 0-10%. Estimated useful life of equipment and property are as follows:


Flight equipment, including aircraft		1-9 years
Other equipment and property		3-7 years

Improvements to capital equipment, including those performed in response to Airworthiness Directives (“ADs”) issued by the Federal Aviation Administration (“FAA”), are capitalized at cost. Modifications, including those in response to ADs, and routine maintenance and repairs are expensed as incurred.

Leasehold improvements are stated at cost and amortized over the shorter of their estimated useful lives or the term of the lease.

Impairment of Long-Lived Assets

The Company reviews its long-lived assets used in operations for impairment whenever events or circumstances indicate that the carrying amount of an asset may not be recoverable. To the extent that the future undiscounted net cash flows expected to be generated from an asset are less than the carrying amount of the asset, an impairment loss will be recognized based on the difference between the asset’s carrying amount and its estimated fair market value. No impairment charges were recognized in 2006 or 2005. A $1.5 million asset impairment of DC-10 parts was recorded during 2004.

Goodwill and Intangible Assets

The trademark, aircraft leases at market rates in excess of rental rates, Extended Range Two Engine Operations (“ETOPs”) and goodwill (cost in excess of net assets acquired) relate to the acquisition of North American during 2005 (see Note 10). The Company accounted for the intangible assets of North American in accordance with Statement of Financial Accounting Standards No. 142 (“SFAS No. 142”), Goodwill and Other Intangible Assets. Pursuant to SFAS No. 142, goodwill and indefinite-lived intangibles, such as the trademark and ETOPs, are not amortized but are subject to annual impairment reviews. The Company performed an annual impairment test as of October 1, 2006 for goodwill and indefinite-lived intangibles. This test indicated that goodwill and indefinite-lived intangibles were not impaired. The trademark, valued at approximately $0.6 million, and ETOPs, valued at approximately $4.7 million, were acquired during 2005.

The aircraft leases at net market rates in excess of rental rates of $2.8 million are being amortized on a straight-line basis over a weighted average of 31 months, which was the average remaining life of the aircraft leases at the date of the North American acquisition. The Company expensed $0.9 million and $0.7 million in 2006 and 2005, respectively. For the years ending December 31, 2007, 2008, and 2009, the annual amortization expense is estimated to be $0.6 million, $0.5 million, and $0.1 million, respectively.

Other Assets and Deferred Charges

Debt issuance costs are amortized on a straight-line basis, which is not materially different from the results obtained using the effective interest method, over the period the related debt is expected to be outstanding.

The fair market value of the warrants issued to the Air Transportation Stabilization Board (“ATSB”) in connection with its loan guarantee was recorded as a long-term other asset and was amortized using the interest method (see Note 5). On March 30, 2006, the Company prepaid the remaining principal balance of $24.0 million under the ATSB Loan using cash reserves from operations. The Company had recorded the $24.0 million outstanding balance as a current liability as of December 31, 2005 in the accompanying Consolidated Balance Sheets due to covenant violations. As a result of this prepayment, during the first quarter of 2006, the Company expensed $2.3 million in unamortized debt issuance and warrant costs associated with the ATSB Loan.

Additionally, in March 2006, World Airways and North American entered into a Loan and Security Agreement with Wachovia Bank, National Association (“Wachovia Loan”), for the issuance of loans and letters of credit up to $50.0 million subject to certain terms, conditions, and limitations. At December 31, 2006, the unamortized debt issuance cost associated with the Wachovia Loan is $0.3 million, which is being amortized over 1.3 years.

Revenue Recognition

Military revenues are recognized as air transportation services are provided on a per leg basis. Charter revenues are initially recorded as ~~a component of~~ unearned revenue at the time of sale and recognized as revenue when air transportation services are provided on a per leg basis. Passenger ~~ticket~~ ticket sales for scheduled service are initially recorded as ~~a component of~~ unearned revenue, and revenue derived from ticket sales is recognized in revenue on a per leg basis at the time the service is provided. Non-refundable tickets expire one year from the date the ticket is purchased. ATickets ~~number of~~which ~~these tickets~~ expire unused ~~and~~ are recognized as revenue upon expiration.

Aircraft Leases

The majority of the Company’s aircraft are leased from third parties. In order to determine the proper classification of its leased aircraft as either operating leases or capital leases, the Company must make certain estimates at the inception of the lease relating to the economic useful life the expected lease term, and the fair value of an asset, as well as select an appropriate discount rate to be used in discounting future lease payments. These estimates are utilized by management to determine whether the lease is classified as an operating lease or a capital lease. All of the Company’s aircraft leases have been classified as operating leases, which results in rental payments being charged to expense over the terms of the related leases. The Company recognizes lease expense on a straight-line basis over the term of the lease. Additionally, operating leases are not reflected in our Consolidated Balance Sheet and accordingly, neither a lease asset nor an obligation for future lease payments is reflected in our Consolidated Balance Sheet. Deferred gains realized in connection with the sale-leaseback of aircraft and equipment are amortized over the periods of the respective leases.

Fuel Reconciliation Adjustments

Military and charter contracts generally include a fixed rate per gallon for fuel usage with a provision to partially or fully adjust to the actual price per gallon paid. The contracted rate (per mile) and fuel prices (per gallon) are established by the military for a 12-month period running from October to September of the next year. The Company receives reimbursement from the military each month if the price of fuel paid by the Company to fuel vendors for military missions exceeds the fixed price; if the price of fuel paid by the Company to fuel vendors is less than the fixed price, ~~then~~ the Company pays the difference to the military. A similar reconciliation is performed for certain charter contracts. The fuel reconciliation is recorded as an adjustment to revenues in the period when air transportation is provided.

Commission Expense

The Company pays commissions for World Airways and North American based on percentages of military revenues and on scheduled passenger service for North American ~~to credit card companies and~~ travel agencies.

Passenger Taxes and Charges

Certain taxes and charges collected from passengers or customers, including but not limited to, excise taxes and passenger facility charges, remitted to taxing jurisdictions or agencies, are recorded on a net basis in the income statement.

Income Taxes

The Company’s ~~provides~~effective ~~for~~tax ~~income~~rate ~~taxes~~is ~~using~~based ~~the~~on ~~asset~~enacted ~~and~~statutory ~~liability~~tax ~~method~~rates. ~~Deferred~~Tax regulations require items to be included in the tax ~~assets and~~returns ~~liabilities~~at different times than the items are ~~recognized~~reflected ~~for~~in the ~~future~~financial ~~tax~~statements. ~~consequences~~As ~~attributable~~a toresult, ~~differences~~the ~~between~~Company’s effective tax rate reflected in the ~~financial~~Consolidated ~~statement~~Financial ~~carrying~~Statements ~~amounts~~is ofdifferent ~~existing~~than ~~assets~~that ~~and~~reported ~~liabilities~~in ~~and~~its ~~their~~income ~~respective~~ tax ~~bases~~returns. Deferred tax assets ~~and~~generally ~~liabilities~~represent ~~are~~items ~~measured~~that ~~using~~can ~~enacted~~be ~~tax~~used ~~rates~~as ~~expected~~a ~~to apply~~tax todeduction ~~taxable~~or ~~income~~credit in the ~~years~~Company’s tax returns in future years for which ~~those~~it ~~temporary~~has ~~differences~~already ~~are~~recorded ~~expected~~the totax bebenefit in the Consolidated Financial Statements. The Company provides a valuation allowance for deferred tax assets when it is more likely than not that some portion, or all of its ~~recovered~~deferred tax assets, will not be realized. In assessing the realizability of the deferred tax assets, management considers whether it is more likely than not that some portion, or ~~settled~~all of the deferred tax assets, will be realized. The ~~effect~~ultimate realization onof deferred tax assets ~~and~~is ~~liabilities~~dependent upon the generation of afuture ~~change~~taxable inincome (including reversals of deferred tax ~~rates~~liabilities) isduring the periods in which those temporary difference will become deductible. Deferred tax liabilities generally represent tax expense recognized in the ~~financial~~Consolidated ~~statements~~Financial inStatements for which payment has been deferred, or expense for which a deduction has already been taken on the ~~period~~Company’s ~~that~~income ~~includes~~tax returns but has not yet been recognized as an expense in the ~~enactment~~Consolidated ~~date~~Financial Statements.

Earnings Per Share

Basic earnings per share is computed by dividing net earnings by the weighted average number of shares outstanding during the period. Diluted earnings per share ~~include~~ includes the effects on net earnings and shares of ~~common~~ common equivalent shares outstanding during the period.


	2006
	Earnings (Numerator)			Shares (Denominator)	Per Share Amount
Basic and Diluted EPS
Loss available to common stockholders	$	(2,292	)	23,643	$	(0.10	)

	2005
	Earnings (Numerator)			Shares (Denominator)			Per Share Amount
	Earnings(Numerator)			Shares(Denominator)		Per ShareAmount
Basic EPS
Earnings available to common stockholders	$	31,628		$	22,588	$	$1.40	~~1.40~~
Effect of dilutive securities
Warrants		—			1,772
Options		—			1,454
Restricted shares		—			11
8% convertible debentures		162			999
Amortization of debt issuance cost		35			—
Aircraft lease restructuring fees		(13	)		—
Diluted EPS
Earnings available to common shareholders plus assumed conversion	$	31,812			26,824		$	1.19
Earnings available to common stockholders plus assumed conversion	$	31,812		$	26,824	$	1.19

	2004
	Earnings (Numerator)			Shares (Denominator)			Per Share Amount
	Earnings(Numerator)			Shares(Denominator)		Per ShareAmount
Basic EPS
Earnings available to common stockholders	$	25,587		$	13,095	$	$1.95	~~1.95~~
Effect of dilutive securities
Warrants		—			1,992
Options		—			1,842
8% convertible debentures		1,290			7,662
Profit sharing		(90	)		—
Amortization of debt issuance cost		183			—
Aircraft lease restructuring fees		(273	)		—
Diluted EPS
Earnings available to common shareholders plus assumed conversion	$	26,697			24,591		$	1.09
Earnings available to common stockholders plus assumed conversion	$	26,697		$	24,591	$	1.09

~~During~~Excluded ~~the~~from ~~year ended December 31, 2004,~~ the ~~Company amended its~~ diluted ~~EPS calculation to conform to the applicable guidance provided by SFAS No. 128, Earnings Per Share. Consistent with the Company’s previous diluted EPS calculation, the~~ earnings ~~numerator~~per ~~was~~share ~~increased by the interest expense savings resulting from the assumed conversion of the Company’s convertible debentures. Based upon the assumed conversion of the Debentures, the amended~~ calculation ~~increased~~for the ~~earnings numerator~~year byended ~~the~~December ~~resulting amortization expense savings associated with the capitalized debt issuance cost~~31, ~~and~~2006 ~~decreased~~are ~~the~~1.7 ~~earnings numerator by the additional profit sharing expense and~~million ~~lease~~shares ~~restructuring fees which resulted from increased earnings~~ related to ~~interest~~warrants ~~expense~~ and ~~amortization~~ ~~expense savings~~0.8 ~~Management~~million ~~has~~shares ~~determined~~related ~~that this revision did not cause the Company’s Consolidated Financial Statements for the years ended December 31, 2004 and 2003, and for any of the quarters within those years, taken as a whole,~~ to beoptions. ~~materially~~These ~~misleading.~~shares ~~The following~~are ~~table~~excluded ~~shows~~because the effect of ~~the~~including ~~revision on~~ the ~~previously~~shares ~~reported~~would ~~fully~~have ~~diluted~~been ~~EPS calculations~~anti-dilutive.

	2004
Diluted EPS	Q1		Q2			Q3		Q4		YTD
As previously reported	$	0.34	$	0.13		$	0.31	$	0.32	$	1.08
Revised		0.34		0.12			0.31		0.32		1.09
Variance	$	—	$	(0.01	)	$	—	$	—	$	0.01

	2003
Diluted EPS	Q1			Q2			Q3		Q4		YTD
As previously reported	$	0.47		$	0.44		$	0.11	$	0.06	$	0.98
Revised		0.44			0.42			0.11		0.06		0.95
Variance	$	(0.03	)	$	(0.02	)	$	—	$	—	$	(0.03	)

Equipment and Property

Equipment and property are stated at cost or, if acquired under capital leases, at the present value of minimum lease payments at inception of the lease.

Provisions for depreciation and amortization of equipment and property are computed over estimated useful lives or the expected term of the lease, if shorter, for capital leases, by the straight-line method, with estimated salvage values of 0-15%. The Company recognizes lease expense on a straight-line basis over the expected term of the lease. The Company currently has no capital leases. Estimated useful lives of equipment and property are as follows:

Flight equipment		5-16 years
Other equipment and property		3-7 years

Improvements to capital equipment, including those performed in response to Airworthiness Directives (“ADs”) issued by the Federal Aviation Administration, are capitalized at cost. Modifications, including those in response to ADs, and routine maintenance and repairs are expensed as incurred.

Deferred gains realized in connection with the sale-leaseback of aircraft and equipment are amortized over the periods of the respective leases.

Leasehold improvements are stated at cost and amortized over their estimated useful lives or the expected term of the lease, whichever is shorter.

Aircraft Maintenance

Airframe and engine maintenance costs are recognized using the expense as incurred method of accounting. Under this method, maintenance costs are recognized as expense when maintenance services are completed and as flight hours are flown for nonrefundable maintenance payments required by lease or service agreements. After qualifying maintenance is completed, the Company records a maintenance receivable from the lessors and is reimbursed for amounts paid from the funds held by the lessors.

Impairment of Long-Lived Assets

The Company reviews its long-lived assets used in operations for impairment whenever events or circumstances indicate that the carrying amount of an asset may not be recoverable. To the extent that the future undiscounted net cash flows expected to be generated from an asset are less than the carrying amount of the asset, an impairment loss will be recognized based on the difference between the asset’s carrying amount and its estimated fair market value. A $1.5 million asset impairment of DC-10 parts was recorded during 2004. No impairment charges were recognized in 2005.

Assets to be disposed of are reclassified as assets held for sale at the lower of their carrying amount or fair value less cost to sell. Assets held for sale represent primarily excess DC-10 parts. Assets held for sale are expected to be disposed of by selling the assets within the next 12 months.

Exit or Disposal Costs

Liabilities for costs associated with an exit or disposal activity are recognized and measured at their fair value in the period in which the liability is incurred. Liabilities for costs to terminate a contract before the end of its term are recognized and measured at their fair value when the Company terminates the contract in accordance with the contract terms. Liabilities for costs that will continue to be incurred under a contract for its remaining term without economic benefit to the Company are recognized and measured at their fair value when the Company ceases using the right conveyed by the contract. If the contract is an operating lease, the fair value of the liability at the cease-

use date is determined based on the remaining lease rentals, reduced by the estimated sublease rentals that can be reasonably obtained for the property.

Goodwill and Intangible Assets

The trademark, aircraft leases at market rates in excess of rental rates, ETOPS and goodwill (cost in excess of net assets acquired) relate to the acquisition of North American during 2005 (see Note 7). The Company accounted for the intangible assets of North American in accordance with Statement of Financial Accounting Standards No. 142 (“SFAS No. 142”), Goodwill and Other Intangible Assets. Pursuant to SFAS No. 142, goodwill and indefinite-lived intangibles, such as the trademark and ETOPS, are not amortized but are subject to annual impairment reviews. Since the trademark, valued at approximately $0.6 million, and ETOPS, valued at approximately $4.7 million, was acquired during 2005 and no events of impairment occurred, the Company concluded that these intangibles were not impaired as of December 31, 2005. The Company performed an annual impairment test as of October 1, 2005 for goodwill and indefinite-lived intangibles. This test indicated that goodwill and indefinite-lived intangibles were not impaired as of December 31, 2005.

The aircraft leases at market rates in excess of rental rates of $2.8 million are being amortized on a straight-line basis over approximately 31 months, which was the remaining life of the aircraft leases at the date of the North American acquisition. Accumulated amortization was $0.7 million at December 31, 2005. For the years ending December 31, 2006 and 2007, the annual amortization expense is estimated to be $1.1 million and $1.0 million, respectively.

Other Assets and Deferred Charges

The fair market value of the warrants issued to the ATSB in connection with the loan guarantee was recorded as a long-term other asset and is amortized through December 2008 using the interest method (see Note 4).

On March 30, 2006, the Company prepaid the remaining principal balance of $24.0 million under the ATSB Loan with cash reserves. The Company has recorded the $24.0 million outstanding balance as a current liability as of December 31, 2005 in the accompanying Consolidated Balance Sheets due to covenant violations. As a result of this prepayment, during the first quarter of 2006, the Company will expense $2.3 million in unamortized debt issuance and warrant costs associated with the ATSB Loan.

