AIR T INC - 10-Q Quarterly Report

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FORM 10-Q

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

Quarterly Report Under Section 13 or 15 (d)
of the Securities Exchange Act of 1934

For Quarter Ended December 31, 2003
Commission File Number 0-11720

Air T, Inc.
(Exact name of registrant as specified in its charter)

Delaware 52-1206400
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

Post Office Box 488, Denver, North Carolina 28037
(Address of principal executive offices)

(704) 377-2109
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15 (d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.

Yes X No

Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 126-2 of the Exchange Act).

Yes No X

APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.

2,726,320 Common Shares, par value of $.25 per share were outstanding
as of February 12, 2004

AIR T, INC. AND SUBSIDIARIES

INDEX

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Condensed Consolidated Statements of Operations
for the three and nine-month periods ended
December 31, 2003 and 2002 (Unaudited) 3

Condensed Consolidated Balance Sheets at
December 31, 2003 (Unaudited)
and March 31, 2003 4

Condensed Consolidated Statements of Cash
Flows for the nine-month periods
ended December 31, 2003 and 2002 (Unaudited) 5

Condensed Consolidated Statement of Stockholders'
Equity and Other Comprehensive Loss
at December 31, 2003 (Unaudited) 6

Notes to Condensed Consolidated Financial
Statements (Unaudited) 7-12

Item 2. Management's Discussion and Analysis
of Financial Condition and Results
of Operations 13-18

Item 3. Quantitative and Qualitative Disclosures
about Market Risk 19

Item 4. Controls and Procedures 19

PART II. OTHER INFORMATION

Item 6. Exhibits and Reports on Form 8-K 19

Signatures 20

Exhibit Index 21

Officers' Certifications 22-25

AIR T, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

AIR T, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS

AIR T, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

AIR T, INC AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY AND
OTHER COMPREHENSIVE INCOME (LOSS) (UNAUDITED)

AIR T, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

A. Financial Statements

The Condensed Consolidated Balance Sheet as of December 31, 2003, the
Condensed Consolidated Statements of Operations for the three and nine-
month periods ended December 31, 2003 and 2002, the Condensed Consolidated
Statements of Cash Flows for the nine-month periods ended December 31, 2003
and 2002 and the Condensed Consolidated Statement of Stockholders' Equity
and Other Comprehensive Income (Loss) have been prepared by Air T, Inc.
(the Company) without audit. In the opinion of management, all adjustments
(consisting only of normal recurring adjustments) necessary to present
fairly the financial position, results of operations, cash flows and equity
position as of December 31, 2003, and for prior periods presented, have
been made.

It is suggested that these financial statements be read in conjunction
with the financial statements and notes thereto included in the Company's
Annual Report on Form 10-K for the year ended March 31, 2003. The results
of operations for the period ended December 31 are not necessarily
indicative of the operating results for the full year.

B. Income Taxes

The tax effect of temporary differences, primarily asset reserves and
accrued liabilities, gave rise to the Company's deferred tax asset in the
accompanying December 31, 2003 and March 31, 2003 consolidated balance
sheets. Deferred income taxes are recognized for the tax consequence of
such temporary differences at the enacted tax rate expected to be in effect
when the differences reverse.

The income tax provision (benefit) from continuing operations for the
respective nine-months ended December 31, 2003 and 2002 differ from the
federal statutory rate primarily as a result of state income taxes and
permanent timing differences.

C. Net Earnings (Loss) Per Share

Basic earnings (loss) per share has been calculated by dividing net
earnings (loss) by the weighted average number of common shares outstanding
during each period. For purposes of calculating diluted earnings (loss)
per share, shares issuable under employee stock options were considered
potential common shares and were included in the weighted average common
shares unless they were anti-dilutive. For the three-month and nine-month
period ended December 31, 2002 all outstanding stock options were anti-
dilutive.

The computation of basic and diluted earnings (loss) per common share is as
follows:

Three Months Ended Nine Months Ended
December 31, December 31,
2003 2002 2003 2002

Net earnings (loss) $ 230,020 $ 37,363 $ 937,226 $ (487,310)

Basic and Diluted Earnings (Loss)
Per Share:
Continuing Operations $ 0.11 $ 0.04 $ 0.50 $ (0.06)
Discontinued Operations (0.03) (0.03) (0.16) (0.12)
Total Basic and Diluted Net
Earnings (Loss) Per Share $ 0.08 $ 0.01 $ 0.34 $ (0.18)

Weighted Average Shares Outstanding:
Basic 2,726,320 2,726,320 2,726,320 2,726,320
Plus: Incremental shares from
stock options 21,608 - 4,397 -
Diluted 2,747,928 2,726,320 2,730,717 2,726,320

7

D. Inventories

Inventories consist of the following:

December 31, 2003 March 31, 2003

Aircraft parts and supplies $ 1,769,432 $ 2,088,315
Aircraft equipment manufacturing:
Raw materials 3,834,278 2,595,448
Work in process 1,686,429 745,409
Finished goods 2,369,165 1,940,077

Total Inventory 9,659,304 7,369,249
Reserves (1,189,662) (1,093,961)

Total, net of reserves $ 8,469,642 $ 6,275,288

Recent Accounting Pronouncements

The FASB has issued SFAS No. 143, "Accounting for Asset Retirement
Obligations" and SFAS No. 144, "Accounting for the Impairment or Disposal
of Long-lived Assets". SFAS No. 143 addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-
lived assets and the associated asset retirement costs. It requires that
the fair value of a liability for an asset retirement obligation be
recognized in the period in which it is incurred if a reasonable estimate
of fair value can be made. The associated asset retirement costs are
capitalized as part of the carrying amount of the long-lived asset. SFAS
No. 143 was effective for the Company beginning April 1, 2003. Adoption of
SFAS No. 143 did not have a material effect on the Company's financial
position and results of operations.

