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 September 30, 2004
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

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.

2,658,334 Common Shares, par value of $.25 per share were outstanding
as of October 18, 2004.

This filing contains 28 pages.

AIR T, INC. AND SUBSIDIARIES

INDEX

Page
PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Condensed Consolidated Statements of Operations
for the three and six-month periods ended
September 30, 2004 and 2003 (Unaudited) 3

Condensed Consolidated Balance Sheets at
September 30, 2004 (Unaudited)
and March 31, 2004 4

Condensed Consolidated Statements of Cash
Flows for the six-month periods
ended September 30, 2004 and 2003 (Unaudited) 5

Condensed Consolidated Statements of Stockholders'
Equity and Comprehensive Income (Loss) for the
six-month periods ended September 30,
2004 and 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 13-21

Item 3. Quantitative and Qualitative Disclosure
About Market Risk 21

Item 4. Controls and Procedures 21

PART II. OTHER INFORMATION

Item 6. Exhibits and Reports on Form 8-K 22

Signatures 23

Exhibit Index 24

Officers' Certifications 25-27

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 STATEMENTS OF STOCKHOLDERS' EQUITY
AND COMPREHENSIVE INCOME (LOSS) (UNAUDITED)

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

1. Financial Statement Presentation

The Condensed Consolidated Balance Sheet as of September 30, 2004 and
the Condensed Consolidated Statements of Operations, Condensed Consolidated
Statements of Cash Flows and the Condensed Consolidated Statements of
Stockholders' Equity and Comprehensive Income (Loss), for the periods ended
September 30, 2004 and 2003 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 consolidated financial position, results of operations
and cash flows as of September 30, 2004, and for prior periods presented,
have been made.

It is suggested that these financial statements be read in conjunction
with the consolidated financial statements and notes thereto included in
the Company's Annual Report on Form 10-K/A for the year ended March 31,
2004. The results of operations for the period ended September 30 are not
necessarily indicative of the operating results for the full year.

Current reclassifications have been made to fiscal 2004 amounts to
conform to the current year presentation.

2. 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 September 30, 2004 and March 31, 2004 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 provisions for continuing operations for the respective
three and six-months ended September 30, 2004 and 2003 differ from the
federal statutory rate primarily as a result of state income taxes and, to
a lesser extent, permanent tax differences.

3. Net Earnings Per Share

Basic earnings (loss) per share has been calculated by dividing net
earnings by the weighted average number of common shares outstanding during
each period. For purposes of calculating diluted earnings 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. As of September 30, 2004 all stock options
were dilutive.

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

Three Months Ended Six Months Ended
September 30, September 30,
2004 2003 2004 2003

Net earnings $ 538,290 $ 358,419 $1,071,566 $ 707,207

Basic and Diluted Earnings
(Loss)
Per Share:
Continuing Operations $ 0.20 $ 0.22 $ 0.40 $ 0.39
Discontinued Operations - (0.09) - (0.13)
Total Basic and Diluted
Net Earnings Per Share $ 0.20 $ 0.13 $ 0.40 $ 0.26

Weighted Average Shares
Outstanding:
Basic 2,657,334 2,726,320 2,672,081 2,726,320
Plus: Incremental
shares from stock
options 35,675 7,294 30,942 -
Diluted 2,693,009 2,733,614 2,703,023 2,726,320

4. Inventories

Inventories consist of the following:

September 30, 2004 March 31, 2004
Aircraft parts and supplies $ 2,023,746 $ 2,053,665
Aircraft equipment
manufacturing:
Raw materials 4,180,820 3,508,363
Work in process 1,424,787 1,563,259
Finished goods 568,020 920,149
Total inventory 8,197,373 8,045,436
Reserves (1,611,475) (1,585,364)

Total, net of reserves $ 6,585,898 $ 6,460,072

5. Recent Accounting Pronouncements

In November 2002, the FASB issued FASB Interpretation (FIN) No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others".

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.