Post-retirement Benefits Other Than Pensions

World Airways’ retired cockpit crewmembers and eligible dependents are covered under post-retirement health care and life insurance benefits to age 65. A small group of administrative retirees are also covered under a post-retirement health care and life insurance benefits plan for life. The Company accounts for the benefit costs in accordance with Statement of Financial Accounting Standards No. 106, Employers’ Accounting for Post-retirement Benefits Other Than Pensions (“SFAS No. 106”) and Statement of Financial Accounting Standards No. 158, Employers’ Accounting for Defined Benefit Pension and Other Post-retirement Plans (“SFAS 158”). The Company funds the benefit costs on a pay-as-you-go (cash) basis. During 2005, World Airways recorded an adjustment of $1.6 million for post-retirement health care and life insurance benefits (see ~~Notes 8~~Note ~~and 14~~11). The Company evaluated the impact of this adjustment to prior periods and determined that it was not material to ~~the current year or~~ any prior periods.

Accounting for Stock-Based Compensation

AtEffective ~~December~~January 311, ~~2005~~2006, the Company ~~had~~adopted ~~three~~Statement ~~stock-based compensation plans, which are described more fully in Note 6. During 2005, the Company issued 50,000 shares~~ of ~~restricted~~Financial ~~stock~~Accounting ~~which~~Standards ~~vest over four years~~ (~~time based only~~“SFAS”). ~~Compensation expense was recognized for this restricted stock grant~~No. ~~In February~~ ~~2006~~123(R), the employee to whom the stock was issued resigned and accordingly the restricted stock grant terminated and the grant was cancelled effective on the date of termination. During the first quarter of 2006, the Company will reverse the transactions related to the termination of the restricted stock grant. The Company accounts for stockShare-~~based~~Based ~~compensation~~Payments ~~plans under~~(“SFAS ~~the~~123R”) ~~recognition~~which ~~and~~supersedes ~~measurement principles of~~ Accounting Principles Board (“APB”) Opinion No. 25, Accounting for Stock Issued to Employees (“~~ABP~~APB ~~No.~~ 25”), and ~~related~~revises ~~interpretations.~~guidance ~~No stock-based~~in ~~compensation~~SFAS ~~cost~~No. 123, ~~related~~Accounting tofor ~~stock~~Stock-Based ~~options~~Compensation is(“SFAS ~~reflected~~123”). inThis ~~net earnings because all~~pronouncement ~~options~~requires ~~granted~~companies ~~under~~to ~~those~~measure ~~plans~~the ~~had~~cost anof ~~exercise~~employee ~~price~~services ~~equal~~received toin ~~the~~exchange ~~market~~for ~~value~~an award of ~~the~~equity ~~underlying common~~instruments (typically stock options) based on the grant-date fair value of ~~grant~~the award. The ~~following~~fair ~~table~~value ~~illustrates~~is ~~the~~estimated ~~effect~~using onoption-pricing ~~net earnings and~~models. ~~earnings~~The ~~per~~resulting ~~share~~cost ifis ~~the~~recognized ~~Company~~over ~~had applied~~ the ~~fair~~period ~~value~~during ~~recognition~~which ~~provisions~~an ofemployee ~~Statement~~is ~~of Financial~~required ~~Accounting Standards No. 123, Accounting for Stock-Based Compensation (“SFAS No. 123”),~~ to ~~stock-based~~provide ~~compensation~~service (in ~~thousands,~~exchange ~~except~~for ~~per~~the ~~share~~award, ~~data):~~

46 32

	2005			2004			2003
Net earnings, as reported	$	31,628		$	25,587		$	15,321
Deduct: Total stock-based compensation expense determined under fair value based method for all awards, net of related tax effects		(529	)		(810	)		(528	)
Pro forma net earnings		31,099			24,777			14,793
Earnings per share
Basic — as reported	$	1.40		$	1.95		$	1.37
Basic — pro forma	$	1.38		$	1.89		$	1.32
Diluted — as reported	$	1.19		$	1.09		$	0.95
Diluted — pro forma	$	1.17		$	1.05		$	0.92

usually the vesting period. Additionally, SFAS 123R requires the cash flows resulting from the tax benefits in excess of the compensation expense recognized for those options (excess tax benefits) to be classified as financing cash flows. SFAS No. 123R applies to new share-based awards and to unvested stock options outstanding on the effective date and issuances under the Company’s stock incentive plan. The Company utilizes the Black-Scholes option pricing model to estimate the fair value of its stock based awards and expects to continue using the same methodology in the future (See Note 8). The Company used the modified prospective method to adopt SFAS 123R and therefore did not restate its prior period results.

~~The~~Prior ~~per~~to ~~share~~the ~~weighted-average~~adoption ~~fair value~~ of ~~stock~~SFAS ~~options granted during 2005~~123R, ~~2004,and~~the ~~2003~~Company ~~was~~accounted for ~~$7.53,~~stock-based ~~$3.88,~~compensation ~~and~~plans ~~$1.08,~~under ~~respectively, on~~ the ~~date~~recognition ofand ~~grant~~measurement ~~using~~principles ~~the~~of ~~Black~~APB ~~Scholes~~25, ~~option-pricing model~~and ~~with~~related ~~the~~interpretations. ~~following weighted-average assumptions:~~

	2005			2004			2003
Expected dividend yield		0	%		0	%		0	%
Risk-free interest rate		3.9	%		3.8	%		3.1	%
Expected life (in years)		4.1			4.7			5.2
Risk-free volatility		44	%		79	%		102	%

The following table illustrates the effect on net earnings and earnings per share if the Company had applied the fair value recognition provisions of SFAS 123, to stock-based compensation (in thousands, except per share data):


	2005			2004
Net earnings, as reported	$	31,628		$	25,587
Deduct: Total stock-based compensation expense determined under fair value based method for all awards, net of related tax effects		(529	)		(810	)

Pro forma net earnings	$	31,099		$	24,777

Earnings per share
Basic — as reported	$	1.40		$	1.95
Basic — pro forma	$	1.38		$	1.89
Diluted — as reported	$	1.19		$	1.09
Diluted — pro forma	$	1.17		$	1.05

Recently Issued Accounting Standards

~~Statement~~In ofSeptember ~~Financial~~2006, ~~Accounting~~the ~~Standards~~Securities ~~(“SFAS”)~~and ~~No. 123(R)~~Exchange ~~Share–Based~~Commission ~~Payments~~ (~~“SFAS~~the ~~No. 123(R)~~“SEC”) ~~supersedes~~issued ~~APB~~SAB No108. 25 ~~and~~Due ~~revises~~to ~~guidance~~diversity in ~~SFAS~~practice ~~No. 123.~~among ~~Among other things~~registrants, ~~SFAS~~SAB ~~No. 123(R)~~108 ~~requires~~expresses ~~that~~SEC ~~compensation~~staff ~~expense~~views beregarding ~~recognized in~~ the ~~financial~~process ~~statements~~by ~~for share-based~~which ~~awards~~misstatements ~~based~~in onfinancial ~~the~~statements ~~grant~~are ~~date~~evaluated ~~fair~~for ~~value~~purposes of ~~those~~determining ~~awards.~~whether Itfinancial ~~will~~statement ~~also~~restatement ~~require~~is ~~the~~necessary. ~~benefits associated~~SAB ~~with~~108 ~~tax~~is ~~deductions~~effective infor ~~excess~~fiscal ofyears ~~recognized~~ending ~~compensation~~after ~~cost to be reported as a financing cash flow rather than as an operating cash flow as currently required. The Company adopted SFAS No.~~November ~~123(R) on January 1~~15, 2006. ~~Consequently,~~The ~~the~~adoption ~~Company~~of ~~will~~SAB ~~use~~108 ~~the modified prospective method and therefore~~ will not ~~restate~~have ~~its prior period results. SFAS No. 123(R) will~~a ~~apply~~material toimpact ~~new share-based awards and to unvested stock options outstanding~~ on the ~~effective date and issuances under the~~ Company’s ~~stock~~financial ~~incentive plan~~statements. Unrecognized non-cash stock compensation expense related to unvested options outstanding as of December 31, 2005 was approximately $0.4 million and will be recorded over the remaining vesting period of approximately two years. The Company currently utilizes the Black-Scholes option pricing model to estimate the fair value for the above pro forma calculations and expects to continue using the same methodology in the future.

In ~~May 2005~~September 2006, the ~~Financial Accounting Standard Board (“~~FASB”) issued ~~Statement~~FASB ofStaff ~~Financial Accounting~~Position ~~Standards~~AUG ~~No. 154~~AIR-1 (~~“SFAS~~the ~~154~~“FSP”), “Accounting ~~Changes~~for ~~and~~Planned ~~Error~~Major ~~Corrections.~~Maintenance Activities” ~~SFAS~~that ~~154 requires~~eliminates ~~that,~~the ~~when~~accrue-in-advance amethod ~~company~~as ~~changes~~an ~~its~~acceptable method of accounting ~~policies,~~for itplanned ~~must~~major ~~apply~~maintenance ~~the~~activities. ~~change retrospectively~~The toFSP ~~all~~is ~~prior~~applicable ~~periods~~to ~~presented,~~fiscal ~~unless~~years ~~impracticable~~beginning after December 15, ~~instead~~2006 ofand arequires ~~cumulative effect~~retrospective ~~adjustment~~application into ~~the~~all ~~period~~financial ofstatements ~~the change~~presented. ~~SFAS~~The ~~154~~Company ~~may~~does ~~also~~not ~~apply~~believe ~~when~~ the ~~FASB~~impact ~~issues~~of ~~new rules requiring changes in accounting. However, if~~ the ~~new~~adoption ~~rule~~of ~~allows~~this ~~cumulative~~FSP ~~effect~~will ~~treatment, it~~have ~~would~~a ~~take~~material ~~precedence~~impact ~~over~~on ~~SFAS~~its ~~154~~financial statements.

2In July 2006, the FASB, issued FASB Interpretation No. ~~Prepaid~~(“FIN”) ~~Expenses~~48, “Accounting for Uncertainty in Income Taxes” which clarifies the accounting and ~~Other~~disclosure ~~Current~~requirements ~~Assets~~for uncertainty in tax positions, as defined. This interpretation is effective for fiscal years beginning after December 15, 2006. FIN 48 requires a two-step approach to evaluate tax positions and determine if they should be recognized in the financial statements. The two-step approach involves recognizing any tax positions that are “more likely that not” to occur and then measuring those positions to determine if they are recognizable in the financial statements. The Company will adopt FIN 48 effective January 1, 2007 and does not believe its adoption will result in a material cumulative-effect adjustment.

2. Segment Information

The Company has two reportable segments: World Airways and North American. The Company operates and manages these companies as two distinct operating segments, and prepares separate financial statements for each that are reviewed by senior management at World Air Holdings, as well as the chief operating officer and other management at the operating company level. Financial and other information for the year ended December 31, 2006 and 2005 by reporting segment is set forth below (in thousands).


	Year Ended December 31, 2006
	World Airways		North American			World Air Holdings, World Risk Solutions, and Eliminations			Total
Total revenue	$	559,809	$	267,195		$	(1,348	)	$	825,656
Operating expense		557,211		271,144			(1,919	)		826,436
Operating income/(loss)		2,598		(3,949	)		571			(780	)
Total assets		115,040		76,572			7,138			198,750
Depreciation and amortization expense		6,072		1,425			17			7,514
Capital expenditures	$	6,629	$	2,165		$	130		$	8,924
Total block hours		56,102		27,475			—			83,577


	Year Ended December 31, 2005
	World Airways		North American		World Air Holdings, World Risk Solutions, and Eliminations			Total
Total revenue	$	623,719	$	163,333	$	86		$	787,138
Operating expense		570,059		162,201		(1,738	)		730,522
Operating income/(loss)		53,660		1,132		1,824			56,616
Total assets		176,165		78,274		6,207			260,646
Depreciation and amortization expense		5,181		1,105		—			6,286
Capital expenditures	$	6,579	$	577	$	5		$	7,161
Total block hours		58,515		17,175		—			75,690

*	Financial and statistical data include the results of North American from April 28, 2005 to December 31, 2005

In 2004, the Company operated as a single segment. The Company acquired North American in 2005 and considered North American a separate segment.

3. Prepaid Expenses and Other Current Assets

Prepaid expenses and other current assets consist of the following (in thousands):

	December 31,
	2005			2004
	2006		2005
Prepaid insurance	$	3,~~980~~141	$	$3,980	~~2,884~~
Prepaid rent		74,~~259~~343		7,259	~~1,881~~
Prepaid fuel		21,~~038~~251		2,038	~~1,780~~
Prepaid taxes		25,~~736~~033		2,736	—
Deposits		~~927~~1,650		927	~~725~~
Inventories		1,175			—
Inventories, net of obsolescence reserve of $1,966 at December 31, 2006 and $1,245 at December 31, 2005		2,328		1,175
Other		1,951		2,131
Total	$	19,697	$	20,246

47 34

	December 31,
	2005		2004
Other		2,131		1,065
Total	$	20,246	$	8,335

4. Other Assets and Deferred Charges

3. Other Assets and Deferred Charges

Other assets and deferred charges consist of the following (in thousands):

	December 31,
	2005			2004
	2006			2005
Deferred rent	$	65,~~214~~176		$	—6,214
Fair market value of ATSB warrants		~~4,792~~—			4,792
Debt issuance costs — convertible debentures due in 2009		—			1,397
Debt issuance costs — Wachovia Loan		492			—
Debt issuance costs — term loan due in 2008		~~1,433~~—			1,433
Restricted cash		~~830~~—			—830
Other		4201			—4
		13,273			7,622
		5,869			13,273
Accumulated amortization		(~~3,558~~185	)		(23,~~019~~558	)
Total	$	95,~~715~~684		$	59,~~603~~715

45. Long-term Debt

The Company had no outstanding debt at December 31, 2006. The Company’s long-term debt, including current maturities thereof, at December 31, is2005 was as follows (in thousands):

	2005			2004
	2006		2005
ATSB Loan	$	~~24,000~~—	$	$24,000	~~30,000~~
Convertible senior subordinated debentures due December 2009 — principal amount of $18.1 million, with interest at 8% payable semi-annually		—			19,879
Less: current maturities		—		24,000
Total		24,000			49,879
Total long-term debt, net of current maturities	$	—	$	—
Less: current maturities		24,000			6,000
Total long-term debt, net of current maturities	$	—		$	43,879

On December 30, 2003, the Company issued $25.5 million aggregate principal amount of the Debentures in exchange for $22.5 million aggregate principal amount of its then outstanding 8.0% Convertible Senior Subordinated Debentures due in 2004 (the “Old Debentures”) and $3.0 million in cash. The Company called for redemption the remainder, or $18.0 million aggregate principal amount, of its Old Debentures and redeemed the Old Debentures on January 28, 2004. ~~Interest on the Debentures was payable semi-annually on June 30 and December 30 of each year.~~ The Debentures were convertible, at any time, into the Company’s common stock at a conversion price of $3.20 per share. The Debentures were redeemable by the Company at 100% of the principal amount on or after December 30, 2004 if the average closing price of the Company’s common stock was equal to or greater than 200% of the conversion price for 20 of 30 consecutive trading days, and on or after December 30, 2005 if the average closing price of the Company’s common stock was equal to or greater than 150% of the conversion price for 20 of 30 consecutive trading days. On or after December 30, 2006, the New Debentures were redeemable at any time at 100% of the principal amount regardless of the stock price. On February 22, 2005, World Air Holdings issued a notice of redemption of the Debentures, giving the holders until March 22, 2005 to exercise their conversion rights at a conversion price of $3.20 per share. The holders converted all of the outstanding Debentures by March 22, 2005.