SFAS No. 144 supersedes SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of" and amends
Accounting Principles Bulletin (APB) No. 30 "Reporting the Results of
Operations-Discontinued Events and Extraordinary Items". Along with
establishing a single accounting model, based on the framework established
in SFAS No. 121, for long-lived assets to be disposed of by sale, this
standard retains the basic provisions of APB No. 30 for the presentation of
discontinued operations in the income statement but broadens that
presentation to include a component of an entity. SFAS No. 144 was
effective for the Company beginning April 1, 2002. The effect of the
adoption of SFAS No. 144 on management's plan to discontinue the operations
of MAS is reflected in the Company's condensed consolidated statements of
financial position and results of operations and is detailed in Note H
Discontinued Operations.

In November 2002, the FASB issued FASB Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others". This Interpretation elaborates on
the disclosures to be made by a guarantor in its interim and annual
financial statements about its obligations under certain guarantees that it
has issued. It also clarifies that a guarantor is required to recognize,
at the inception of a guarantee, a liability for the fair value of the
obligation undertaken in issuing the guarantee. The disclosure
requirements, initial recognition and initial measurement provisions of
this Interpretation are currently effective and did not have a material
effect on our financial position and results of operations for the three
and nine months ended December 31, 2003.

The Company's ground equipment subsidiary warranties its products for up to
a two-year period from date of sale. Product warranty reserves are
recorded at time of sale based on the historical average warranty cost and
are adjusted as actual warranty cost becomes known. As of December 31,
2003 the Company's warranty reserve amounted to $127,000.

8

Product warranty reserve activity during the nine-months ended December 31,
2003 is as follows:

Balance at 3/31/03 $116,000
Additions to reserve 111,000
Use of reserve (100,000)
Balance at 12/31/03 $127,000

In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure". This Statement amends FASB
Statement No. 123, "Accounting for Stock-Based Compensation", to provide
alternative methods of transition for a voluntary change to the fair value
based method of accounting for stock-based employee compensation. In
addition, this Statement amends the disclosure requirements of Statement
123 to require prominent disclosures in both annual and interim financial
statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results. The
Company has elected to continue to account for its stock-based compensation
under the provisions of Accounting Principles Bulletin No. 25. The Company
has applied the fair value recognition provisions of SFAS NO. 123 to its
stock-based compensation and has determined that there is no effect on
proforma net income and proforma earnings per share for the three-month and
nine-month periods ended December 31, 2003 and 2002 respectively.

In January 2003, the FASB issued FASB Interpretation No. 46, Consolidation
of Variable Interest Entities ("FIN 46"). This Interpretation requires
that variable interest entities created after January 31, 2003, and
variable interest entities in which an interest is obtained after that
date, be evaluated for consolidation into an entity's financial
statements. For variable interest entities created or acquired prior to
that date, the provisions of FIN 46 must be applied for the first interim
or annual period ending after December 31, 2003. The adoption of FIN 46 is
not expected to have an impact on the Company's consolidated financial
statements.

In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity".
SFAS No. 150 is effective for the Company beginning July 1,2003, although the
FASB has recently proposed that implementation of certain provisions of
SFAS NO. 150 be postponed indefinitely. The Company has determined that
the adoption of SFAS No. 150 will not have an impact on the Company's
financial position or results of operations.

Derivative Financial Instruments

As required by SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities", the Company recognizes all derivatives as either
assets or liabilities in the statement of financial position and measures
those instruments at fair value.

The Company is exposed to market risk, such as changes in interest rates.
To manage the volatility relating to interest rate risk, the Company may
enter into interest rate hedging arrangements from time to time. The
Company does not utilize derivative financial instruments for trading or
speculative purposes.

In May 2001, the Company entered into two interest rate swaps with notional
amounts of $2.4 million, and $2 million respectively. These agreements
were originally entered into at respective interest rates of 6.97% and 6.5%.
On July 31, 2002 the Company elected to unwind its $2,000,000 (6.5%)
revolving credit line swap in consideration for $58,750, the fair-market-
value termination fee as of that date. On October 30, 2003, the Company
terminated its remaining credit line swap for $97,500, the fair-market-value
termination fee as of that date. The $88,636 included in accumulated other
comprehensive income (loss) at date of termination will be ratably amortized
into interest expense over the remaining term of the Company's credit line.

G. Financing Arrangements

On August 31, 2003 the Company amended its $7,000,000 secured long-term
revolving credit line to extend its expiration date to August 31, 2005.