Product warranty reserve activity during the six-months ended September 30,
2004 and 2003 are as follows:

Six Months Ended
September 30,
2004 2003

Beginning balance $ 147,000 $ 116,000
Additions to reserve 65,000 66,000
Use of reserve (56,000) (32,000)
Ending balance $ 156,000 $ 150,000

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, due to the fact that no
stock options were granted since fiscal 2000, there is no effect on
proforma net income and proforma earnings per share for the six-month
periods ended September 30, 2004 and 2003.

6. Derivative Financial Instruments

As required by SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities" as amended, 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 $62,044 included in accumulated
other comprehensive income (loss) at date of termination is being ratably
amortized into interest expense over the remaining term of the Company's
credit line.

7. Financing Arrangements

In August 2004 the Company amended its $7,000,000 secured long-term
revolving credit line to extend its expiration date to August 31, 2006. In
order to more closely match the credit line's limits to the Company's
financing needs in light of its current cash balances, the Company agreed
to reduce the credit line's limit to $3,500,000 from September 1, 2004 to
December 31, 2004. 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. As of September 30, 2004, 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. At September 30, 2004, $2,791,000 was available under the
terms of the credit facility. 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 September 30, 2004
was 1.84%. At September 30, 2004 and March 31, 2004, the amounts
outstanding against the line were $709,000 and $132,000, respectively.

In March 2004, the Company utilized its revolving credit line to acquire a
corporate aircraft for $975,000. In April 2004, the Company refinanced the
aircraft under a secured 4.35% fixed rate five-year term loan, based on a
ten year amortization with a balloon payment at the end of the fifth year.

8. 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 consideration of
$1,950,000. On August 14, 2003, the Company closed on the transaction for
consideration totaling $1,885,000, comprised of $1,550,000 in cash and a
$335,000 promissory note. The sale resulted in the recognition of losses
totaling $1,121,000. In conjunction with the 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 sale agreement, the Company also entered into a
three-year consignment agreement granting the buyer an exclusive right to
sell the remaining MAS inventory not included in the sale transaction. Upon
termination of the consignment agreement, all unsold inventory will be
returned to the Company. Inventory on consignment, net of applicable
reserves, under this agreement amounted to $671,000 as of September 30,
2004. The accompanying fiscal 2004 condensed consolidated financial
statements reflects the sale of certain MAS assets and the net operations
of MAS as discontinued operations, net of tax, for all periods presented.

A summary of the operating results of the discontinued operations for
the six-months ended September 30, 2004 and 2003 is as follows:

2004 2003

Revenue $ - $ 2,565,931

Operating Loss $ - $ (373,819)

Loss before income taxes $ - $ (571,897)
Income tax benefit - 223,040

Net loss $ - $ (348,857)

9. 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. The operations of MAS are, therefore,
not presented in the segment 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 primarily to one customer,
Federal Express Corporation, and the ground equipment segment encompasses
the operations of Global Ground Support, LLC.

The Company evaluates the performance of its operating segments based
on operating income from continuing operations.

Segment data is summarized as follows:

Three months ended Six months ended
September 30, September 30,
2004 2003 2004 2003

Operating Revenues
Overnight Air Cargo $ 9,552,478 $ 8,514,306 $18,603,606 $15,799,774
Ground Equipment 6,813,166 5,108,772 12,848,871 8,879,365
Total $16,365,644 $13,623,078 $31,452,477 $24,679,139

Operating Income(Loss)(1)
Overnight Air Cargo $ 498,486 $ 814,658 $ 1,280,692 $ 1,658,735
Ground Equipment 726,503 694,083 1,361,971 1,011,605
Corporate (2) (314,115) (563,602) (859,891) (1,041,755)
Total $ 910,874 $ 945,139 $ 1,782,772 $ 1,628,585

Depreciation and
Amortization
Overnight Air Cargo $ 94,581 $ 55,675 $ 210,712 $ 110,476
Ground Equipment 30,813 40,399 61,144 82,067
Corporate 13,687 41,746 27,857 82,834
Total $ 139,081 $ 137,820 $ 299,713 $ 275,377