~~Since~~On ~~the~~December 30, ~~Debentures~~2003, ~~and~~ the ~~Old~~Company ~~Debentures~~closed ~~had~~the ~~substantially~~$30.0 ~~different~~million ~~terms,~~ATSB ~~under~~Loan ~~Emerging Issues~~of ~~Task~~which ~~Force~~90.0% (“~~EITF~~Tranche A Loan”) ~~No. 96-19,~~was ~~Debtor’s~~guaranteed ~~Accounting~~by ~~for~~the aATSB ~~Modification~~and or10.0% ~~Exchange~~(“Tranche ofB ~~Debt~~Loan”) was guaranteed by another third ~~Instruments,~~party. The Company’s obligations under the ~~Debentures~~loan agreement were ~~recorded~~secured atby ~~their~~substantially ~~estimated~~all ~~fair~~of ~~value~~the assets of ~~$28.5 million~~the atCompany ~~the time~~and ofits ~~issuance~~subsidiaries. onAt December 3031, ~~2003.~~2005, ~~The~~the ~~following~~blended ~~were~~rate ~~the~~on ~~key~~both ~~assumptions~~Tranches ~~used~~approximated in4.5%. ~~determining~~Also, at December 31, 2005, the ~~fair~~Company’s ~~value~~indebtedness of ~~the~~$24.0 ~~Debentures:~~million ~~principal~~outstanding ~~amount~~under ofits $2530.5 0 million, ~~closing~~ATSB ~~stock~~Loan ~~price~~was secured by substantially all of ~~$3.37 per~~the ~~share,~~Company’s ~~risk~~assets. ~~free~~The ~~interest~~ATSB ~~rate~~Loan ofcontained ~~1.28%,~~restrictive ~~expected~~covenants ~~volatility~~that ofimposed significant ~~50%,~~operating and ~~average~~financial ~~life~~restrictions ofon ~~2.5 years.~~the AsCompany requiring it to maintain a ~~result~~certain amount of ~~the~~unrestricted ~~fair~~cash ~~value~~or ofcash ~~the~~equivalents ~~Debentures~~and ~~exceeding~~to ~~the~~comply ~~carrying~~with ~~amount~~certain offinancial ~~the~~ ratios as well as certain negative covenants.

48The Company recorded the $24.0 million outstanding balance as a current liability as of December 31, 2005 in the Consolidated Balance Sheets due to covenant violations. On March 30, 2006 the Company prepaid the remaining principal balance of $24.0 million under the ATSB Loan with working capital. As a result of this prepayment, during the first quarter of 2006, the Company expensed $2.3 million in unamortized debt issuance cost and unamortized warrant costs associated with the ATSB Loan.

~~Old~~In ~~Debentures~~March 2006, ~~the~~World ~~Company~~Airways ~~recorded~~and North American entered a ~~loss~~Loan onand ~~debt~~Security ~~extinguishment~~Agreement with Wachovia Bank, National Association (“Wachovia Loan”), for the issuance of loans and letters of credit up to $350.0 million subject to certain terms, conditions, and limitations. The facility matures in ~~December 2003~~March 2008. Under the Wachovia Loan, the Company’s ~~Amortization~~borrowings bear interest at fluctuating rates. The applicable rate will be one of the ~~excess~~following three options, as designated by the Company: (1) the bank’s base lending rate, (2) the Federal Funds Rate, or (3) the Eurodollar or London Interbank Offered Rate (“LIBOR”) plus an applicable percentage. The rates applicable to outstanding borrowings fluctuate based on many factors including, but not limited to, general economic conditions, and general interest rates, including the prime rate, and the supply of and demand for credit in the ~~fair~~London ~~value~~interbank market. At December 31, 2006, the Company’s borrowing base was approximately $29.0 million, of which $283.5 4 million ~~over~~was utilized for letters of credit issued under the ~~par~~facility. As a result, the available amount offor borrowing was $25.5 6 million ~~was~~. ~~recognized~~The asborrowing base fluctuates on a ~~credit~~daily basis and is subject to ~~interest~~a ~~expense~~$50.0 ~~until~~million maximum and includes the ~~early~~sum ~~conversion~~of: (1) 85%—90% of ~~the~~eligible government ~~Debentures~~receivables, ~~when the~~(2) 70% ~~remaining~~of ~~excess~~eligible unbilled government receivables, not to exceed $5.0 million, (3) 80% of ~~the~~eligible ~~fair~~commercial receivables, (4) 75% of the value ~~over~~of ~~par~~eligible ~~was~~spare ~~relieved~~parts, ~~through~~not ~~additional~~to ~~paid-in~~exceed ~~capital~~$15.0 million; less the face amount of issued and outstanding letters of credit and any applicable reserves. The Company had no borrowings outstanding at December 31, 2006.

In ~~the~~October ~~December 31~~2006, ~~2003 Consolidated Balance Sheet,~~ the Company ~~recorded~~completed a ~~beneficial~~“modified ~~conversion feature~~Dutch ofAuction” ~~$1.4 million~~tender inoffer ~~connection~~(“Tender ~~with~~Offer”) ~~the~~and ~~issuance~~purchased ~~of the Debentures as a reduction to long-term debt~~2.22 million ~~This~~shares ~~amount was calculated as the excess~~ of ~~the~~its ~~fair~~outstanding ~~value of the~~ common stock ~~of $3.37~~(See ~~per~~Note ~~share~~9). ~~over~~As ~~the~~a ~~stated~~result ~~conversion price~~ of ~~$3.20~~the ~~per~~Tender ~~share~~Offer, ~~multiplied by~~ the ~~7,982,813~~ ~~shares to be issued if all Debentures were converted. The~~ Company ~~subsequently~~modified ~~determined~~the innumber ~~2004 that~~of ~~the~~warrants ~~stated~~and ~~conversion~~exercise price inpursuant ~~the Debentures agreement should have been adjusted~~ to ~~an “effective”~~the ~~conversion~~provisions ~~price,~~of ~~which is $3.57 per share rather than~~ the ~~stated~~ATSB ~~conversion~~warrant ~~price of the Debentures~~agreement. ~~This~~As ~~amount~~a ~~was~~result, ~~calculated by taking~~ the ~~recorded~~ATSB ~~$28.5 million~~held ~~fair~~warrants ~~value~~to ofpurchase ~~the Debentures divided by 7~~1,~~982~~153,~~813~~973 shares. ~~Therefore~~and 806,616 ~~the~~shares ~~conversion~~at ~~feature~~$0.86 ~~was not “in the money”~~ and ~~no beneficial conversion feature existed~~$3.52 ~~Management~~per ~~determined~~share, ~~that~~respectively ~~this did not cause the~~at ~~Company’s Consolidated Financial Statements for the year ended~~ December 31, ~~2003,~~2006. or(See ~~the~~Note ~~quarters ended March 31, 2004 and June 30, 2004, taken as a whole, to be materially misleading~~7). The ~~balance sheet~~Company ~~impact~~borrowed ~~of the correction was recorded as a retroactive reclassification to reduce additional paid-in capital and increase long-term debt by~~ $121.4 0 million onunder the ~~December 31,~~Wachovia ~~2003~~Loan ~~Consolidated Balance~~agreement ~~Sheet.~~to ~~Further,~~fund the ~~Consolidated~~Tender ~~Statement~~Offer ofand ~~Income~~related ~~for~~transaction ~~the~~costs ~~quarter~~to ~~ended~~repurchase ~~September 30, 2004~~Company ~~included~~stock. an(See ~~adjustment~~Note to9). ~~reduce~~The ~~interest~~amount ~~expense~~borrowed bybore ~~$112,000,~~interest ~~which~~at ~~represents~~ the ~~cumulative~~ ~~impact~~monthly ofLIBOR ~~this~~and ~~correction. Management does not believe that the impact of this correction~~ was ~~material~~ tosubsequently ~~the~~repaid ~~quarter~~on ~~ended September~~November 3015, ~~2004, or to the year ended December 31, 2004~~2006.

In February 2005, after satisfying the requirement applicable to the redemption of the Debentures on or after December 30, 2004, World Air Holdings issued notice to the holders of its Debentures that it had elected to redeem for cash all of the outstanding Debentures on March 24, 2005, plus any accrued and unpaid interest6. ~~The~~Operating ~~holders~~Leases of the Debentures had until the close of business on March 22, 2005 to exercise their conversion rights at a conversion price of $3.20 per share, plus any accrued and unpaid interest. All of the outstanding Debentures were converted by March 22, 2005.

In addition on December 30, 2003, the Company closed the $30.0 million ATSB Loan of which 90% (“Tranche A Loan”) is guaranteed by the ATSB and 10% (“Tranche B Loan”) was guaranteed by another third party. The Company’s ~~obligations~~leases ~~under the loan agreement governing the ATSB Loan (the “ATSB Loan Agreement”) were secured by substantially~~ all ofbut ~~the~~one ~~assets~~ of ~~the Company and~~ its ~~subsidiaries.~~ ~~The~~operational ~~Tranche~~aircraft Afleet ~~Loan~~under ~~bore~~operating anlease ~~interest rate equal to the lender’s weighted average cost of issuing commercial paper plus 0~~agreements.5% ~~per annum. The Tranche B Loan bore interest at a rate equal to LIBOR plus 1.0% per annum. Interest on the ATSB Loan was payable semi-annually on June 12th and December 12th of each year.~~ At December 31, ~~2005~~2006, ~~the~~World ~~blended~~Airways’ ~~rate on~~operating ~~both Tranches approximated 4.5%. The Company was required to pay semi-annually in advance~~fleet ~~guarantee~~consisted ~~fees commencing on the date~~ of ~~the~~17 ~~closing~~aircraft, of ~~the~~which ~~ATSB~~nine ~~Loan~~are ~~(i) to~~passenger ~~the~~aircraft ~~ATSB at an annual rate of 4.5% of the principal amount of the Tranche A Loan scheduled to be outstanding for the interest periods ending on June 12~~ and ~~December 12,~~eight ~~2004,~~are ~~increasing~~freighter ~~by 0.5% each year for subsequent semi-annual interest periods through December 12~~aircraft, ~~2008;~~with ~~and~~base ~~(ii) to~~lease ~~the~~terms ~~guarantor~~expiring ~~of the Tranche B Loan~~ at anvarious ~~annual~~dates ~~rate~~through ~~of 3~~2015.0% ofAt ~~the principal amount of the Tranche B Loan scheduled to be outstanding for the interest periods ending on June 12th and~~ December ~~12th through December 12~~31, ~~2008. The Company was required to pre-pay the ATSB Loan~~2006, ~~subject~~North toAmerican’s ~~certain limitations~~operating ~~and~~fleet ~~exclusions,~~consisted ~~from (a) the proceeds~~ of ~~future borrowings from other sources and~~nine ~~issuances~~aircraft, ofall ~~debt or equity securities; (b) the proceeds~~ of ~~any~~which ~~significant~~are ~~asset~~operated ~~sales; and (c) the net proceeds from insurance or condemnation. In the event of a change~~ in ~~control,~~passenger ~~as defined in the ATSB Loan Agreement~~configurations, ~~the~~with ~~ATSB~~remaining ~~would~~base ~~have~~lease ~~had~~terms ~~the~~expiring ~~right~~at tovarious ~~require~~dates ~~the~~through ~~Company to repay the ATSB Loan in full~~2014.

In ~~order~~2004, tothe Company ~~complete~~reached ~~the~~an ~~acquisition~~agreement with one of ~~North~~its ~~American~~MD-11 aircraft lessors to restructure certain leases. In exchange for reduced fixed monthly lease rates and a reduction in ~~April 2005~~the lease terms, the Company ~~was~~agreed ~~required~~ to an annual restructuring fee based on net ~~seek~~earnings. aPayments ~~waiver~~commenced ofin ~~certain~~2005 ~~restrictions~~based ofon 2004 results, and continue through the ~~ATSB~~lease ~~Loan~~terminations in 2011, which will be paid in 2012. InOver ~~exchange~~the ~~for~~term of the ~~waiver~~agreement, the total obligation of the Company is limited to $24.2 million on a ~~agreed~~cumulative basis. In each year, the cash payment is limited to ~~certain~~$1.6 ~~modifications~~million for 2005, $3.6 million per year for 2006 through and including ~~changing~~2011, and $1.0 million in 2012. Although cash disbursements are limited each year, due to the ~~minimum~~cumulative nature of the agreement, expense recognized may differ from the related cash ~~covenant~~payment to be disbursed in the following year. In 2005, the Company and the ~~principal repayment~~lessor ~~schedule~~agreed to a definitive methodology used to calculate the restructuring fee. ~~The~~As ~~new~~a result, ~~schedule~~the ~~required~~Company ~~payments~~recognized ofno ~~$6.0 million~~expense in ~~December 2005~~2006 ~~(which~~due ~~was~~to ~~made)~~the Company’s net loss, $5.0 million ~~each~~and $4.5 million was recorded in ~~June~~ ~~and~~expense ~~December 2006~~for 2005 and ~~2007~~2004, respectively. ~~and~~The aCompany’s ~~final~~related ~~payment~~cash ofpayments were $43.0 6 million inand ~~June 2008~~$1.6 million in 2006 and 2005, respectively.

~~The~~Rental ~~ATSB~~expense, ~~Loan~~primarily ~~Agreement~~relating ~~contained~~to ~~negative~~aircraft ~~covenants~~leases, ~~that~~totaled ~~limited~~approximately ~~the~~$122.6 ~~Company’s~~million, ~~ability~~$112.2 tomillion, ~~(a) grant~~and ~~additional~~$77.2 ~~liens~~million onfor the ~~its~~years ~~property;~~ended ~~(b)~~December ~~make~~31, ~~significant~~2006, ~~investments;~~2005, ~~(c) pay~~and ~~dividends~~2004, ~~redeem capital~~respectively. ~~stock~~Certain orof ~~repay~~the ~~indebtedness~~Company’s ~~other~~operating ~~than~~leases ~~the~~require ~~ATSB~~rental ~~Loan;~~payments ~~(d) liquidate,~~that ~~wind~~vary ~~up,~~in ~~dissolve~~amount ~~or engage~~from inyear ~~certain~~to ~~acquisitions;~~year. ~~(e) engage~~The inCompany ~~certain~~accounts ~~sale-leaseback~~for ~~transactions;~~the ~~(f) engage~~cost ~~in certain~~of ~~transactions~~these ~~with~~leases ~~affiliates;~~on ~~(g) engage~~a instraight-line basis, ~~any~~thereby ~~business~~recognizing ~~unrelated~~annual torent ~~its~~expense ~~existing business;~~evenly ~~(h) consolidate,~~over ~~merge~~the ~~with~~lease orterm. ~~into~~The ~~another~~Company’s ~~entity~~Consolidated orBalance ~~sell~~Sheets ~~substantially~~reflect ~~all~~the ofcumulative-to-date ~~its assets~~difference ~~unless~~between ~~certain~~rent ~~conditions~~expense ~~are~~recognized ~~satisfied;~~and ~~(i) engage~~cash inpayments ~~certain~~made ~~asset~~within ~~sales;~~current ~~(j) create~~and ornon-current ~~acquire~~deferred ~~certain~~ rent.

49Certain of the Company’s aircraft leases also require the Company to pay certain amounts related to maintenance reserves for airframes, engines, auxiliary power units and landing gears based on flight hours and cycles. Certain return conditions also must be met prior to returning the aircraft to the lessor. The Company also pays maintenance fees to certain maintenance providers for auxiliary power units based on flight hours. The aggregate amount the Company paid and expensed in 2006, 2005, and 2004 for maintenance reserves for airframes, engines, auxiliary power units and landing gears, and maintenance fees for auxiliary power units was $50.5 million, $45.3 million, and $29.8 million, respectively.

~~subsidiaries;~~Future ~~(k) enter~~annual ~~into~~minimum ~~joint~~lease ~~ventures~~payments, ~~involved~~excluding incontingent ~~speculative~~rentals ~~transactions;~~related ~~(l) amend the terms of agreements relating~~ to ~~the~~maintenance ~~Company’s~~reserve ~~other~~payments, ~~indebtedness for borrowed money; (m) enter~~at ~~into any going-private transactions; (n)~~December ~~grant any additional negative pledges; or (o) re-price outstanding stock options. In addition~~31, ~~the~~2006 ~~ATSB~~for ~~Loan~~operating ~~Agreement~~leases ~~contained certain financial covenants~~ that ~~required~~have ~~the~~initial ~~Company~~or toremaining ~~maintain~~base alease ~~certain~~terms ~~amount~~in excess of ~~unrestricted~~one ~~cash~~year ~~and~~were ~~cash equivalents~~as ~~and~~follows ~~to comply with certain financial ratios, including indebtedness to EBITDAR~~ (~~earnings~~in ~~before interest, taxes, depreciation, amortization and aircraft rent~~thousands): ~~and EBITDAR to fixed charges.~~

The Company issued to the ATSB, as additional compensation for the federal loan guarantee, warrants to purchase an aggregate of 2,378,223 shares of common stock on December 30, 2003. The warrants were vested and fully exercisable at the date of grant. The Company recorded the fair value of these warrants as an addition to other long-term assets, with a credit to additional paid-in capital. This long-term asset was expensed in the first quarter of 2006 when the ATSB Loan was prepaid in full. In August 2004, the ATSB exercised warrants to purchase 111,111 shares at $2.50 per share and, pursuant to the net exercise provisions of the warrants, received 21,994 shares of the Company’s common stock. Additionally, in February 2005, the ATSB exercised warrants to purchase an additional 111,111 shares at $2.50 per share and, pursuant of the net exercise provisions of the warrants, received 76,345 shares of the Company’s common stock. The ATSB held warrants to purchase an aggregate of 2,156,001 shares at December 31, 2005.