9

The revolving credit line contains customary events of default, a
subjective acceleration clause and restrictive covenants that, among other
matters, require the Company to maintain certain financial ratios. There
is no requirement for the Company to maintain a lock-box arrangement under
this agreement. Under the provisions of the revolving credit line, the
sale of MAS, as described in Note H., would be considered an event of
default. The Company has obtained a waiver for this covenant. As of
December 31, 2003, the Company was in compliance with all of the restrictive
covenants. The amount of credit available to the Company under the agreement
at any given time is determined by an availability calculation, based on the
eligible borrowing base, as defined in the credit agreement, which includes
the Company's outstanding receivables, inventories and equipment, with
certain exclusions. The credit facility is secured by substantially all of
the Company's assets.

Amounts advanced under the credit facility bear interest at the 30-day
"LIBOR" rate plus 137 basis points. The LIBOR rate at December 31, 2003
was 1.11%. At December 31, 2003 and March 31, 2003, the amounts outstanding
against the line were $104,000 and $2,217,000, respectively. At December
31, 2003, $2,116,000 was available under the terms of the credit facility.

The Company has classified its outstanding bank debt of $104,000 as long-
term as of December 31, 2003 to reflect the terms included under the
amendment signed on August 31, 2003.

H. Discontinued Operations

During the fourth quarter of fiscal 2003, Company management agreed to a
plan to sell the assets of Mountain Aircraft Services, LLC (MAS) and to
discontinue the operations of the Company's aviation service sector
business. The Company entered into a letter of intent on June 19, 2003 to
sell certain assets and the business operations of MAS to an investor
group which included former management of MAS, for consderation of
$1,950,000 and closed on the transaction on August 14, 2003. In conjunction
with the above sale, the Company agreed to indemnify the buyer and its
affiliates with respect to certain matters related to contractual
representations and warranties and the operation of the business prior to
closing. Although no assurances can be made, the Company does not believe
the indemnities provided will have a material effect on its financial
condition or results of operations.

Under the terms of the agreement signed on August 14, 2003, the Company
also entered into a three-year consignment agreement granting the buyer an
exclusive right to sell the remaining $789,000 net value of MAS inventory
included in the Company's condensed consolidated balance sheet as of
December 31, 2003. Upon termination of the consignment agreement the buyer
will return all unsold inventory to the Company. Accordingly, the
accompanying condensed consolidated financial statements reflect the sale
of certain MAS assets and reclassify the net operations of MAS as
discontinued operations, net of tax, for all periods presented.

A summary of the assets held for sale at December 31, 2003 and March 31,
2003 is as follows:

A summary of the operating results of the discontinued operations for
the nine-months ended December 31, 2003 and 2002 is as follows:

2003 2002
Revenue $ 2,657,752 $ 4,946,843
Operating Loss $ (503,054) $ (207,126)

Loss before income taxes $ (701,054) $ (533,522)
Income tax benefit 273,411 208,074

Net loss $ (427,643) $ (325,448)

10

I. Segment Information

The Company operates three subsidiaries in two continuing business
segments. Each business segment has separate management teams and
infrastructures that offer different products and services.

During the fourth quarter of fiscal 2003, Company management agreed to
a plan to sell the assets of MAS and to discontinue the operations of the
Company's aviation service sector business. On August 14, 2003, the
Company closed on its transaction to sell certain assets and the business
operations of MAS. Therefore, to present the two periods ended December
2003 and 2002 comparably, the operations of MAS and the consigned
inventory, as discussed in Note H. Discontinued Operations, are not
presented in the segment and Identifiable asset information below.

The subsidiaries with continuing operations have been combined into
the following two reportable segments: overnight air cargo and ground
equipment. The overnight air cargo segment encompasses services provided
to one customer, Federal Express Corporation, and the ground
equipment segment encompasses the operations of Global Ground Support, LLC.

Segment data is summarized as follows:

Three months ended Nine months ended
December 31, December 31,
2003 2002 2003 2002

Operating Revenues
Overnight Air Cargo $ 10,050,669 $ 7,241,762 $25,850,443 $21,580,247
Ground Equipment 2,929,464 3,992,789 11,808,829 9,026,966
Total $ 12,980,133 $11,234,551 $37,659,272 $30,607,213

Operating Income (Loss)
Overnight Air Cargo $ 1,204,673 $ 498,707 $ 3,210,849 $ 1,808,217
Ground Equipment (97,784) 262,932 915,596 (306,325)
Corporate (1) (736,766) (601,682) (2,142,237) (1,690,865)
Total $ 370,123 $ 159,957 $ 1,984,208 $ (188,973)

Depreciation and Amortization
Overnight Air Cargo $ 55,624 $ 56,183 $ 166,100 $ 185,926
Ground Equipment 35,940 43,757 118,007 137,941
Corporate 41,322 36,521 124,156 106,615
Total $ 132,886 $ 136,461 $ 408,263 $ 430,482

Capital Expenditures, net
Overnight Air Cargo $ 36,014 $ 4,996 $ 68,162 $ 22,748
Ground Equipment 22,837 11,779 38,385 106,663
Corporate 11,405 32,989 34,750 109,277
Total $ 70,256 $ 49,764 $ 141,297 $ 238,688

As of
December 31, 2003
March 31, 2003
Identifiable Assets
Overnight Air Cargo $ 4,065,598 $ 4,130,676
Ground Equipment 10,727,378 8,615,032
Corporate 3,276,884 4,684,070

Total $ 18,069,860 $ 17,429,778

(1) Includes income from inter-segment transactions
11

J. Resignation of Executive Officer

Effective December 31, 2003, an executive officer and director of the
company resigned his employment with AirT.