Capital
Expenditures, net
Overnight Air Cargo $ 109,168 $ 23,534 $ 124,425 $ 32,148
Ground Equipment - 11,131 4,232 15,548
Corporate 63,805 22,548 84,625 23,345
Total $ 172,973 $ 57,213 $ 213,282 $ 71,041

As of
September 30, March 31,
2004 2004
Identifiable Assets
Overnight Air Cargo $ 6,094,443 $ 5,727,470
Ground Equipment 11,096,380 9,646,490
Corporate 5,112,033 3,093,449

Total $22,302,856 $18,467,409

(1) Reclassifications have been made to fiscal 2004 amounts to reflect
current period changes in allocations of corporate administrative
costs.
(2) Includes income from inter-segment
transactions.

10. Resignation of Executive Officer

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

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.

During the third quarter of fiscal 2004 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 resulted in a $305,000 reductionthe
offset of which write-off 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.

During the third quarter of fiscal 2004 the Company also agreed to
buyback purchase from the former executive officer 118,480 shares of the
Company 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 approximately equal 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 and all
such stock will be subsequently retired.

The first two installment payments required to be made under the above
agreements were made on January 12 and July 7, 2004, the third, and final,
installment is scheduled to be made on January 7, 2005.

11. Commitments and Contingencies

Global and one of its former employees are defendants in a
lawsuit commenced in March 2002 in the United States District Court for the
District of Columbia, Catalyst & Chemical Services, et al. vs Global Ground
Support, LLC, et al., Case No. 1:02CV00388. The plaintiffs claim to have
developed a novel method of aircraft de/ant-icing, and allege that the
system is the subject of trade secrets and a patent. The plaintiffs allege
that the defendants misappropriated the trade secrets, breached a
confidentiality agreement, and infringed the patent. The defendants deny
all the claims and have defended the lawsuit vigorously. Discovery has
been completed, with the exception of the deposition of the plaintiffs'
damages expert witness which has not been scheduled. On May 7, 2004, the
defendants moved for summary judgment on all claims. The plaintiffs have
moved for summary judgment on the patent infringement claim. The summary
judgment motions have been fully briefed and the parties' are awaiting the
Court's ruling. No trial date has been set. If any of the plaintiffs'
claims survive the defendants' summary judgment motion, trial is expected
to be conducted in the first quarter of 2005.

The Company is currently involved in certain intellectual property,
personal injury and environmental matters, which involve pending or
threatened lawsuits. Management believes the results of these pending or
threatened lawsuits will not have a material adverse effect on the
Company's results of operations or financial position.

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

As discussed above, during fiscal 2003, the Company decided to
discontinue and dispose of its aircraft component parts brokerage and
repair services business operated by its Mountain Aircraft Services, LLC
(MAS) subsidiary and accordingly, the Company's consolidated financial
statements have been reclassified to reflect the results of MAS as a
discontinued operation. See Note 8 Discontinued Operations of Notes to
Condensed Consolidated Financial Statements. Consequently, MAS' operations
are not included in the Results of Continuing Operations discussed below,
however, continuing operations reflect certain residual cost associated
with discontinued operations.

Overview

The Company's continuing operations operate in two business segments,
providing overnight air cargo services to the express delivery services
industry and aviation ground support and other specialized equipment
products to passenger and cargo airlines, airports, the military and
industrial customers. Each business segment has separate management teams
and infrastructures that offer different products and services. The
subsidiaries make up the following reportable segments: air cargo and
ground equipment in the accompanying condensed consolidated financial
statements.

The Company's most significant component of revenue, which accounted
for approximately 59%, of revenue for the six-months ended September 30,
2004, was generated through its overnight air cargo subsidiaries, Mountain
Air Cargo, Inc. (MAC) and CSA Air, Inc. (CSA).

MAC and CSA provide short-haul express air freight services primarily
to one customer, Federal Express Corporation (the customer). Separate
agreements cover the four types of aircraft operated by MAC and CSA for
their customer-Cessna Caravan, ATR-42, Fokker F-27, and Short Brothers SD3-
30. Cessna Caravan, ATR-42 and Fokker F-27 aircraft (a total of 93 revenue
aircraft at September 30, 2004) are owned by and dry-leased from the
Customer. Two Short Brothers SD3-30 aircraft are owned by the Company.
The SD3-30's are operated periodically 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.