2007	$	124,980
2008		112,659
2009		101,892
2010		92,558
2011		71,883
Thereafter		132,766

Total	$	636,738

~~On March 30, 2006 the Company prepaid the remaining principal balance of $24~~7.~~0 million~~ ~~under~~Capital ~~the ATSB~~Stock Loan with working capital. The Company has recorded the $24.0 million outstanding balance as a current liability as of December 31, 2005 in the accompanying Consolidated Balance Sheets due to covenant violations. As a result of this prepayment, during the first quarter of 2006, the Company will expense $2.3 million in unamortized debt issuance cost and unamortized warrant costs associated with the ATSB Loan.

InAt ~~March~~December ~~2006~~31, ~~World Airways and North American entered a Loan and Security Agreement with Wachovia Bank~~2006, ~~National Association (“Wachovia”)~~5,159,751 ~~for~~shares ~~the issuance~~ of ~~loans~~common ~~and~~stock ~~letters~~were ofreserved ~~credit~~for upunder ~~to $50.0 million~~stock ~~subject~~option toincentive ~~certain~~plans ~~terms~~(3, ~~conditions~~060,162 ~~and limitations. The facility matures in March 2008. Under the Wachovia loan agreement~~shares), ~~the~~upon ~~Company’s borrowings bear interest at fluctuating rates. The applicable rate is determined by either~~ the ~~bank’s~~exercise ~~base~~of ~~lending~~warrants ~~rate~~(1, ~~the Federal Funds Rate~~960,589 ~~the Eurodollar or London Interbank Offered Rate (“LIBOR”~~shares) ~~plus an applicable percentage. The rates applicable to outstanding borrowings fluctuate based on many factors including~~, ~~but not limited to, general economic conditions,~~ and ~~general~~under ~~interest~~an ~~rates,~~employee ~~including~~salary ~~the~~exchange ~~prime~~program ~~rate~~(139, ~~and~~000 ~~the supply of and demand for credit in the London interbank market~~shares). ~~There~~ ~~are no amounts outstanding on this facility.~~

5. Operating Leases

The Company leases 100% of its aircraft fleet under operating lease agreements. At December 31, 2005, World Airway’s operating fleet consisted of 17 aircraft, of which ten are passenger aircraft and seven are freighter aircraft, with base lease terms expiring at various dates through 2015.

At December 31, 2005, North American’s operating fleet consisted of eight aircraft, all of which are operated in passenger configurations, with an average remaining base lease term of three years. North American added one B767-300ER to its fleet in March 2006. North American is also scheduled to take delivery of a fifth B767-300ER in December 2006.

In prior years, the Company paid amounts less than its contractual aircraft rent obligations in order to conserve cash. The Company continued to recognize expense for the full amount of its contractual rent payments due. The accrual for unpaid contractual rent obligations was $1.7 million at December 31, 2004. There was no balance outstanding at December 31, 2005. This accrual is included as accrued rent in the current liabilities section of the Consolidated Balance Sheet. The Company’s aircraft lessors agreed to amended terms of the aircraft lease agreements to provide for the future repayment of the unpaid contractual rent obligations. During the second quarter of 2004, the Company paid $7.2 million of this liability based on 2003 earnings. In 2005, the Company paid the remaining $1.7 million of this liability based on 2004 net earnings.

In the first quarter of 2004, the Company reached an agreement with one of its MD-11 lessors to restructure certain leases. In exchange for reduced fixed monthly lease rates, the Company agreed to an annual restructuring fee based on net income. Payments commenced in 2005 based on 2004 results, and continue through the lease terminations in 2011, which will be paid in 2012. Over the term of the agreement, the total remaining lease obligation of the Company is limited to no more than $24.2 million on a cumulative basis. In individual years, the annual lease payment is capped at $1.6 million in 2005, $3.6 million per year for 2006 through and including

2011, and $1.0 million in 2012. Although cash disbursements are capped each year, due to the cumulative nature of the agreement, expense recognized in a given year may differ from the cash obligation to be disbursed in the following year. For 2005, expense recorded for this obligation totaled $5.0 million. The current portion of the liability, $3.6 million, is reflected in the current liabilities section of the Consolidated Balance Sheet and the remainder of $3.6 million is shown as a non-current liability.

In 1999, the Company granted warrants to each of two MD-11 aircraft lessors to purchase up to 1,000,000 shares of common stock (see Note 6). The fair value of the warrants at the time of issuance is being amortized as rent expense over the remaining terms of the related aircraft lease agreements. Each of the lessors exercised its warrants to purchase 1,000,000 shares of the common stock prior to the respective expiration dates of the warrants.

The Company was obligated through April 2006 under an operating lease for office space at its former headquarters in Herndon, Virginia, which it vacated in May 2001. The Company received rental income sufficient to offset its lease expense through March 2002, after which time no rental income was received except $0.4 million in 2003. The Company recognized a $1.1 million liability at December 31, 2004 for the costs that would continue to be incurred, without economic benefit to the Company, over the remaining term of its lease of this office space. During 2005, the Company reviewed its estimates and determined that an additional $1.0 million charge should be recorded to fully accrue for the remaining lease obligations, due to a remote likelihood of receiving sublease rentals, resulting in a $0.4 million balance at December 31, 2005. The liability is included in other accrued liabilities on the accompanying Consolidated Balance Sheets, and the expense is included in sales, general and administrative on the accompanying Consolidated Statements of Income.

Rental expense, primarily relating to aircraft leases, totaled approximately $112.2 million, $77.2 million and $89.3 million for the years ended December 31, 2005, 2004 and 2003, respectively. Certain of the Company’s operating leases require rental payments that vary in amount from year to year. The Company accounts for the cost of these leases on a straight-line basis, thereby recognizing annual rent expense evenly over the expected lease term. The Company’s Consolidated Balance Sheets reflect the cumulative-to-date difference between rent expense recognized and expected payments made in current and non-current deferred rent.

Future annual minimum lease payments (including unpaid contractual rent) for operating leases that have initial or remaining base lease terms in excess of one year were as follows (in thousands):

2006	$	111,911
2007		120,445
2008		104,028
2009		91,271
2010		79,423
Thereafter		213,707
Total	$	720,785

Future annual minimum lease payments include lease extensions and aircraft commitments signed by the Company as of June 30, 2006.

The Company’s aircraft leases require the Company to pay certain maintenance reserves for airframes, engines, auxiliary power units and landing gears based on flight hours. Certain return conditions also must be met prior to returning the aircraft to the lessor. The Company also pays maintenance fees to certain maintenance providers for auxiliary power units based on flight hours. The aggregate amount the Company paid and expensed in 2005 for maintenance reserves for airframes, engines, auxiliary power units and landing gears and maintenance fees for auxiliary power units was $45.3 million.

6. Capital Stock

At December 31, 2005, 5,950,638 shares of common stock were reserved for under stock option incentive plans (3,655,637 shares), upon the exercise of warrants (2,156,001 shares), and under an employee salary exchange program (139,000 shares).

In December 2003, the Company issued to the ATSB, as consideration for the federal loan guarantee, warrants to purchase an aggregate of 2,378,223 shares of common stock. These warrants were vested and fully exercisable at the date of grant. The fair value of these warrants on the date of grant using the Black Scholes option-pricing model was $4.8 million. The following table shows details of the warrants issued to the ATSB as well as the assumptions used in the Black Scholes option-pricing model:


Number of Shares	Exercise Price		Expiration Date	Risk Free Interest Rate		Expected Dividend Yield		Volatility		Expected Life
1,269,022	$	0.78	12/31/2008	3.23	%	0	%	50	%	5.0 yrs
111,111	$	2.50	8/23/2004	1.22	%	0	%	50	%	0.7 yrs
111,111	$	2.50	3/29/2005	0.96	%	0	%	50	%	1.2 yrs
886,979	$	3.20	12/31/2009	3.43	%	0	%	50	%	6.0 yrs

~~Table~~In August 2004, the ATSB exercised warrants to purchase 111,111 shares at $2.50 per share and, pursuant to the net exercise provisions of ~~Contents~~the warrants, received 21,994 shares of the Company’s common stock. Additionally, in February 2005, the ATSB exercised warrants to purchase an additional 111,111 shares at $2.50 per share and, pursuant to the net exercise provisions of the warrants, received 76,345 shares of the Company’s common stock. In October 2006, the Company completed the Tender Offer and purchased 2.22 million shares of its outstanding common stock (See Note 9). As a result of the Tender Offer, the Company modified the number of warrants and exercise price pursuant to the provisions of the ATSB warrant agreement. Therefore, the ATSB held warrants to purchase 1,153,973 shares and 806,616 shares at $0.86 and $3.52 per share, respectively at December 31, 2006.

Number of						Risk Free			Expected
Shares		Exercise Price		Expiration Date		Interest Rate			Dividend Yield			Volatility			Expected Life
	1,269,022	$	0.78		12/31/2008		3.23	%		0	%		50	%	5.0 yrs
	111,111	$	2.50		8/23/2004		1.22	%		0	%		50	%	0.7 yrs
	111,111	$	2.50		3/29/2005		0.96	%		0	%		50	%	1.2 yrs
	886,979	$	3.20		12/31/2009		3.43	%		0	%		50	%	6.0 yrs

In August 2004, the ATSB exercised warrants to purchase 111,111 shares at $2.50 per share and, pursuant to the net exercise provisions of the warrants, received 21,994 shares of the Company’s common stock. Additionally, in February 2005, the ATSB exercised warrants to purchase an additional 111,111 shares at $2.50 per share and, pursuant to the net exercise provisions of the warrants, received 76,345 shares of the Company’s common stock. The ATSB held warrants to purchase an aggregate of 2,156,001 shares at December 31, 2005. The Company is currently in violation of certain covenants in the ATSB warranty agreement related to the last filings of its SEC reports. The Company has a waiver related to this violation.

The Company recorded the fair value of these warrants within other long-term assets, with a credit to additional paid-in capital. The Company recorded amortization of $1.5 million in 2005 and expensed the remaining $1.8 million in March 2006, when the debt was prepaid in full.

In 1999, pursuant to amendments to lease agreements for the Company’s MD-11 aircraft, the Company granted warrants to each of two lessors to purchase up to 1,000,000 shares of common stock at an exercise price of $2.50 per share, with expiration dates of August 2004 and March 2005. The warrants were vested and fully exercisable at the date of grant. Warrants were exercised in August 2004 to purchase 1,000,000 shares, and the remaining warrants to purchase 1,000,000 shares were exercised in January 2005. The per share weighted-average fair value of the warrants was $0.90 on the date of grant using the Black Scholes option-pricing model with the following assumptions: ~~expected~~ ~~dividend yield of 0.0%,~~ risk free interest rate of 5.735%, expected ~~life~~dividend yield of ~~5 years~~0.0%, ~~and~~ expected volatility of 78%, and expected life of 5 years.

OnIn ~~February 22,~~November ~~2005~~2006, ~~World~~the ~~Air~~Company’s ~~Holdings~~Board ~~issued~~of Directors passed a ~~notice~~resolution ofto ~~redemption~~retire 1,039,694 shares of ~~its~~common ~~the~~stock ~~Debentures, giving~~held ~~the~~as ~~holders~~treasury ~~until~~shares. ~~March 22,~~The ~~2005~~resolution toalso ~~exercise~~provided ~~their~~that ~~conversion~~these ~~rights~~shares atbe arestored ~~conversion~~to ~~price~~ the status of ~~$3.20~~authorized ~~per~~but ~~share.~~unissued ~~The~~shares ~~holders~~of ~~converted~~common ~~all~~stock of the ~~outstanding Debentures by March 22, 2005~~Company.

~~The~~37 Company’s Board of Directors authorized a stock repurchase program on April 3, 2006, to repurchase up to 2.0 million shares of the Company’s common stock. The program will not commence until the Company is current in its required periodic reporting obligations to the SEC. Purchases under the stock repurchase program will be made in amounts and at such times as the Company deems appropriate, based on a variety of factors including price, corporate and regulatory requirements and overall market conditions.

8. Stock based compensation

Stock Incentive Plans

Under the World Air Holdings, Inc. Amended and Restated 1995 Stock Incentive Plan (the “1995 Plan”), members of the Company’s Board of Directors, employees, and consultants to the Company or its affiliates are eligible to receive stock incentive awards. At December 31, ~~2005~~2006, the Company ~~has~~had reserved 3,~~405~~030,~~637~~ 162 shares of common stock for issuance under the 1995 Plan. Options expire at the earlier of the stated expiration, which shall not exceed ten years from the date of grant, or one year after the termination of a grantee’s employment with the Company. The exercise price for options granted is the fair market value of the common stock on the date of grant. Outstanding options become vested and fully exercisable at various times through ~~February~~ August 2013.

~~Under~~During a2005, ~~Non-Employee~~the ~~Directors’~~Company ~~Stock~~issued ~~Option~~50,000 ~~Plan~~shares ~~(the~~of ~~“Directors’~~restricted ~~Plan”),~~stock ~~which~~with ~~expired~~vesting byover ~~its terms~~a infour ~~2005,~~year ~~non-affiliate~~required ~~directors~~service ~~are~~period, ~~offered~~and ~~options~~recorded tocompensation ~~purchase~~expense ~~10,000~~over ~~shares~~the ~~of common~~same ~~stock,~~period. ~~upon~~In ~~election~~February or2006, ~~appointment to~~ the ~~Board~~employee ofto ~~Directors~~whom of the ~~Company.~~stock Atwas ~~December~~issued 31resigned and, ~~2004~~accordingly, the ~~Company~~restricted ~~has reserved~~stock ~~250,000~~grant ~~shares~~terminated ofand ~~common~~was ~~stock~~cancelled ~~for~~effective ~~issuance~~on ~~under~~ the ~~Directors’~~date ~~Plan~~of termination. ~~Options~~During ~~granted under~~ the ~~Directors’~~first ~~Plan~~quarter ~~vest~~of ~~in 36 equal monthly installments following the award~~2006, ~~as long as~~ the ~~individual~~Company ~~remains~~reversed a$0.3 million ~~director~~ of ~~the Company.~~deferred Atstock-based ~~December~~compensation ~~31,~~related ~~2005,~~to the ~~reserved~~forfeiture ~~shares~~ of ~~common~~this restricted stock ~~were no longer available for issuance~~grant.

52Under a Non-Employee Directors’ Stock Option Plan (the “Directors’ Plan”), non-affiliate directors are granted options to purchase 10,000 shares of common stock, upon election or appointment to the Board of Directors of the Company. Options granted under the Directors’ Plan vest in 36 equal monthly installments following the award, as long as the individual remains a director of the Company. The Director’s Plan provided that after December 31, 2005, no additional options could be granted from this plan.

Stock Options

For stock option awards granted prior to January 1, 2006, but for which the vesting period is not complete, the Company adopted SFAS 123R using the “modified prospective method” of accounting permitted under SFAS 123R. Under this method, the Company accounts for such awards on a prospective basis, with expense being recognized in the consolidated statements of income beginning in the first quarter of 2006, using the grant-date fair values previously calculated in prior pro forma disclosures. The Company will recognize the related compensation cost not previously recognized in the pro forma disclosures over the remaining vesting periods.

The fair value of stock options is determined at the grant date using a Black-Scholes option pricing model, which requires the Company to make several assumptions. The risk-free interest rate is based on the U.S. Treasury yield curve in effect for the expected term of the option at the time of grant. The dividend yield on the Company’s common stock is assumed to be zero since the Company does not pay dividends and has no current plans to do so in the future. The market price volatility of the Company’s common stock is based on the historical volatility of the common stock price over an approximate four year time period. The expected term of the options is based on historical experience of all option grants.

During the third quarter of 2006, the Company granted options to purchase 333,400 shares under the 1995 Stock Incentive Plan. These stock options vest in 33 1/3% increments on the first three anniversary dates of the awards; thus, the Company will recognize compensation expense for these awards on a straight-line basis over each award’s vesting period. During the second quarter of 2005, the Company granted options to purchase 10,000 shares under the Director’s Plan that vest in 36 equal monthly installments from the day of grant.