In consideration of approximately $300,000, payable in three
installments over a one-year period starting January 12, 2004, the
executive agreed to forgo certain retirement and other contractual benefits
for which the company had previously accrued aggregate liabilities of
amounting to approximately $715,000.

The above mentioned cancellation of contractual retirement benefits
reduced recorded liabilities by $715,000. The difference between the
recorded liability and ultimate cash payment of $300,000 required the
recording of a $305,000 reduction in actuarial losses, recorded in
Other Comprehensive Loss, a $90,000 reduction in intangible assets and a
net $20,000 reduction in executive compensation charges included in the
statement of operations. After accounting for the effect of income taxes,
these transactions increased the company's reported net earnings from
continuing operations by $12,000.

The company also agreed to buyback purchase from the former executive
officer 118,480 shares of AirT common stock held by him (representing
approximately 4.3% of the outstanding shares of common stock at December
31, 2003) for $4.54 per share (80% of the January 5, 2004 closing price).
The stock repurchase will take place in three installments over a one-year
period, starting January 12, 2004, and will total approximately $538,000.
The repurchase of the former executive's stock will be recorded in the
period that the repurchase occurs as treasury stock transactions.

K. Commitments and Contingencies

Global and one of its employees are defendants in a lawsuit filed in
March 2002 in the United States District Court for the District of
Columbia, Catalyst & Chemical Services et al v. Terex, et al. In this
action, the plaintiffs allege that they provided to Global and the employee
certain trade secrets regarding aircraft de/anti-icing systems that were
then disclosed by Global and the employee to third parties. The plaintiffs
allege misappropriation of trade secrets, breach of contract and violation
of the federal Racketeer Influenced and Corrupt Organizations Act and seek
monetary damages. The Company and its employee have filed an answer in this
action denying all liability. Upon Global's motion, the court has
dismissed the plaintiff's claims under the Racketeer Influenced and Corrupt
Organizations Act. Recently the plaintiffs amended the complaint to add a
patent infringement claim, which appears to involve the same materials and
information that constitute the alleged trade secrets. Global has not yet
responded to the newly-filed patent claim. The Company does not believe
that the action has any merit and intends to defend the lawsuit vigorously.
In November 2002, Global and the Company filed suit in North Carolina state
court against affiliates of the plaintiffs in the Catalyst & Chemical
Services et al v. Terex, et al action alleging defamation. This action has
been +moved to, and is pending before, the United States District Court
for the District of Columbia.

The Company is currently aware of certain intellectual property,
personal injury and environmental matters, some of which involve
pending or threatened lawsuits. If adversely decided, management
believes the results of these pending or threatened lawsuits would
not have a material adverse effect on the Company.

12

Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Continuing Operations.

Overview

The Company's most significant component of revenues, which accounted
for 68.6% of revenues for the nine months ended December 31, 2003, was
generated by its air cargo subsidiaries, Mountain Air Cargo, Inc.(MAC) and
CSA Air, Inc.(CSA). MAC and CSA are short-haul express air freight
carriers, which provide services to one customer, Federal Express
Corporation (the Customer). MAC and CSA's revenues contributed approximately
$25,850,000 and $21,580,000 to the Company's revenues for the nine-month
periods ended December 31, 2003 and 2002, respectively. The increase in
revenues was primarily attributed to increased cargo and maintenance services,
related to the Customer's aircraft fleet modernization and route expansion,
provided during the current period. Under the terms of the dry-lease
service agreements, which currently covers approximately 98% of the revenue-
generating aircraft operated, the Company passes through to its Customer
certain cost components of its operations without markup. The cost of
fuel, flight crews, landing fees, outside maintenance, parts and certain
other direct operating costs are included in operating expenses and billed
to the Customer as cargo and maintenance revenue, at cost.

Separate agreements cover the four types of aircraft operated by MAC
and CSA-Cessna Caravan, Fokker F-27, ATR 42 and Short Brothers SD3-30.
Cessna Caravan, Fokker F-27 and ATR 42 aircraft (a total of 99 aircraft at
December 31, 2003) are owned by and dry-leased from the
Customer, and Short Brothers SD3-30 aircraft (two aircraft at
December 31, 2003) are owned by the Company and operated under wet-lease
arrangements with the Customer. Pursuant to such agreements, the Customer
determines the type of aircraft and schedule of routes to be flown by MAC
and CSA, with all other operational decisions made by the Company.

Agreements are renewable annually and may be terminated by the
Customer at any time upon 15 to 30 days' notice. The Company believes that
the short term and other provisions of its agreements with the Customer are
standard within the air freight contract delivery service industry. The
Company is not contractually precluded from providing such services to
other firms, and has done so in the past. Loss of its contracts with the
Customer would have a material adverse effect on the Company.