The per share weighted-average fair value of the options to purchase 333,400 shares granted during the third quarter of 2006 was $4.61 on the date of grant using the Black Scholes options-pricing model. The per share weighted-average fair value of the options to purchase 10,000 shares granted during the second quarter of 2005 was $4.29 on the date of grant using the Black-Scholes option-pricing model. The per share weighted-average fair value of the options to purchase 696,000 shares granted during 2004 was $2.54 on the date of grant using the Black Scholes option-pricing model with the following weighted-average assumptions:


	2006		2005		2004
Expected dividend yield	0	%	0	%	0	%
Risk-free interest rate	4.6	%	3.9	%	3.7	%
Expected term (in years)	4.0		4.2		4.8
Expected stock volatility	80.9	%	70.7	%	80.2	%

~~Stock~~The ~~option~~table ~~activity~~below ~~during~~summarizes ~~the~~stock ~~last~~option ~~three~~award ~~years~~activity ispursuant asto ~~follows~~the ~~(in~~Company’s ~~thousands,~~plans ~~except~~for ~~per~~the ~~share amounts)~~last three years:

	Number of				Weighted
	Number ofShares(in thousands)			WeightedAverageExercise Price			Weighted AverageRemainingContractual Term(in years)	AggregateIntrinsic Value(in thousands)
	Options				Average
Outstanding at December 31, 2003	3,694			$	1.58
	Outstanding				Exercise Price
Granted	696				3.89
Balance at December 31, 2002		3,833			$	1.73
Exercised	(1,583	)			0.95
Granted		1,117				1.18
Forfeited	(174	)			2.04
Exercised		(344	)			0.87
Outstanding at December 31, 2004	2,633				2.53
Forfeited		(912	)			2.03
Granted	10				7.53
Balance at December 31, 2003		3,694				1.58
Exercised	(836	)			2.82
Granted		696				3.89
Forfeited	(79	)			6.19
Exercised		(1,583	)			0.95
Outstanding at December 31, 2005	1,728				2.25
Forfeited		(174	)			2.04
Granted	333				7.44
Balance at December 31, 2004		2,633				2.53
Exercised	(405	)			1.30
Granted		10				7.53
Forfeited	(32	)			2.59
Exercised		(836	)			2.82
Outstanding at December 31, 2006	1,624				3.55		4.5	$	10,296
Forfeited		(79	)			6.19
Exercisable at December 31, 2006	1,108			$	2.31		3.7	$	7,205
Balance at December 31, 2005		1,728			$	2.25
Vested & Expected to Vest at December 31, 2006	1,454

At December 31, ~~2005~~2006, the range of exercise prices per share and weighted-average remaining life of outstanding options was $0.5691 — $7.53 and 4.5 years, respectively. ~~The following table summarizes stock options outstanding and exercisable at December 31, 2005 (in thousands, except per share amounts):~~

	Outstanding Options						Exercisable Options
			Weighted
			Average		Weighted				Weighted
	Number		Remaining Life		Average		Number		Average
Range of Exercise Price	of Options		Years		Exercise Price		of Options		Exercise Price
$0.56 - 1.25		872		3.2	$	0.88		746	$	0.88
1.26 - 2.50		58		1.4	$	1.52		58	$	1.52
2.51 - 3.75		684		6.2	$	3.46		313	$	3.40
3.76 - 5.00		12		6.1	$	4.06		—	$	—
5.01 - 6.25		92		4.7	$	6.02		52	$	5.92
7.50 - 8.75		10		9.3	$	7.53		2	$	7.53
Total		1,728						1,171

The following table summarizes stock options outstanding and exercisable at December 31, 2006 (in thousands, except per share amounts):

At December 31, 2005, 2004 and 2003, the number of shares issuable upon the exercise of options was 1,170,426, 1,444,464, and 2,535,016, respectively, and the weighted-average exercise prices per share of the options were $1.82, $1.89, and $1.39, respectively.


	Outstanding Options				Exercisable Options
Range of Exercise Price	Number of Options	Weighted Average Remaining Life in Years	Weighted Average Exercise Price		Number of Options	Weighted Average Exercise Price
$0.56 - 1.25	510	2.3	$	0.91	510	$	0.91
1.26 - 2.50	38	1.1	$	1.57	38	$	1.57
2.51 - 3.75	671	5.2	$	3.46	516	$	3.42
3.76 - 5.00	6	5.1	$	4.06	—		—
5.01 - 6.25	56	5.5	$	6.15	39	$	6.15
6.25 – 7.50	334	6.6	$	7.44	—		—
7.50 - 8.75	10	8.3	$	7.53	5	$	7.53

Total	1,625	4.5	$	3.55	1,108	$	2.31

~~During~~At ~~2005~~December 31, ~~the~~2006, ~~Company~~2005 ~~issued~~and ~~shares~~2004, ~~of restricted stock pursuant to~~ the ~~1995~~number ~~Plan.~~of ~~Stock awards are grants that entitle the holder to~~ shares ofissuable ~~the~~upon ~~Company’s common stock as~~ the ~~award~~exercise ~~vests. The market value~~ of ~~the~~vested ~~stock~~options ~~awards at the date of the grant is recorded as unearned compensation~~was 1,107,563, ~~a component of stockholders’ equity~~1,170,426, and ~~charged on a straight-line basis to expense over the respective vesting period. During 2005~~1,444,464, ~~the Company granted 50~~respectively,~~000~~ ~~shares~~and ofthe ~~restricted stock with a~~ weighted -average ~~fair~~exercise ~~value~~prices ofper ~~$6.06~~share ~~at the date~~ of ~~grant. The vesting period for~~ the ~~restricted stock~~options iswere ~~25% per year over four years~~$2.31, ~~The Company recorded deferred compensation related to the award of~~ $01.~~3 million during 2005. In February 2006~~82, ~~the employee who received the restricted stock grant terminated his employment~~ and ~~the grant was cancelled effective on the date of termination~~$1. ~~During the first quarter of 2006~~89, ~~the Company reversed the transactions related to the termination of the restricted stock grant~~respectively.

53The total intrinsic value of options exercised for the year ended December 31, 2006, determined as of the date of exercise of options, was $3.1 million. The total intrinsic value of options exercised for the year ended December 31, 2005 and 2004, determined as of the date of exercise of options, was $5.0 million and $4.9 million, respectively. Cash received from option exercises during 2006, 2005, and 2004 totaled $0.5 million, $2.4 million and $1.5 million, respectively.

7The Company recorded $0.4 ~~North~~million ~~American~~of ~~Acquisition~~stock-based compensation expense related to non-vested stock options to sales, general and administrative expense for the year ended December 31, 2006. The excess tax benefit realized for the tax deduction from option exercises under the Company plan was $1.4 million for 2006, which generated cash flows from excess tax benefits, under the long-haul method, of $1.2 million.

OnAt ~~April~~December 2731, ~~2005~~2006, ~~the Company acquired North American, a privately-held airline based in Jamaica, New York, for approximately $34.8 million in cash which was funded from internally generated funds. In addition,~~ there was a $01.6 3 million ~~subsequent reduction in the purchase price based on terms~~ of ~~the~~total ~~purchase~~unrecognized ~~contract.~~compensation ~~North~~expense ~~American~~related ~~provides passenger service~~ to ~~tour~~non-vested ~~operators,~~stock ~~and~~options ingranted ~~selected~~under ~~scheduled~~the ~~service~~Company’s ~~markets~~stock ~~as well~~incentive ~~as to USAF~~plans. AtThat ~~December 31,~~cost ~~2005,~~is ~~North~~expected ~~American~~to ~~leased~~be ~~three~~recognized ~~Boeing~~over ~~767~~a ~~and five Boeing 757 aircraft, which complement the service provided by World Airways with its larger wide~~weighted-~~body aircraft.~~average ~~North~~period ~~American~~of ~~maintains its operational headquarters at John F~~2.5 ~~Kennedy International Airport in Jamaica, New York~~years. ~~World Airways and World Air Holdings continue to be based in Peachtree City, Georgia.~~

Restricted Stock Awards

During the third quarter of 2006, the Company granted 196,800 shares of restricted common stock to non-employee members of the Board, executive officers, officers, and certain other management employees of the Company. The restricted shares were granted pursuant to the 1995 Plan. The fair value at the date of grant of these shares was $1.7 million. Compensation expense for these awards will be recognized on a straight-line basis over the weighted-average requisite service period of 4.1 years.

The Company recorded $0.2 million of stock-based compensation expense to sales, general and administrative expense for the year ended December 31, 2006 associated with these restricted stock awards. At December 31, 2006, there was approximately $1.5 million of total unrecognized compensation expense related to non-vested restricted stock granted under the Company’s stock incentive plan, which is expected to be recognized over a weighted-average vesting period of 4.1 years.

Stock Option Awards Review

During 2006, under the direction of the Audit Committee of the Board of Directors, the Company voluntarily initiated a review of all stock option awards from the date of the Company’s initial public offering of its common stock in 1995 through December 31, 2006. In order to ensure independence and objectivity, the Company also retained a law firm that is independent of the Company to perform a review of all prior stock option awards as an independent investigation. The independent counsel engaged to perform that review has submitted its report to the Audit Committee, which accepted the report and deemed the review concluded. Based on its own review and the review of independent counsel, the Company concluded that, although no backdating or other intentional misconduct was found, the Company had not properly accounted for certain options awarded in each of the years 1997 through 2003.

The impact of such adjustments, consisting of previously unrecognized compensation expense, for each of such years and in the aggregate is as follows:


	1997			1998			1999			2000			2001			2002			2003			Total
	(in thousands)
Stock Compensation Expense	$	79		$	(20	)	$	—		$	103		$	256		$	79		$	73		$	570
Tax effect		—			—			—			—			—			—			(15	)		(15	)

Total, net of tax	$	79		$	(20	)	$	—		$	103		$	256		$	79		$	58		$	555

Income/(loss) before taxes	$	12,230		$	(10,905	)	$	(13,653	)	$	(3,159	)	$	(26,037	)	$	2,041		$	19,123

Percent of income before taxes		0.6	%		0.2	%		0.0	%		3.3	%		1.0	%		3.9	%		0.4	%

The Company recorded this cumulative adjustment of $0.6 million to sales, general, and administrative expense in its consolidated financial statements for the quarter ended September 30, 2006.

9. Tender Offer

On September 5, 2006, the Company’s Board of Directors authorized a “modified Dutch Auction” tender offer whereby the terms permitted the Company to repurchase up to 2.22 million shares of its common stock at a price per share not greater than $9.50 and not less than $9.00.

In October 2006, the Company completed the Tender Offer and purchased 2.22 million shares of its outstanding common stock at a price per share of $9.20 totaling approximately $20.8 million, which was funded through borrowings under the Wachovia Loan. The shares purchased represented approximately 9.1% of the Company’s outstanding common stock at October 12, 2006.

10. North American Acquisition

On April 27, 2005, the Company acquired North American, a privately-held airline based in Jamaica, New York, for approximately $34.8 million in cash, which was funded from internally generated funds. In addition, there was a $0.6 million subsequent reduction in the purchase price based on terms of the purchase agreement.

The Company commenced the consolidation of North American on April 28, 2005 and the acquisition was accounted for using the purchase method of accounting in accordance with Statement of Financial Accounting Standards No. 141, Business Combinations. The following summarizes the total purchase price for North American (in thousands):


Cash consideration	$	34,750
Direct acquisition costs		1,408
Adjustment to distribution made to Seller to cover tax payments as provided in Stock Purchase Agreement		(565	)

	$	35,593

~~Under~~The ~~the~~ purchase ~~method of accounting, the total purchase~~ price ~~was~~allocation ~~allocated~~for ~~to North American’s net tangible and intangible assets based upon their estimated fair value as of~~ the ~~date of the~~ acquisition ~~with~~has ~~any~~been ~~amount~~finalized ~~paid~~with ~~in excess of~~ the ~~fair~~exception ~~value~~ of ~~the~~certain ~~net assets recorded as~~tax ~~goodwill.~~uncertainties ~~Based~~related ~~upon~~to ~~the~~amounts ~~purchase~~due ~~price~~from ~~and review of~~ the ~~net~~seller. ~~assets acquired and liabilities assumed, the preliminary purchase price allocation is as follows (in thousands):~~

	Fair Value of Net
	Assets
	Acquired
Cash and cash equivalents	$	8,640
Restricted cash		2,372
Other current assets		16,239
Equipment and property, net		1,498
Long-term deposits and other assets		4,446
Intangible assets acquired:
ETOPS * program added value		4,680
Aircraft leases at market rates in excess of rental rates		2,840
Trademark		575
Goodwill		25,370
Total assets acquired		66,660
Liabilities assumed:
Accounts payable and accrued liabilities		(29,155	)
Deferred tax liabilities		(1,912	)
Net assets acquired	$	35,593

Under the purchase method of accounting, the total purchase price was allocated to North American’s net tangible and intangible assets based upon their estimated fair value as of the date of the acquisition with any amount paid in excess of the fair value of the net assets recorded as goodwill. Based upon the purchase price and value of the net assets acquired and liabilities assumed, the purchase price allocation is as follows (in thousands):

* ETOPS — Extended range Two Engine Operations


	Fair Value of Net Assets Acquired
Cash and cash equivalents	$	8,640
Restricted cash		2,372
Other current assets		16,239
Equipment and property, net		1,498
Long-term deposits and other assets		4,446
Intangible assets acquired:
ETOPs * program added value		4,680
Aircraft leases at market rates in excess of rental rates		2,840
Trademark		575
Goodwill		25,370

Total assets acquired		66,660
Liabilities assumed:
Accounts payable and accrued liabilities		(29,155	)
Deferred tax liabilities		(1,912	)

Net assets acquired	$	35,593

The fair values of certain identifiable tangible and intangible assets were determined with the assistance of American Appraisal Associates, Inc., an independent third-party appraiser. Goodwill of $25.4 million has been recorded and represents the excess of the purchase price over the fair value of the tangible and other intangible assets acquired less the fair value of the liabilities assumed. In accordance with SFAS No. 142, Goodwill and Other Intangible Assets, goodwill and intangible assets with indefinite useful lives are not amortized, but are tested for impairment at least annually or more frequently if circumstances indicate their value may no longer be recoverable. The Company performed an annual impairment test as of October 1, 2006 for goodwill and indefinite-lived intangibles. This test indicated that goodwill and indefinite-lived intangibles were not impaired as of December 31, 2006. The goodwill is not deductible for tax purposes.

54Unaudited pro forma information for the Company reflecting the acquisition of North American as if it had occurred on January 1, 2004 is as follows (in thousands, except per share amounts):


	2005		2004
Total operating revenues	$	863,098	$	709,396
Net earnings	$	34,222	$	24,131
Basic earnings per share	$	1.52	$	1.84
Weighted average shares outstanding		22,588		13,095
Fully diluted earnings per share	$	1.28	$	1.03
Weighted average shares outstanding		26,824		24,591

~~for~~The ~~impairment~~above atpro ~~least~~forma ~~annually~~results orinclude ~~more~~adjustments ~~frequently~~for ifthe ~~circumstances~~amortization ~~indicate~~of ~~their~~intangibles, ~~value~~adjustments ~~may~~to nodepreciation to ~~longer~~reflect bethe ~~recoverable~~new basis and depreciable lives for equipment and property, and decreased interest income/additional interest expense to reflect the impact of the cash payments related to the purchase of North American. ~~The~~These ~~goodwill~~results isare not ~~deductible~~indicative of ~~for~~what ~~tax~~actual ~~purposes~~results would have been or will be in the future.

~~During the fourth quarter of fiscal year 2005, the Company made adjustments to goodwill for certain amounts due from the Seller related to income taxes~~11. AEmployee ~~roll~~Benefit ~~forward~~Plans ~~of the changes to goodwill during the fiscal year ended December 31, 2005 is as follows:~~

Balance at December 31, 2004	$	—
Goodwill acquired at acquisition		21,883
Purchase price adjustment during fourth quarter 2005		3,487
Balance at December 31, 2005	$	25,370

World Airways’ Crewmembers Target Benefit Plan (the “Target Benefit Plan”) is a defined contribution plan covering cockpit crewmembers with contributions based upon wages, as defined. It is a tax-qualified retirement plan under Section 401(a) of the Internal Revenue Code of 1986, as amended (the “Code”). Expense for the Target Benefit Plan totaled $3.0 million, $2.8 million, and $2.7 million for the years ended December 31, 2006, 2005, and 2004, respectively.

~~The~~World ~~purchase~~Airways ~~price~~also ~~allocation~~sponsors ~~for~~a ~~the~~Crewmembers ~~acquisition~~Deferred ~~has~~Income ~~not~~Plan ~~been~~(the “Deferred ~~finalized~~Income ~~because~~Plan”). ~~the~~It ~~post~~is ~~closing settlements~~a ~~have~~tax-qualified ~~not~~retirement ~~been~~plan ~~completed~~under ~~and~~Section 401(k) of the ~~Company’s~~Code. ~~determination~~Under ofthe ~~certain~~Deferred ~~amounts~~Income ~~due~~Plan, ~~from~~cockpit ~~the Seller~~crewmembers ~~related~~may elect to ~~income~~invest ~~taxes~~salary ~~are~~deferrals ~~subject~~of up to ~~adjustment~~$15,000 asor ~~more~~25% ~~information~~of istheir ~~received.~~salary in ~~Therefore,~~selected ~~the~~investment ~~purchase~~funds. ~~price~~The ~~allocations~~Company ~~are~~does ~~subject~~not tomake ~~change~~any ~~based~~contributions ~~upon~~to ~~continuing~~the ~~review~~Deferred Income Plan.

~~Unaudited~~World ~~pro~~Airways’ ~~forma~~flight ~~information~~attendants ~~for~~participate in a pension plan maintained by the ~~Company~~International ~~reflecting~~Brotherhood of Teamsters (“IBT”). This plan is a multi-employer plan subject to the ~~acquisition~~funding and other provisions of ~~North~~the ~~American~~Pension asProtection ~~if it~~Act ~~had~~of ~~occurred~~2006. Contributions made to the IBT on ~~January~~ behalf of the flight attendants totaled $1.3 million, ~~2005~~$1.3 million, and ~~2004~~$1.0 ismillion asfor ~~follows~~the ~~(in~~years ~~thousands~~ended December 31, ~~except~~2006, ~~per~~2005, ~~share~~and ~~amounts):~~ 2004 respectively.

	2005		2004
Total revenues	$	863,098	$	709,396
Net earnings	$	34,222	$	24,131
Basic earnings per share	$	1.52	$	1.84
Weighted average shares outstanding		22,588		13,095
Fully diluted earnings per share	$	1.28	$	1.03
Weighted average shares outstanding		26,824		24,591

Under World Air Holdings’ and World Airways’ 401(k) Administrative Plan (“401(k) Plan”), employees may elect to invest salary deferrals of up to $15,000 or 25% of their salary in selected investment funds. It is a tax-qualified retirement plan under Section 401(k) of the Code. The Company contributes matching funds to the 401(k) Plan equal to 50% of participants’ voluntary deferrals up to 10% of salary. The Company expensed, for its contribution to the 401(k) Plan, approximately $0.7 million, $0.6 million, and $0.3 million during the years ended December 31, 2006, 2005, and 2004, respectively.

~~The~~World Airways ~~above~~has ~~pro~~a ~~forma~~profit ~~results~~sharing ~~include~~bonus ~~adjustments~~plan (the “Profit Sharing Plan”) for ~~the~~its ~~amortization~~cockpit ofcrewmembers ~~intangibles,~~and ~~adjustments~~flight ~~to depreciation~~attendants pursuant to ~~reflect~~agreements with the ~~new~~unions ~~basis~~representing ~~and~~the ~~depreciable~~two ~~lives~~groups. ~~for~~It ~~equipment~~is ~~and~~not ~~property,~~a ~~and~~tax-qualified ~~lost~~plan under the Code. ~~interest~~Distributions ~~income/additional~~under ~~interest~~the ~~expense~~Profit toSharing ~~reflect~~Plan ~~the~~are ~~impact~~equal to 20% of ~~the~~net ~~cash~~earnings, ~~payments~~as ~~related~~defined, subject to ~~the~~ ~~purchase~~an annual limitation of ~~North~~10% ~~American.~~of ~~These~~the ~~results~~total ~~are~~annual ~~not~~aggregate ~~indicative~~compensation of ~~what~~World ~~actual~~Airways ~~results~~employees ~~would~~participating ~~have been~~in orthe ~~will~~Profit beSharing Plan in that year. Due to net losses for the ~~future~~year ended December 31, 2006, the Company recorded no profit sharing expense during 2006. The Company expensed $4.8 million and $4.8 million for this plan during the years ended December 31, 2005, and 2004, respectively.

8World Air Holdings and World Airways have a profit sharing bonus plan for management, administrative and operations personnel. ~~Employee~~Due ~~Benefit~~to ~~Plans~~net losses for the year ended December 31, 2006, the Company recorded no profit sharing expense during 2006. The Company expensed $4.7 million, and $4.2 million for these plans during the years ended December 31, 2005 and 2004, respectively.

World Airways’ Crewmembers Target Benefit Plan (the “Target Benefit Plan”) is a defined contribution plan covering cockpit crewmembers with contributions based upon wages, as defined. It is a tax-qualified retirement plan under Section 401(a) of the Internal Revenue Code of 1986, as amended (the “Code”). Expense for the Target Benefit Plan totaled $2.8 million, $2.7 million, and $2.4 million for the years ended December 31, 2005, 2004 and 2003, respectively.

World Airways also sponsors a Crewmembers Deferred Income Plan (the “Deferred Income Plan”). It is a tax-qualified retirement plan under Section 401(k) of the Code. Under the Deferred Income Plan, cockpit crewmembers may elect to invest salary deferrals of up to $14,000 or 25% of their salary in selected investment funds. The Company does not make any contributions to the Deferred Income Plan.

World Airways’ flight attendants participate in a retirement plan maintained by the International Brotherhood of Teamsters (“IBT”). Contributions made to the IBT on behalf of the flight attendants totaled $1.3 million, $1.0 million, and $0.8 million for the years ended December 31, 2005, 2004 and 2003, respectively.

Under World Air Holdings’ and World Airways’ 401(k) Administrative Plan (“401(k) Plan”), employees may elect to invest salary deferrals of up to $14,000 or 25% of their salary in selected investment funds. It is a tax-qualified retirement plan under Section 401(k) of the Code. The Company contributes matching funds to the 401(k) Plan equal to 50% of participants’ voluntary deferrals up to 10% of salary. The Company expensed, for its contribution to the 401(k) Plan, approximately $0.6 million, $0.3 million and $0.2 million during the years ended December 31, 2005, 2004 and 2003, respectively.

World Airways has a profit sharing bonus plan (the “Profit Sharing Plan”) for its cockpit crewmembers and flight attendants pursuant to agreements with the unions representing the two groups. It is not a tax-qualified plan under

the Code. Distributions under the Profit Sharing Plan are equal to 20% of earnings, as defined, subject to an annual limitation of 10% of the total annual aggregate compensation of World Airways employees participating in the Profit Sharing Plan in that year. The Company expensed $4.8 million, $4.8 million and $3.7 million for this plan during the years ended December 31, 2005, 2004 and 2003, respectively.

World Air Holdings and World Airways have a profit sharing bonus plan for management, administrative and operations personnel. The Company expensed $4.7 million, $4.2 million and $2.5 million for these plans during the years ended December 31, 2005, 2004 and 2003, respectively.

World Airways’ cockpit crewmembers and eligible dependents are covered under a post-retirement health care and life insurance benefits plan until age 65. A small group of administrative retirees are also covered under a post-retirement health care and life insurance benefits plan for life. The Company accrues for the cost of post-retirement health and life insurance benefits in accordance with SFAS No. 106 but funds the benefit costs on a pay-as-you-go (cash) basis.

~~World~~In ~~Airways~~December ~~uses~~2006, athe ~~December 31st measurement~~Company ~~date~~adopted ~~for~~the recognition and disclosure provisions of SFAS 158. SFAS 158 requires the Company to recognize in its statement of financial position an asset for a defined benefit pension or post-retirement ~~health~~ ~~care~~plan’s ~~and~~overfunded ~~life~~status ~~insurance~~or ~~benefits~~a liability for a plan.’s ~~For~~underfunded ~~2005~~status, and to recognize changes in that funded status through other comprehensive income/(loss) in the ~~Company’s~~year ~~accumulated~~in ~~benefit obligation~~which ~~assumptions~~the ~~were~~changes ~~modified~~occur. ~~for~~SFAS 158 will not change the ~~following:~~amount of net periodic benefit expense recognized in the Company’s results of operations.

	•		The retirement eligibility provision was adjusted to reflect that World Airways cockpit employees have the option to retire at the age of 55 with at least five years of service in addition to the previously reflected age 60 provision (See Note 14).
	•		A flat $50,000 life insurance benefit was added effective February 1, 2005 for cockpit retirees who die prior to age 65.

World Airways uses a December 31st measurement date for the post-retirement health care and life insurance benefits plan. During 2005, the Company’s accumulated benefit obligation assumptions were modified for the following:

A• ~~summary~~The ofretirement eligibility provision was adjusted to reflect that World Airways cockpit employees have the ~~net~~option ~~periodic~~to ~~post-retirement~~retire ~~benefit~~at ~~costs~~the ~~was~~age asof ~~follows~~55 (with at least five years of service in ~~thousands):~~ addition to the previously reflected age 60 provision.

	Year Ended December 31,
	2005		2004		2003
Service cost	$	768	$	378	$	310
Interest cost on accumulated post-retirement benefit obligation		445		243		237
Amortization of prior service cost		10		—		—
Net amortized loss		272		13		12
Adjustment for revised retirement eligibility		1,599		—		—
Net periodic post-retirement benefit cost	$	3,094	$	634	$	559

•

A flat $50,000 life insurance benefit was added effective February 1, 2005 for cockpit retirees who die prior to age 65.

~~The~~42 ~~reconciliation of the accumulated post-retirement benefit obligation was as follows (in thousands):~~

	2005			2004
Accumulated post-retirement benefit obligation, beginning of year	$	4,849		$	4,244
Service cost		768			378
Interest cost		445			243
Benefits paid		(180	)		(137	)
Adjustment for revised retirement eligibility		1,599			—
Actuarial loss		1,956			121
Plan amendments		100			—
Accumulated post-retirement benefit obligation, end of year	$	9,537		$	4,849

The reconciliation of the accrued post-retirement benefits as of year-end was as follows (in thousands):

	2005			2004
Unfunded status	$	9,537		$	4,849
Unrecognized prior service cost		(89	)		—
Unrecognized net loss		(2,453	)		(768	)
Accrued post-retirement benefits included in liabilities on accompanying balance sheets	$	6,995		$	4,081

The assumed discount rate used to measure the accumulated post-retirement benefit obligation for 2005 and 2004 was 5.25%. The medical cost trend rate in 2005 was 10% for years prior to Medicare eligibility and 12% for years after Medicare eligibility, trending down to an ultimate rate in 2014 and beyond of 5%. A ~~one~~summary ~~percentage point increase in the assumed health care cost trend rates for each future year would have increased the aggregate~~ of the ~~service and interest cost components of 2005~~ net periodic post-retirement benefit ~~cost~~costs byis ~~$153,000 and would have increased the accumulated post-retirement benefit obligation~~ as offollows ~~December 31, 2005 by $951,000. A one percentage point decrease~~ (in ~~the~~thousands): assumed health care cost trend rates for each future year would have decreased the aggregate of the service and interest cost components of 2005 net periodic post-retirement benefit cost by $133,000 and would have decreased the accumulated post-retirement benefit obligation as of December 31, 2005 by $840,000.

World Airways used the following actuarial assumptions to determine its net periodic benefit cost for the years ended December 31, 2005 and 2004, as measured at December 31, 2005, and its benefit obligations at December 31, 2005 and 2004:


	2006		2005		2004
Service cost	$	1,053	$	768	$	378
Interest cost on accumulated post-retirement benefit obligation		540		445		243
Amortization of prior service cost		11		10		—
Net amortized loss		156		272		13
Adjustment for revised retirement eligibility		—		1,599		—

Net periodic post-retirement benefit cost	$	1,760	$	3,094	$	634

	Used for Net Periodic			Used for Benefit
	Post-Retirement			Obligations as of
Assumption	Benefit Cost for 2005			December 31, 2005
Discount rate		5.25	%		5.25	%
Salary increase*	not applicable			not applicable
Long-term rate of return*	not applicable			not applicable

The reconciliation of the accumulated post-retirement benefit obligation is as follows (in thousands):

	Used for Net Periodic			Used for Benefit
	2006			2005
	Post-Retirement			Obligations as of
Accumulated post-retirement benefit obligation, beginning of year	$	9,537		$	4,849
Assumption	Benefit Cost for 2004			December 31, 2004
Service cost		1,053			768
Discount rate		6.0	%		5.25	%
Interest cost		540			445
Salary increase*	not applicable			not applicable
Benefits paid		(245	)		(180	)
Long-term rate of return*	not applicable			not applicable
Adjustment for revised retirement eligibility		—			1,599
Actuarial (gain)/loss		(2,397	)		1,956
Plan amendments		(331	)		100
Accumulated post-retirement benefit obligation, end of year	$	8,157		$	9,537

* The ~~salary~~reconciliation ~~increase~~of ~~assumption~~the isaccrued ~~not~~post-retirement ~~applicable because the~~ benefits ~~are~~as ~~not~~of ~~related to compensation. The long~~year-~~term~~end ~~rate of return assumption~~ is ~~not applicable because the plan is funded on a pay~~ as gofollows ~~basis.~~(in thousands):

The Company expects to contribute the following amounts to the post-retirement health care benefit plan in each of the next five fiscal years, and in the aggregate for the five fiscal years thereafter. Benefit payments, which reflect expected future service, are based on assumptions about future events. Actual benefit payments may vary significantly from the estimates listed below (in thousands):


	2006			2005
Unfunded status	$	8,157		$	9,537
Unrecognized prior service cost		252			(89	)
Unrecognized net gain/(loss)		100			(2,453	)
Accumulated other comprehensive income		(352	)		—

Accrued post-retirement benefits included in liabilities on accompanying balance sheets	$	8,157		$	6,995

2006	$	421
2007		550
2008		616
2009		747
2010		869
2011 through 2015		4,506
Total	$	7,709

The assumed discount rate used to measure the accumulated post-retirement benefit obligation for 2006 and 2005 was 5.75% and 5.25%, respectively. The medical cost trend rate in 2006 was 10.75%, trending down to an ultimate rate in 2015 and beyond of 5.0%. A one percentage point increase in the assumed health care cost trend rates for each future year would have increased the aggregate of the service and interest cost components of 2006 net periodic post-retirement benefit cost by $226,000 and would have increased the accumulated post-retirement benefit obligation as of December 31, 2006 by $914,000. A one percentage point decrease in the assumed health care cost trend rates for each future year would have decreased the aggregate of the service and interest cost components of 2006 net periodic post-retirement benefit cost by $193,000 and would have decreased the accumulated post-retirement benefit obligation as of December 31, 2006 by $815,000.

~~North~~World ~~American~~Airways ~~provides~~used ~~a tax qualified 401(k) employee savings plan for~~ the ~~benefit~~following ofactuarial ~~substantially~~assumptions ~~all employees. Under the plan, employees may contribute up~~ to ~~$14,000~~determine ofits ~~their salary.~~net ~~North~~periodic ~~American~~benefit ~~matches~~cost ~~employees’~~for ~~contributions up to 100% of~~ the ~~first~~years 3%ended ofDecember 31, ~~compensation plus~~2006 ~~50%~~and of2005, ~~the~~as ~~next~~measured 2%at ofDecember 31, ~~compensation.~~2006, ~~North~~and ~~American~~its ~~also~~benefit ~~has~~obligations ~~the~~at ~~option to make additional profit-sharing contributions to the plan. Total contribution expense for matching of elective deferrals for the period April 28, 2005 to~~ December 31, ~~2005~~2006 ~~was~~and ~~$0.4 million.~~ 2005:


Assumption	Used for Net Periodic Post-Retirement Benefit Cost for 2006	Used for Benefit Obligations as of December 31, 2006
Discount rate	5.25%	5.75%
Salary increase*	not applicable	not applicable
Long-term rate of return*	not applicable	not applicable


Assumption	Used for Net Periodic Post-Retirement Benefit Cost for 2005	Used for Benefit Obligations as of December 31, 2005
Discount rate	5.25%	5.25%
Salary increase*	not applicable	not applicable
Long-term rate of return*	not applicable	not applicable

*	The salary increase assumption is not applicable because the benefits are not related to compensation. The long-term rate of return assumption is not applicable because the plan is funded on a pay-as-you-go basis.