Global Ground Support, LLC (Global), another subsidiary of the
Company, manufactures, services and supports aircraft deicers and other
specialized equipment on a worldwide basis. Global's revenue contributed
approximately $11,809,000 and $9,027,000 to the Company's revenues for the
nine-month periods ended December 31, 2003 and 2002, respectively. The
increase in revenues in 2003, which took place during the first and second
quarters, was primarily related to a current period increase in sales of
mobile deicers and a large scale airport contract.

Except for the second quarter of fiscal 2004, the business of Global
had been adversely affected by reduced orders from commercial airlines and
aviation-related companies. The decrease in orders, which started in early
2001, declined further after September 11, 2001. Global, which also
derives a significant portion of its revenue from sale of products for
military applications, experienced temporary declines in orders for certain
military programs due to funding delays during fiscal 2003 and the third
quarter of fiscal 2004. On January 23, 2004 the Company received a three-year
extension to its existing four-year supply agreement with
the U.S. Air Force. In connection with the extension, the Air
Force placed a $11.3 million order, to be completed over the
next three to four quarters.

The Company operates three subsidiaries in two continuing business
segments. Each business segment has separate management teams and
infrastructures that offer different products and services. The
subsidiaries have been combined into the following reportable segments:
overnight air cargo and ground equipment in the accompanying condensed
consolidated financial statements.

Resignation of Executive Officer

Effective December 31, 2003, an executive officer and director of the
company resigned his employment with AirT.

In consideration of approximately $300,000, payable in three
installments over a one-year period starting January 12, 2004, the
executive agreed to forgo certain retirement and other contractual benefits
for which the company had previously accrued aggregate liabilities of
$715,000.
13

The above mentioned cancellation of contractual retirement benefits
reduced recorded liabilities by $715,000. The difference between the
recorded liability and ultimate cash payment of $300,000 required the
recording of a $305,000 reduction in actuarial losses, recorded in
Other Comprehensive Income (Loss), a $90,000 reduction in intangible assets
and a net $20,000 reduction in executive compensation charges
included in the statement of operations. After accounting for the
effect of income taxes, these transactions increased the company's reported
net earnings from continuing operations by $12,000.

The company also agreed to buyback purchase from the former executive
officer 118,480 shares of AirT common stock held by him (representing
approximately 4.3% of the outstanding shares of common stock at December
31, 2003) for $4.54 per share (80% of the January 5, 2004 closing price).
The stock repurchase will take place in three installments over a one-year
period, starting January 12, 2004, and will total approximately $538,000.
The repurchase of the former executive's stock will be recorded in the
period that the repurchase occurs as treasury stock transactions.

Critical Accounting Policies and Estimates

The preparation of the Company's financial statements in conformity
with accounting principles generally accepted in the U.S. requires the use
of estimates and assumptions to determine certain assets, liabilities,
revenues and expenses. Management bases these estimates and assumptions
upon the best information available at the time of the estimates or
assumptions. The Company's estimates and assumptions, related to both
continuing and
discontinued operations could change materially as conditions within and
beyond our control change. Accordingly, actual results could differ
materially from estimates. The most significant estimates made by
management include allowance for doubtful accounts receivable, reserves for
excess and obsolete inventories, deferred tax asset valuation, retirement
benefit obligations and valuation of revenue recognized under the
percentage of completion method. Following is a discussion of critical
accounting policies and related management estimates and assumptions
necessary in determining the value of related assets or liabilities.

Allowance for Doubtful Accounts. An allowance for doubtful accounts
receivable is established based on management's estimates of the
collectability of accounts receivable. The required allowance is determined
using information such as customer credit history, industry information,
credit reports and customer financial condition. The estimates can be
affected by changes in the aviation industry, customer credit issues or
general economic conditions.

Inventories. The Company's parts inventories are valued at the lower of
cost or market. Provisions for excess and obsolete inventories are based
on assessment of slow-moving and obsolete inventories, and the current
level of sales from consignment inventory. Historical part usage,
estimated future demand and anticipated transactions between willing buyers
and sellers provide the basis for estimates. Estimates are subject to
volatility and can be affected by reduced equipment utilization, the
retirement of aircraft or ground equipment and changes in the aviation
industry.

Deferred Taxes. Deferred tax assets and liabilities net of valuation
allowance, if any, reflect the likelihood of the recoverability of these
assets. Company judgement of the recoverability of these assets is based
primarily on estimates of current and expected future earnings and tax
planning.

Retirement Benefits Obligation. The Company currently determines the value
of retirement benefits assets and liabilities on an actuarial basis using
an appropriate discount rate. Values are affected by the Company's outside
actuary's estimates of the expected return on insurance policies and the
discount rates used. Changes in the discount rate used will affect the
amount of pension gain or loss recognized in other comprehensive income.
During the quarter ended December 31, 2003, the Company adjusted its
deferred retirement obligation balance after reaching a settlement with a
Company executive who resigned employment effective December 31, 2003 (see
Resignation of Executive Officer).

Revenue Recognition. Cargo revenue is recognized upon completion of
contract terms and maintenance revenue is recognized when the service has
been performed. Revenue from product sales is recognized when contract
terms are completed and title has passed to customers. Revenues from
overhaul contracts on customer owned parts, certain labor service contracts
and long term fixed price manufacturing projects are recognized on the
percentage-of-completion method. Revenues for contracts under percentage
of completion
14

are measured by the percentage of cost incurred to date, to estimated total
cost for each contract or workorder; unanticipated changes in job
performance, job conditions and estimated profitability may result in
revisions to costs and income, and are recognized in the period in which
the revisions are determined.