9The Company expects to contribute the following amounts to the post-retirement health care benefit plan in each of the next five fiscal years, and in the aggregate for the five fiscal years thereafter. ~~Income~~Benefit ~~Taxes~~payments, which reflect expected future service, are based on assumptions about future events. Actual benefit payments may vary significantly from the estimates listed below (in thousands):

The components of income tax expense for the years ended December 31 were as follows (in thousands):


2007	$	353
2008		398
2009		475
2010		535
2011		577
2012 through 2016		3,800

Total	$	6,138

	2005			2004			2003
Current:
Federal	$	18,959		$	12,422		$	3,562
State		1,477			773			240
Deferred:
Federal		(317	)		(4,450	)		—
State		(146	)		(300	)		—
	$	19,973		$	8,445		$	3,802

North American provides a tax qualified 401(k) employee savings plan for the benefit of substantially all employees. Under the plan, employees may contribute up to $15,000 of their salary. North American matches employees’ contributions up to 100% of the first 3% of compensation plus 50% of the next 2% of compensation. North American also has the option to make additional profit-sharing contributions to the plan. Total contribution expense for matching of elective deferrals for the year ended December 31, 2006 was $0.6 million.

In August 2005, North American implemented a profit sharing plan for its employees. It is not a tax-qualified plan under the Code. The plan provided for payment based on certain earnings targets for the year ended December 31, 2006 and 2005. Due to net losses for the year ended December 31, 2006, North American recorded no profit sharing expense during 2006. North American expensed $1.0 million for this plan during the year ended December 31, 2005.

12. Income Taxes

The components of income tax expense (benefit) for the years ended December 31 are as follows (in thousands):


	2006			2005			2004
Current:
Federal	$	173		$	18,959		$	12,422
State		(953	)		1,477			773
Foreign		372			—			—
Deferred:
Federal		73			(317	)		(4,450	)
State		(20	)		(146	)		(300	)
Foreign		—			—			—

	$	(355	)	$	19,973		$	8,445

Income tax expense differed from the amounts computed by applying the U.S. federal statutory income tax rate of 35% to pre-tax income as a result of the following (in thousands):

	Years Ended December 31,
	2006			2005			2004
	2005			2004			2003
Expected Federal income tax expense/(benefit) at the statutory rate of 35%	$	(926	)	$	18,061		$	11,911
Expected Federal income tax at the statutory rate of 35%	$	18,061		$	11,911		$	6,693
State and local taxes (net of federal benefit)		(52	)		879			307
State and local taxes (net of federal benefit)		879			307			156
Decrease in deferred tax asset valuation allowance		—			(31	)		(5,075	)
Decrease in deferred tax asset valuation allowance		(31	)		(5,075	)		(3,664	)
Other:
Meals and entertainment		~~1,086~~893			~~975~~1,086			~~961~~975
Other		(22270	)		~~327~~(22	)		~~(344~~327	)
Income tax expense	$	19,973		$	8,445		$	3,802
Income tax expense/(benefit)	$	(355	)	$	19,973		$	8,445

The tax effects of temporary differences that give rise to significant portions of deferred tax assets and liabilities at December 31 were as follows (in thousands):

	2005			2004
	2006			2005
Deferred tax assets:
Net operating loss carry-forward	$	1,~~753~~720		$	1,~~879~~753
Recognition of sale/leaseback gains		~~386~~233			~~600~~386
Accrued post-retirement benefit obligation		2,~~553~~794			12,~~490~~553
Profit sharing and compensated absences		52,~~441~~072			45,~~888~~441
Deferred rent		2,~~117~~314			32,~~210~~117
Allowance for doubtful accounts receivable		~~604~~589			6604
Alternative minimum tax credit carry-forward		2,789			2,789
Loss on convertible debt extinguishment		—			645
Legal expense		174			1,067
Legal expense		1,067			1,204
Other		1,438			1,193
Other		1,193			902
Gross deferred tax assets		14,123			17,903
Gross deferred tax assets		17,903			17,613
Less: valuation allowance		(3,717	)		(3,717	)
Less: valuation allowance		(3,717	)		(3,748	)
Net deferred tax assets	$	10,406		$	14,186
Net deferred tax assets		14,186			13,865
Deferred tax liabilities:
Prepaid expenses		2,~~389~~042			—2,389
Equipment and property		85,~~550~~743			98,~~388~~550
Recoverable parts		~~233~~141			—233
Intangibles		2,~~780~~444			—2,780
Net deferred tax asset/(liability)	$	~~234~~36		$	~~4,477~~234

In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based upon the level of historical taxable income and projections for future taxable income over the periods in which the deferred tax assets are deductible, management believes it is more likely than not that the Company will realize the benefits of these deductible differences, net of the existing valuation allowance at December 31, 2006. The amount of the deferred tax asset considered realizable, however, could be reduced in the near term if estimates of future taxable income during the carryforward period are reduced.

58The availability of Net Operating Loss (“NOL”) carry-forwards and Alternative Minimum Tax (“AMT”) credit carry-forwards to reduce the Company’s future federal income tax liability is subject to limitations under Section 382 of the Code. Generally, these limitations restrict the availability of NOL carry-forwards upon certain changes in stock ownership by five percent stockholders which, in aggregate, exceed 50 percentage points in value in a three-year period (“Ownership Change”). The Company experienced an Ownership Change in July 2000 primarily due to vesting of restricted shares under the Company’s Employee Salary Exchange Program and the liquidation of WorldCorp, Inc.

As of December 31, 2006 the Company has $46.7 million NOL carry-forwards that are limited by Internal Revenue Code (“IRC”) Section 382. Due to this limitation, only $4.8 million of the NOL carry-forwards will be available for possible utilization for federal income tax purposes. This amount is computed based upon the $343,000 annual limitation resulting from the 2000 Ownership Change. Subsequent ownership changes, if any, could impose additional limitations on the Company’s NOL carry-forwards. The Company’s total NOL carry-forwards will begin to expire in 2007. The application of the Code in this area is subject to interpretation by the Internal Revenue Service (“IRS”). The NOL carry-forwards are subject to examination by the IRS and, thus, are subject to adjustment or disallowance resulting from any such IRS examination.

World Airways is presently under examination by the IRS for the income tax return filed for the year ended December 31, 2004. North American is also under examination by the IRS for the S-Corporation income tax returns filed for the years ended December 31, 2003 and 2004. Currently, there are no adjustments proposed by the IRS and the impact of this examination is not determinable.

income and projections for future taxable income over the periods in which the deferred tax assets are deductible, management believes it is more likely than not that the Company will realize the benefits of these deductible differences, net of the existing valuation allowance at December 31, 200513. ~~The~~Major ~~amount~~Customers ofand ~~the~~Products ~~deferred tax asset considered realizable, however, could be reduced in the near term if estimates of future taxable income during the carryforward period are reduced.~~

The availability of Net Operating Loss (“NOL”) carry-forwards and Alternative Minimum Tax (“AMT”) credit carry-forwards to reduce the Company’s future federal income tax liability is subject to limitations under Section 382 of the Code. Generally, these limitations restrict the availability of NOL carry-forwards upon certain changes in stock ownership by five percent shareholders which, in aggregate, exceed 50 percentage points in value in a three-year period (“Ownership Change”). The Company experienced an Ownership Change in July 2000 primarily due to vesting of restricted shares under the Company’s Employee Salary Exchange Program and the liquidation of WorldCorp, Inc.

As of December 31, 2005 the Company has $46.7 million NOL carry-forwards that are limited by Internal Revenue Code (“IRC”) Section 382. Due to this limitation, only $4.8 million of the NOL carry-forwards will be available for possible utilization for federal income tax purposes. This amount is computed based upon the $343,000 annual limitation resulting from the 2000 Ownership Change. Subsequent ownership changes, if any, could impose additional limitations on the Company’s NOL carry-forwards. The Company’s total NOL carry-forwards will begin to expire in 2007. The application of the Code in this area is subject to interpretation by the Internal Revenue Service (“IRS”). The NOL carry-forwards are subject to examination by the IRS and, thus, are subject to adjustment or disallowance resulting from any such IRS examination.

North American is presently under examination by the IRS for the income tax returns filed for the years ended December 31, 2003 and 2004. Currently, there are no adjustments proposed by the IRS and the impact of this examination is not determinable.

10. Major Customers and Products

Information concerning customers for years in which their revenues comprise 10% or more of the Company’s total operating revenues is presented in the following table (in millions):

	Year Ended December 31,
World Airways	~~2005~~2006		2005	~~2004~~		2004		~~2003~~
U.S. Air Force (“USAF”) Air Mobility Command	$	~~477~~398.67	$	$477.6	~~390.7~~	$	390.7	$	~~354.7~~

	Period April 28 to
	Year Ended December 31,
North American	~~December 31, 2005~~2006		2005*
U.S. Air Force (“USAF”) Air Mobility Command	$	~~103~~159.64	$	103.6

~~Information~~* ~~concerning~~Financial ~~the~~data ~~classification~~include ofthe ~~World~~results ~~Airways’ revenues comprising 10% or more~~ of ~~total~~ ~~operating~~North ~~revenues~~American isfrom ~~presented~~April in28, ~~the~~2005 ~~following~~to ~~table~~December ~~(in~~31, ~~millions):~~ 2005.

	Year Ended December 31,
World Airways	2005		2004		2003
Passenger Charter Operations	$	520.8	$	432.6	$	343.3
Cargo Charter Operations		99.9		69.1		128.5

Information concerning the Company’s revenues comprising 10% or more of total operating revenues is presented in the following table (in millions):

Information concerning the classification of North American revenues comprising 10% or more of total operating revenues is presented in the following table (in millions) for the period from April 28, 2005 through December 31, 2005:


	Year Ended December 31,
World Airways	2006		2005		2004
Passenger Charter Operations	$	445.8	$	520.8	$	432.6
Cargo Charter Operations	$	112.3	$	99.9	$	69.1


	Year Ended December 31
North American	2006		2005*
Passenger Charter Operations	$	204.8	$	131.0
Passenger Scheduled Service		61.0	$	31.8

~~Table~~* Financial data include the results of ~~Contents~~North American from April 28, 2005 to December 31, 2005.

	Period April 28
	to December 31,
North American	2005
Passenger Charter Operations	$	131.0
Passenger Scheduled Service		31.8

14. Commitments and Contingencies

11. Related Party Transactions

Corporate Headquarters

In 2004, the company that owned the building containing World Air Holdings’ corporate headquarters, with respect to which World Airways’ previous Chairman and CEO was a principal, sold the building to a real estate investment trust. In conjunction with this transaction, the Company executed a new 15-year lease. Obligations for rent under the lease aggregating $11.3 million at December 31, 2005 are included with the future lease payments for operating leases in Note 5. The Company incurred $1.2 million of rental expense in 2005, $1.1 million of rental expense in 2004, and $1.3 million of rental expense in 2003, under the lease.

12. Commitments and Contingencies

Union Negotiations and Litigation:

World Airways’ Cockpit Crewmembers: World Airways and the IBT had been negotiating the terms of a new collective bargaining agreement under the auspices of the National Mediation Board (the “NMB”) since the amendable date of the existing agreement expired on June 30, 2003. The cockpit crewmembers, who account for approximately 29.89% ~~(426)~~ of the total workforce at World Airways. ~~After unsuccessful negotiations, a general strike was called on January 28, 2006, against all World Airways’ commercial passenger~~ and ~~cargo~~are ~~flights~~represented ~~(the~~by ~~current contract prohibits World Airways’ pilots from interrupting U.S. military flying). Despite~~ the ~~strike,~~International ~~World~~Brotherhood ~~Airways~~of ~~and~~Teamsters ~~the~~ (“IBT ~~continued negotiations and reached a Tentative Agreement on Sunday~~”), ~~February 5,~~are ~~2006.~~subject ~~The IBT thereafter suspended all job actions and on March 4, 2006, with 65% of the World Airways pilots voting, the pilots voted~~ to ~~ratify the substantive terms of the Tentative Agreement. The Tentative Agreement included~~ a ~~one~~collective ~~time~~bargaining ~~signing~~agreement ~~bonus of $2.6 million,~~ which ~~the Company recorded to expense in the first quarter of 2006. The payment of this one time signing bonus was made in 2006. The final agreement~~ will ~~again~~ become amendable on March 1, 2009.

World Airways’ Flight Attendants: The ~~622~~ World Airways’ flight attendants, representing approximately 4341.69% of World Airways employees, are subject to a collective bargaining agreement that ~~will~~became ~~become~~ amendable August 31, 2006. Negotiations ~~are~~began ~~expected~~in tomid-August ~~begin~~2006 ~~prior~~with to the ~~amendable~~ ~~date~~IBT and are ongoing.

~~World~~North ~~Airways~~American’s ~~Aircraft~~Cockpit ~~Dispatchers~~Crewmembers: The ~~World~~National ~~Airways’~~Mediation ~~aircraft~~Board ~~dispatchers, who are represented by the Transport Workers Union~~ (“~~TWU~~NMB”), ~~are~~certified ~~subject~~the IBT to arepresent ~~collective~~North ~~bargaining~~American’s ~~agreement~~cockpit ~~that became~~crewmembers ~~amendable December 31, 2003. Fewer than 15 World Airways employees~~ (approximately 124.16% of ~~World~~ ~~Airways~~the total employees), ~~are~~at ~~covered~~North byAmerican) ~~this~~on ~~collective~~January 16, ~~bargaining agreement~~2004. ~~World~~North ~~Airways~~American and the ~~TWU~~IBT commenced ~~formal~~ negotiations infor ~~January 2004.~~their Infirst ~~August 2004,~~collective ~~the~~bargaining ~~TWU~~agreement ~~requested~~on ~~mediation services from the NMB. In March~~April ~~2005~~6, ~~World~~2004 ~~Airways~~and ~~reached~~have amet ~~Tentative~~on ~~Agreement~~numerous ~~with~~occasions. ~~the~~Although ~~TWU. However,~~representatives onfrom ~~March 15,~~North American ~~2005,~~and ~~World~~the ~~Airways~~IBT ~~received~~continue ~~notification~~to ~~that~~negotiate the ~~majority~~terms of ~~the~~a ~~aircraft dispatchers~~comprehensive ~~did~~final ~~not~~agreement ~~ratify~~under the ~~Tentative~~auspices ~~Agreement.~~of Inthe ~~December 2005~~NMB, ~~World~~no ~~Airways~~collective ~~again~~bargaining ~~reached a Tentative Agreement with the TWU. The new three-year~~ agreement ~~was~~has ~~subsequently~~yet ~~ratified~~been ~~by the World Airways’ dispatchers and became effective January 1, 2006~~reached.

North American’s ~~Cockpit~~Flight ~~Crewmembers~~Attendants: ~~The~~On July 26, 2005, the NMB ~~certified~~authorized a union election (the IBT) toamong ~~represent~~ North American’s ~~cockpit~~ ~~crewmembers~~flight onattendants. ~~January 16,~~Flight ~~2004~~attendants (comprise approximately ~~122 employees or 19~~37.74% of ~~the total~~ employees at North American). ~~North~~On ~~American~~August 31, ~~and~~2005, ~~the~~a ~~IBT~~majority ~~commenced~~of ~~negotiations~~flight ~~for~~attendants ~~their~~voted ~~first collective~~for ~~bargaining~~IBT ~~agreement~~representation. onNegotiations ~~April 6,~~began ~~2004~~in ~~and~~2006 ~~have~~between ~~met on numerous occasions. Although representatives from~~ North American and the IBT ~~continue~~and toare ~~negotiate the terms of a comprehensive final agreement under the auspices of the NMB, no collective bargaining agreement has yet been reached~~ongoing.

~~For~~Other ~~competitive~~Litigation: and economic reasons, effective as of January 1, 2005 and February 1, 2005, North American unilaterally reduced cockpit crewmember wages and other benefits in addition to modifying certain work rules. The IBT thereafter filed suit against North American in the United States District Court for the Northern District

60On January 9, 2004, Whitebox Convertible Arbitrage Partners, L.P. and Pandora Select Partners, L.P. filed a complaint alleging breach of contract by World Airways in connection with its exchange in December 2003 of $22,545,000 aggregate amount of 8.0% Convertible Senior Subordinated Debentures due in 2004 (the “Old Debentures”) for a like amount of the newly-issued Debentures.

ofIn ~~California~~August ~~(San~~2006, ~~Francisco~~World ~~Division)~~Airways ~~seeking,~~and ~~among other~~the ~~things,~~plaintiff aagreed ~~preliminary~~to ~~injunction~~settle ~~against~~this ~~North~~matter ~~American.~~with ~~Subsequently,~~a ~~the~~full ~~judge~~release, ~~issued~~in aexchange for ~~written~~approximately ~~decision~~$0.4 inmillion ~~North~~cash ~~American’s favor~~consideration. The ~~IBT~~settlement ~~has~~was ~~appealed~~accrued toduring the ~~Ninth~~six ~~Circuit~~month ~~Court~~period ~~of Appeals.~~ended ~~North American will continue to vigorously defend itself;. However~~June 30, ~~the~~2006 ~~Company~~and ~~cannot give~~was ~~any~~subsequently ~~assurance~~paid ~~that an adverse result~~ in ~~this~~September ~~litigation will not have a material adverse effect on its financial condition, results of operations, or liquidity~~2006.

~~North~~For ~~American’s~~competitive ~~Flight Attendants:~~and Oneconomic ~~July 26~~reasons, effective as of January 2005, ~~the~~North ~~NMB~~American ~~authorized~~unilaterally areduced ~~union~~cockpit ~~election~~crewmember ~~(the~~wages ~~IBT) among~~and ~~North~~other ~~American’s~~benefits ~~flight~~in ~~attendants.~~addition ~~Flight~~to ~~attendants~~modifying ~~comprise~~certain ~~approximately~~work 43rules.9% ofThe IBT thereafter filed ~~employees~~suit atagainst North American. OnThe ~~August 31,~~United ~~2005,~~States aDistrict ~~majority~~Court for the Northern District of ~~flight~~California ~~attendants~~ruled ~~voted~~in ~~for~~North American’s favor; the IBT ~~representation~~ appealed and the decision of the Ninth Circuit is pending. North American ~~and~~will continue to vigorously defend itself; however the ~~IBT~~Company cannot give any assurance that this litigation will not have ~~yet~~a tomaterial ~~commence~~adverse ~~negotiations~~effect ~~for~~on ~~their~~its ~~first collective~~financial ~~bargaining~~condition, ~~agreement~~results of operations, or liquidity.

~~Litigation:~~ North American ~~was~~, aalong ~~defendant~~with incertain aunrelated ~~legal~~entities, ~~action~~is ~~pending~~a defendant in ~~California~~litigation brought byin ~~a former~~the ~~pilot~~Dominican Republic for, ~~various~~among ~~causes~~other things, breach of ~~action~~contract. Consequently, ~~including~~approximately ~~wrongful termination~~$0.9 Inmillion ~~May 2006,~~of North American’s ~~and~~funds ~~the~~were ~~plaintiff~~embargoed ~~agreed~~and towere ~~settle~~not ~~this~~controlled ~~matter~~by ~~with~~North aAmerican ~~full~~until ~~release~~August 2006, when the court in ~~exchange~~the ~~for~~Dominican $2Republic lifted the embargo and the funds were returned to North American in October 2006.3 North American believes that ~~million~~the ~~cash~~litigation ~~consideration~~is without merit, and intends to vigorously contest the claims. ~~The~~Management believes that the ultimate outcome of these proceedings to which the Company ~~provided~~is ancurrently ~~accrual~~a ~~for~~party ~~this~~will ~~amount~~not ashave ofa ~~December 31,~~material adverse effect on the Company’s ~~2005~~financial condition, results of operations or liquidity.

InNorth ~~addition,~~American ~~the~~was ~~Company~~a isdefendant ~~party~~in ~~to routine~~a ~~litigation~~legal ~~and~~action ~~administrative~~pending ~~proceedings~~in ~~incidental~~California brought by a former pilot tofor ~~its~~various ~~business~~causes of action, ~~none~~including ofwrongful ~~which~~termination. ~~the~~In ~~Company~~May ~~believes~~2006, isNorth ~~likely~~American and the plaintiff agreed to ~~have~~settle this matter with a ~~material~~full ~~adverse~~release, ~~effect~~in ~~on its~~exchange ~~financial~~for ~~condition~~$2.3 million cash consideration. The settlement was accrued at December 31, ~~results~~2005 ofand ~~operations~~was orpaid ~~liquidity~~in May 2006.

~~13. Valuation~~In the ordinary course of business, the Company is party to various other legal proceedings and ~~Qualifying~~claims ~~Accounts~~which ~~(in~~we ~~thousands)~~believe are incidental to the operations of our business. Management believes that the ultimate outcome of these proceedings to which the Company is currently a party will not have a material adverse effect on the Company’s financial condition, results of operations or liquidity.

			Additions
	Balance at		Charged			Amounts
	Beginning		(Credited)			Charged			Balance at
	of Year		to Expense			to Allowance			End of Year
2005
Allowance for accounts receivable	$	209	$	1,622		$	(188	)	$	1,643
Deferred tax valuation allowance	$	3,748	$	(31	)	$	—		$	3,717
2004
Allowance for accounts receivable	$	196	$	2,659		$	(2,646	)	$	209
Deferred tax valuation allowance	$	8,823	$	(5,075	)	$	—		$	3,748
2003
Allowance for accounts receivable	$	255	$	1,939		$	(1,998	)	$	196
Deferred tax valuation allowance	$	12,487	$	(3,664	)	$	—		$	8,823

15. Valuation and Qualifying Accounts (in thousands)

14. Quarterly Results (unaudited)


	Balance at Beginning of Year		Additions Charged (Credited) to Expense			Amounts Charged to Allowance			Balance at End of Year
2006
Allowance for accounts receivable	$	1,643	$	335		$	(355	)	$	1,623
Deferred tax valuation allowance	$	3,717	$	—		$	—		$	3,717
2005
Allowance for accounts receivable	$	209	$	1,622		$	(188	)	$	1,643
Deferred tax valuation allowance	$	3,748	$	(31	)	$	—		$	3,717
2004
Allowance for accounts receivable	$	196	$	2,659		$	(2,646	)	$	209
Deferred tax valuation allowance	$	8,823	$	(5,075	)	$	—		$	3,748

~~The~~16. ~~results~~Quarterly ofResults ~~the Company’s quarterly operations~~ (unaudited) ~~for~~ ~~2005 and 2004 are as follows (in thousands except share data):~~

	Quarter Ended
	Mar 31		Jun 30*		Sep 30		Dec 31*
2005
Operating revenues	$	159,549	$	171,882	$	217,180	$	238,527
Operating income		17,178		10,789		10,235		18,414
Net earnings		9,898		5,506		5,470		10,754
Basic earnings per common share		0.52		0.23		0.23		0.45
Diluted earnings per common share		0.38		0.21		0.20		0.40

The results of the Company’s quarterly operations (unaudited) for 2006 and 2005 are as follows (in thousands except share data):

* During the second quarter of 2005, the Company made adjustments to correct errors in the application of generally accepted accounting principles. These adjustments included entries regarding the timing of expensing recoverable spare parts, flight crew special pay requests, asset disposals and certain other operating expenses including hotels, ground handling and outside consultant fees, the timing of recognizing a vendor rebate and the incorrect use of the original cost as a basis for recognizing depreciation expense of certain aircraft parts that were impaired. As a result of the adjustments for the three month period ended June 30, 2005, revenues increased approximately $0.2 million, operating expenses decreased $0.7 million, total other expenses increased $0.8 million, and income tax expense increased $0.1 million. There was no impact on net earnings. Additionally, during the fourth quarter of 2005, the Company recorded a number of adjustments to correct errors in the application of generally accepted accounting principles. These adjustments included entries to correct errors relating to the disaggregation of deferred rent and deferred gain on sale/leaseback transactions between current and non-current assets and liabilities, the accounting for fuel reconciliation adjustments within revenue versus netting these fuel reconciliation adjustments against fuel expense, the revision of the actuarial calculation of the liability for a post-retirement health care and life insurance benefit plan for the World Airways’ cockpit crews based on using the correct eligible retirement age within the calculation (see Note 8), and to record maintenance reserve receivables due from aircraft lessors for maintenance completed and to record the corresponding payable to the maintenance vendors who performed the maintenance service. As a result of the adjustments for the three month period ended December 31, 2005, revenues increased approximately $13.5 million, operating expenses increased $16.4 million, total other expenses decreased by $0.8 million, and income tax expense decreased by $0.8 million resulting in a net earnings decrease of $1.3 million.


	Quarter Ended
	Mar 31		Jun 30			Sep 30		Dec 31
2006
Operating revenues	$	216,253	$	176,657		$	231,421	$	201,325
Operating income/(loss)		9,446		(12,948	)		6,792		(4,070	)
Net earnings/(loss)		3,542		(7,479	)		5,425		(3,780	)
Basic earnings/(loss) per common share	$	0.15	$	(0.31	)	$	0.22	$	(0.17	)
Diluted earnings/(loss) per common share	$	0.13	$	(0.31	)	$	0.20	$	(0.17	)

61 47

The estimated aggregate impact of these out of period adjustments to correct errors in the application of generally accepted accounting principles for the year ended December 31, 2005 (including those recorded in the second and fourth quarters of 2005) increased total operating expenses by approximately $1.5 million, decreased income tax expense by approximately $0.6 million and decreased net earnings by approximately $0.9 million. The out of period impact of these adjustments was deemed immaterial both individually and in the aggregate, to the Company’s Consolidated Balance Sheets, Consolidated Statements of Income, Consolidated Statements of Changes in Stockholders’ Equity (Deficit) and Consolidated Statements of Cash Flows for any prior annual periods and prior interim periods including 2005 interim periods and to its results for the year ended December 31, 2005, to trends for those periods affected, and to the fair presentation of the Company’s consolidated financial statements for those periods.


	Quarter Ended
	Mar 31		Jun 30		Sep 30		Dec 31
2005
Operating revenues	$	159,549	$	171,882	$	217,180	$	238,527
Operating income		17,178		10,789		10,235		18,414
Net earnings		9,898		5,506		5,470		10,754
Basic earnings per common share	$	0.52	$	0.23	$	0.23	$	0.45
Diluted earnings per common share	$	0.38	$	0.21	$	0.20	$	0.40

~~During the quarter ended September 30, 2005 the Company increased its accrual by $12~~17.~~5 million~~ ~~to $12.7 million~~Subsequent ~~for~~Events legal expenses associated with the wrongful termination lawsuit by a former pilot at North American. In May 2006, North American and the plaintiff agreed to settle this matter with a full release, in exchange for $2.3 million cash consideration. As a result of this agreement, an adjustment to reduce legal expense of $10.4 million was recorded during the quarter ended December 31, 2005.

	Quarter Ended
	Mar 31		Jun 30		Sep 30		Dec 31
2004
Operating revenues	$	129,584	$	115,060	$	129,175	$	130,081
Operating income		13,639		4,388		13,764		8,492
Net earnings		7,875		2,569		7,054		8,089
Basic earnings per common share		0.69		0.22		0.54		0.51
Diluted earnings per common share		0.34		0.12		0.31		0.32

On April 5, 2007, the Company announced that it has entered into an agreement to be acquired by Global Aero Logistics, Inc. for $315.0 million in an all-cash transaction. Under the terms of the agreement, World Air Holdings shareholders will receive $12.50 in cash for each share of the Company’s common stock owned.

~~The~~Delta ~~sum~~Air ofLines, Inc. (“Delta”) filed for ~~the~~bankruptcy ~~quarterly~~in ~~earnings~~2005. ~~per~~World ~~share~~Airways ~~amounts~~filed ~~does~~a ~~not~~claim ~~equal~~against ~~the~~Delta ~~annual amount~~for ~~since~~certain ~~per~~maintenance ~~share~~and ~~amounts~~lease ~~are~~payments ~~computed~~the ~~independently~~Company ~~for~~had ~~each quarter~~made to Delta under maintenance service and ~~full~~equipment ~~year~~lease ~~based~~agreements. onIn ~~respective~~May ~~weighted-average~~2007, ~~shares~~World Airways reached a settlement ~~outstanding~~agreement ~~and~~with ~~other~~Delta ~~dilutive~~whereby ~~potential~~the ~~shares~~Company will have an allowed general unsecured claim in Delta’s bankruptcy case in the amount of $5.5 million. This agreement had no impact on the consolidated financial statements for the year ended December 31, 2006.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders

World Air Holdings, Inc.:

We have audited the accompanying consolidated balance sheets of World Air Holdings, Inc. and subsidiaries (“World Air Holdings”) as of December 31, 2006 and 2005, and the related consolidated statements of operations, changes in stockholders’ equity (deficit) and comprehensive income (loss), and cash flows for each of the years in the three-year period ended December 31, 2006. These consolidated financial statements are the responsibility of the World Air Holdings management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of World Air Holdings as of December 31, 2006 and 2005, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2006, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of World Air Holdings’ internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated July 3, 2007 expressed an unqualified opinion on management’s assessment and an adverse opinion on the effectiveness of internal control over financial reporting.

As discussed in Notes 1 and 8 to the consolidated financial statements, World Air Holdings adopted the provisions of Statement of Financial Accounting Standards No. 123(R), Share-Based Payment effective January 1, 2006. Also, as discussed in Notes 1 and 11 to the consolidated financial statements, World Air Holdings adopted the recognition and disclosure provisions of Statement of Financial Accounting Standards No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans as of December 31, 2006.

/s/ KPMG LLP

Atlanta, Georgia

July 3, 2007

Item 9.

Changes In and Disagreements with Accountants on Accounting and Financial Disclosure.

None

Item 9A.

Controls and Procedures.

A. Disclosure Controls and Procedures

Disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) are controls and other procedures that are designed to provide reasonable assurance that the information that the Company is required to disclose in the reports that are filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including the Chief Executive Officer and the Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

In connection with the preparation of this Annual Report, the Company’s management, with the participation of the Chief Executive Officer and the Chief Financial Officer, carried out an evaluation of the effectiveness of the design and operation of the disclosure controls and procedures as of December 31, ~~2005~~2006. Based on this evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that the disclosure controls and procedures were not effective as of December 31, ~~2005~~2006 due to the material weaknesses in internal control over financial reporting described below.

In light of the material weaknesses described below, the Company performed additional analyses and other procedures to ensure that the consolidated financial statements included in this Annual Report were prepared in accordance with accounting principles generally accepted in the United States (“GAAP”). These procedures included additional testing of financial transactions at December 31, ~~2005~~2006, including a review of ~~cash~~expense ~~receipts~~cut-off and cash disbursements to ensure the accuracy of the annual financial statements. Additionally, the Company ~~performed a review of all~~ ~~material contracts, conducted a more detailed evaluation of fixed asset additions and disposals and~~ performed a review of its tax provision model. As a result of these and other expanded procedures, the Company concluded that the consolidated financial statements included in this Annual Report present fairly, in all material respects, the Company’s financial position, results of operations and cash flows for the periods presented in conformity with GAAP.

B. Management’s Report on Internal Control Over Financial Reporting

World Air Holdings, Inc.’s (“World Air Holdings” or “the Company”) management, under the supervision of the Chief Executive Officer and the Chief Financial Officer, is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act). Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP. Internal control over financial reporting includes policies and procedures that:

(i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company;

(ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company,; and

(iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with existing policies or procedures may deteriorate.

Under the supervision of the Chief Executive Officer and the Chief Financial Officer, the Company’s management conducted an assessment of the Company’s internal control over financial reporting as of December 31, ~~2005~~2006, based on the framework and criteria established in Internal Control — Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on this assessment, management has concluded that internal control over financial reporting was not effective as of December 31, 2006 as a result of the material weaknesses described below.

A material weakness is a control deficiency, or combination of control deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. In connection with management’s assessment of the Company’s internal control over financial reporting referred to above, management has identified the following material weaknesses in the Company’s internal control over financial reporting as of December 31, ~~2005~~2006:

1.50 The Company did not maintain effective company-level controls, as defined in COSO. These deficiencies related to each of the five components of internal control as defined by COSO (control environment, risk assessment, control activities, information and communication, and monitoring). Specifically, the following deficiencies were identified:

a. The Company’s control environment did not set an adequate tone around control consciousness, and this material weakness was a contributing factor in the development of other material weaknesses described below. b. The Company’s operations personnel did not have a sufficient understanding of how their respective processes impacted the ultimate financial reporting process. c. The Company failed to implement an adequate assignment of authority and accountability and the necessary lines of communication between operations and accounting personnel. d. The Company did not employ a staff sufficient in number or with requisite accounting and financial reporting knowledge to ensure the preparation of accurate, reliable and timely interim and annual consolidated financial statements, and to ensure the proper selection of accounting policies and the correct application of generally accepted accounting principles in those financial statements. e. The Company did not provide adequate training opportunities for accounting and operating personnel to maintain current knowledge of accounting requirements.

Each of these material weaknesses in the Company’s company-level controls contributed to the material weaknesses discussed in the following items 2 through 6.

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Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

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