Seasonality

Global's business has historically been highly seasonal. Due to the
nature of its product line, the bulk of Global's revenues and earnings have
typically occurred during the second and third fiscal quarters in
anticipation of the winter season, and comparatively little has occurred
during the first and fourth fiscal quarters. The Company has continued its
efforts to reduce Global's seasonal fluctuation in revenues and earnings by
broadening its product line to increase revenues and earnings in the first
and fourth fiscal quarters. Global is currently in the fifth year of a
multi-year 1999 contract to supply deicing equipment to the United States
Air Force, and has been awarded two large scale contracts, each of which
the Company believes contributed to management's plan to reduce seasonal
airport deicer fluctuation in revenues. However, as these contracts are
completed, seasonal trends for Global's business may resume. The remainder
of the Company's business is not materially seasonal.

Results of Operations

In August 2003, the Company completed the sale of certain assets of MAS
totaling $3,006,000 for consideration of $1,885,000. The loss associated
with this disposition is reflected in discontinued operations. The
operations of MAS have been reclassified as discontinued operations and,
therefore, are not included in the Results of Continuing Operations
discussed below.

Consolidated revenue increased $7,052,000 (23.0%) to $37,659,000 and
$1,746,000 (15.5%) to $12,980,000, respectively, for the nine and three-
month periods ended December 31, 2003 compared to their equivalent 2002
periods. The nine and three-month current period net increase in revenue
primarily resulted from increased revenue at both MAC and Global, as
described in the Overview section of Item 2.

Operating expenses increased $4,879,000 (15.8%) to $35,675,000 for the
nine-month period ended December 31, 2003 and $1,535,000 (13.9%) to
$12,610,000 for the three-month period ended December 31, 2003 compared to
their equivalent 2002 periods. The change in operating expenses for the
nine-month period consisted of the following: cost of flight operations
increased $496,000 (4.8%), primarily as a result of schedule changes which
increased costs associated with airport fees, pilot salaries and travel
partially offset by decreased fuel costs; maintenance expense increased
$2,368,000 (32.3%), primarily as a result of increases in the cost of
parts, outside maintenance and maintenance salaries, related to aircraft
fleet modernization and route expansion; ground equipment increased
$1,629,000 (22.2%), as a result of higher cost of parts and labor
associated with increased Global sales; and general and administrative
expense increased $407,000 (7.8%) primarily as a result of increased profit
sharing accrual, the settlement of an executive employment agreement (see
Resignation of Executive Officer), staffing, contract labor, rent and
professional fees.

The change in operating expenses for the three-month period consisted
of the following: cost of flight operations increased $486,000 (13.5%),
primarily as a result of schedule changes which increased costs associated
with airport fees, pilot salaries and travel partially offset by decreased
fuel costs; maintenance expense increased $1,688,000 (67.9%), primarily as
a result of increased cost of parts, outside maintenance and maintenance
salaries, discussed above; ground equipment decreased $770,000 (24.9%), as a
result of lower cost of parts and labor associated with increased Global
sales; and general and administrative expense increased $135,000 (7.7%)
primarily as a result of the settlement of an executive employment agreement
(see Resignation of Edecutive Officer), increased profit sharing accrual,
staffing, rent, contract labor and professional fees.

As discussed above, the current nine-month period's increased revenues
and related operating income resulted primarily from increased production
related to commercial equipment orders and a large scale airport contract
at Global and increased service revenues in the air cargo sector. During
the nine month period ended December 31, 2003 Global's revenue and
operating income increased $2,782,000 (30.8%) and $1,222,000 (395.6%),
respectively, to $11,809,000 and $916,000, respectively, compared to the
nine months ended December 31, 2002.

15

Net non-operating income increased $340,000 and decreased $106,000,
respectively, for the nine and three-month periods ended December 31, 2003
compared to December 31, 2002. The nine and three-month increases in non-
operating income were principally due to a prior year loss on impairment of
marketable securities, increased current period cash surrender value and a
current year decrease in interest expense due to lower interest rates and
decrease in average debt outstanding.

Pretax earnings increased $2,513,000 and $316,000, respectively, for
the nine and three-month periods ended December 31, 2003, compared to their
respective December 31, 2002 periods. The nine-month increase was
principally due to the above stated increase in air cargo and ground
equipment earnings.

The provision for income taxes increased $986,000 and $110,000 for the
nine and three-month periods ended December 31, 2003, respectively compared
to their respective 2002 periods, primarily due to the increased profits
for the periods ended December 31, 2003. The effective tax rate for the
nine-month periods ended December 31, 2003 and 2002 were, respectively,
39.8% and 33.9%, the lower 2002 period rate was primarily due to state
income tax benefits.

Liquidity and Capital Resources

As of December 31, 2003 the Company's working capital amounted to
$8,558,000, a decrease of $1,028,000 compared to March 31, 2003. The change
to working capital included $300,000 payable to an executive officer, see
Resignation of Executive Officer. The net
decrease primarily resulted from decreased assets held for sale and
accounts receivable and increased accrued expenses, partially offset by
increased inventory and decreased accounts payables and billings in excess
of cost and earnings. On August 31, 2003 the Company amended its
$7,000,000 secured long-term revolving credit line to extend its expiration
date to August 31, 2005.

The credit facility contains customary events of default, a subjective
clause and restrictive covenants that, among other matters, require the
matters, require the Company to maintain certain financial ratios. There
is no requirement for the Company to maintain a lock-box arrangement under
this agreement. Under the provisions of the revolving credit line, the sale
of MAS as described in Note H. would be considered an event of default. The
Company has obtained a waiver for this covenant.
As of December 31, 2003, the Company was in compliance with all of the
restrictive covenants.

The amount of credit available to the Company under the agreement at
any given time is determined by an availability calculation, based on the
eligible borrowing base, as defined in the credit agreement, which includes
the Company's outstanding receivables, inventories and equipment, with
certain exclusions. The credit facility is secured by substantially all of
the Company's assets.

Amounts advanced under the credit facility bear interest at the 30-day
"LIBOR" rate plus 137 basis points. The LIBOR rate at December 31, 2003
was 1.11%. At December 31, 2003 and March 31, 2003, the amounts outstanding
against the line were $104,000 and $2,217,000, respectively. At December
31, 2003, an additional $2,116,000 was available under the terms of the
credit facility.

The Company has not currently, nor in the past, engaged in the use of
structured finance arrangements, known as off-balance sheet financing
transactions, with unconsolidated entities or other persons.

The Company has classified the $104,000 outstanding balance on its
credit line as of December 31, 2003 as long-term to reflect the terms
included under the amendment signed on August 31, 2003.

The respective nine-month periods ended December 31, 2003 and 2002
resulted in the following changes in cash flow: operating activities
provided $881,000 and used $159,000, investing activities provided
$1,734,000 and used $103,000 and financing activities used $2,221,000 and
provided $312,000. Net cash increased $395,000 and $51,000 for the
respective nine-month periods ended December 31, 2003 and 2002.

Cash provided by operating activities was $1,040,000 more for the nine-
months ended December 31, 2003 compared to the similar 2002 period,
principally due to increased earnings and decreased accounts receivables,
offset by increased inventory.

16

Cash provided by investing activities for the nine-months ended
December 31, 2003 was approximately $1,837,000 more than the comparable
period in 2002, principally due to
proceeds from the sale of MAS assets-discontinued operations and marketable
securities and decreased capital expenditures.

Cash used in financing activities for the nine-months ended December
31, 2003 was approximately $2,533,000 more than the comparable 2002 period,
principally due to a decrease in net borrowings under the line of credit in
2003 partially offset by a current period decrease in cash dividend.

There are currently no commitments for significant capital
expenditures. The Company's Board of Directors, on August 7, 1998, adopted
the policy to pay an annual cash dividend in the first quarter of each
fiscal year, in an amount to be determined by the board. On May 27, 2003,
the Company declared that, due to losses sustained in fiscal 2003, no
common share dividend would be paid during fiscal 2004.

Deferred Retirement Obligations

During the quarter ended December 31, 2003 the resignation of a
Company executive resulted in a $715,000 decrease in the Company's deferred
retirement obligation.

Contractual death benefits for the Company's former Chairman and Chief
Executive Officer who passed away on April 18, 1997 are payable by the
Company in the amount of $75,000 per year for 10 years from the date of his
death.

Impact of Inflation

The Company believes the impact of inflation and changing prices on
its revenues and net earnings will not have a material effect on its
manufacturing operations, because increased costs due to the currently
low level of inflation can be passed on to its customers, or on to
its air cargo business since the major cost components of
its operations, consisting principally of fuel, crew and certain
maintenance costs are reimbursed, without markup, under current contract terms.

Recent Accounting Pronouncements

The FASB has issued SFAS No. 143, "Accounting for Asset Retirement
Obligations" and SFAS No. 144, "Accounting for the Impairment or Disposal
of Long-lived Assets". SFAS No. 143 addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-
lived assets and the associated asset retirement costs. It requires that
the fair value of a liability for an asset retirement obligation be
recognized in the period in which it is incurred if a reasonable estimate
of fair value can be made. The associated asset retirement costs are
capitalized as part of the carrying amount of the long-lived asset. SFAS
No. 143 was effective for the Company beginning April 1, 2003. Adoption of
SFAS No. 143 did not have an effect on the Company's financial position and
results of operations.

SFAS No. 144 supersedes SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of" and amends
Accounting Principles Bulletin (APB) No. 30 "Reporting the Results of
Operations-Discontinued Events and Extraordinary Items". Along with
establishing a single accounting model, based on the framework established
in SFAS No. 121, for long-lived assets to be disposed of by sale, this
standard retains the basic provisions of APB No. 30 for the presentation of
discontinued operations in the income statement but broadens that
presentation to include a component of an entity. SFAS No. 144 was
effective for the Company beginning April 1, 2002. The effect of the
adoption of SFAS No. 144 on management's plan to discontinue the operations
of MAS is reflected in the Company's condensed consolidated statements of
financial position and results of operations and is detailed in Note H
Discontinued Operations in the Company's financial statements.

In November 2002, the FASB issued FASB Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others". This Interpretation elaborates on
the disclosures to be made by a guarantor in its interim and annual
financial statements about its obligations under certain guarantees that it
has issued. It also clarifies that a guarantor is required to recognize,
at the

17

inception of a guarantee, a liability for the fair value of the obligation
undertaken in issuing the guarantee. The disclosure requirements, initial
recognition and initial measurement provisions of this Interpretation are
currently effective and did not affect our financial position and results
of operations for the three and nine months ended December 31, 2003.

The Company's ground equipment subsidiary warranties its products for up to
a two-year period from date of sale. Product warranty reserves are
recorded at time of sale based on the historical average warranty cost and
are adjusted as actual warranty cost becomes known. As of December 31,
2003 the Company's warranty reserve amounted to $127,000.

Product warranty reserve activity during the nine-months ended December 31,
2003 is as follows:

Balance at 3/31/03 $116,000
Additions to reserve 111,000
Use of reserve (100,000)
Balance at 12/31/03 $127,000

In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure". This Statement amends FASB
Statement No. 123, "Accounting for Stock-Based Compensation", to provide
alternative methods of transition for a voluntary change to the fair value
based method of accounting for stock-based employee compensation. In
addition, this Statement amends the disclosure requirements of Statement
123 to require prominent disclosures in both annual and interim financial
statements about
the method of accounting for stock-based employee compensation and the
effect of the method used on reported results. The Company has elected to
continue to account for its stock-based compensation under the provisions
of Accounting Principles Bulletin No. 25. The Company has applied the fair
value recognition provisions of SFAS NO. 123 to its stock-based
compensation and has determined that there is no effect on net income and
earnings per share for the three-month and nine-month periods ended
December 31, 2003 and 2002 respectively.

In January 2003, the FASB issued FASB Interpretation No. 46, Consolidation
of Variable Interest Entities ("FIN 46"). This Interpretation requires
that variable interest entities created after January 31, 2003, and
variable interest entities in which an interest is obtained after that
date, be evaluated for consolidation into an entity's financial
statements. For variable interest entities created or acquired prior to
that date, the provisions of FIN 46 must be applied for the first interim
or annual period ending after December 31, 2003. The adoption of FIN 46 is
not expected to have an impact on the Company's consolidated financial
statements.

In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity".
SFAS No. 150 is effective for the Company beginning July 1,2003, although
FASB has recently proposed that implementation of certain provisions of
SFAS NO. 150 be postponed indefinitely. The Company has determined that
the adoption of SFAS No. 150 will not have an impact on the Company's
financial position or results of operations.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

The Company does not hold or issue derivative financial instruments for
trading purposes. On October 30, 2003 the Company terminated its remaining
credit line swap for $97,500. As of December 31, 2003 the Company had
outstanding no interest rate swap agreement to reduce its exposure to the
fluctuations of LIBOR-based variable interest rates.

Item 4. Controls and Procedures

The Company's Chief Executive Officer and Chief Financial Officer have
evaluated the Company's disclosure controls and procedures as of the end of
the period covered by this Quarterly Report on Form 10-Q, and they have
concluded that these disclosure controls and procedures are effective.

18

During the nine month period ended December 31, 2003, the Company made
certain changes to its internal control procedures related to operations to
enhance procedures to verify the independence of vendors and to
periodically review nonstandard payment terms required by vendors. There
was no change in internal controls over financial reporting during or
subsequent to the most recent fiscal quarter that has materially affected,
or is reasonably likely to materially affect, the Company's internal
control over financial reporting.

PART II -- OTHER INFORMATION

Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits

No. Description

3.1 Restated Certificate of Incorporation, incorporated by reference to
Exhibit 3.1 of the Company's Quarterly Report on Form 10-Q for the period
ended December 31, 2003

3.2 By-laws of the Company, as amended, incorporated by reference to
Exhibit 3.2 of the Company's Annual Report on Form 10-K for the fiscal year
ended March 31, 1996

4.1 Specimen Common Stock Certificate, incorporated by reference to
Exhibit 4.1 of the Company's Annual Report on Form 10-K for the fiscal year
ended March 31, 1994

21.1 List of subsidiaries of the Company, incorporated by reference to
Exhibit 21.1 to the Company's Quarterly Report on Form 10-Q for the period
ended September 30, 1997

31.1 Section 302 Certification of Walter Clark

31.2 Section 302 Certification of John J. Gioffre

32.1 Section 906 Certification of Walter Clark

32.2 Section 906 Certification of John J. Gioffre

_______________________

(b) Reports on Form 8-K

No Current Reports on Form 8-K were filed in the three months ended
December 31, 2003.

19

SIGNATURES

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

AIR T, INC.
(Registrant)

Date: February 09, 2004 /s/ Walter Clark
Walter Clark, Chief Executive Officer

Date: February 12, 2004 /s/ John Gioffre
John J. Gioffre, Chief Financial Officer

20

AIR T, INC
EXHIBIT INDEX

PAGE

31.1 Section 302 Certification of Walter Clark 22

31.2 Section 302 Certification of John J. Gioffre 23

32.1 Section 906 Certification of Walter Clark 24

32.2 Section 906 Certification of John J. Gioffre 25

21