Under the terms of the dry-lease service agreements which currently
cover approximately 98% of the revenue aircraft operated, the Company
charges an administrative fee and passes through to its customer certain
other 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.

MAC and CSA's revenue contributed approximately $18,604,000 and
$15,800,000 to the Company's revenues for the six-month periods ended
September 30, 2004 and 2003, respectively, a current year increase of
approximately 18%. The increase in revenue was primarily attributed to
$2,144,000 of increased direct operating costs, passed through to customer,
and an increased volume of maintenance services, related to customer fleet
modernization and route expansion, provided during the current period,
partly offset by decreased administrative fees as older Fokker F-27
aircraft were retired from service prior to the pending introduction of
newer ATR-42 replacement aircraft.

The air cargo segments' operating income decreased $378,000 to
$1,281,000 for the six-month period ended September 30, 2004 compared to
the prior year period principally due to the temporary effects of the
customer's modernization of the aircraft fleet, as well as route expansion.
Revenues from that segment's administrative fees (which are based on the
number of aircraft operated) declined due to delays in the customer's
introduction of newer technology aircraft to replace the older aircraft
removed from service. In addition, administrative costs increased as
additional staffing was put in place to oversee the phase-in of the newer
aircraft and the expansion in the number of routes.

Global Ground Support, LLC (Global), which provided the remaining 41%
of the Company's revenues for the six months ended September 30, 2004,
manufactures, services and supports aviation ground support and specialized
military and industrial equipment on a worldwide basis. On January 23, 2004
the Company received a three-year extension to its existing four-year
supply agreement with the U.S. Air Force. Global's revenue contributed
approximately $12,849,000 and $8,879,000 to the Company's revenues for the
six-month periods ended September 30, 2004 and 2003, respectively. The 45%
increase in revenues was primarily related to a current period $5,479,000
increase in military equipment orders, partially offset by the completion
of a large scale airport contract during the previous six-month period.
This shift in the mix of products sold during the period reduced operating
margins from the comparable prior period. Global's operating income
increased $351,000 to $1,362,000 for the six-months ended September 30,
2004 compared to the prior year period due principally to an increase in
the level of orders under the long-term supply contract with the U.S. Air
Force, which was offset in part by the inclusion in the prior year period
of revenues from a large-scale airport contract which was principally
completed in the third quarter of fiscal 2004.

Outlook

The Company's current outlook for fiscal 2005 assumes that, due to
significantly higher fuel cost and increased losses sustained by commercial
carriers since September 11, 2001, the commercial aviation market will grow
at a rate that is substantially less than the rest of the economy.

Current period orders from the military, lower cost airlines and
aviation service providers have helped offset the lower than normal order
levels experienced from Global's major commercial ground equipment
customers. During the first half of fiscal 2005 MAC's air cargo customer
experienced delays in introducing its newer replacement aircraft into
revenue service. Company management currently anticipates ground equipment
orders will remain level and that its air cargo customer will continue its
aircraft fleet modernization program through fiscal 2005, however, future
aircraft conversion delays, terrorist attacks, competition or inflation may
cause further delays or termination of certain customer orders or projects.

As stated above, during the second quarter of fiscal 2004, Company
management closed on its agreement to sell certain MAS assets and to
discontinue the operations of the Company's aviation service sector
business. The completion of this sale and resulting decrease in operating
losses experienced by this business segment are expected to continue to
improve the Company's overall operating results and financial position
throughout fiscal 2005, as compared to fiscal 2004. As detailed in
Footnote 8 Discontinued Operations, under the terms of the sale agreement,
the Company retained certain inventory which was consigned to the buyer for
sale under a three-year consignment agreement. Future changes in the
market value of this inventory could negatively affect the carrying value
of the inventory on the Company's books. Reductions in the carrying value
of the inventory would negatively affect net earnings.

Based on the current general economic and industry outlook and cost-
cutting measures implemented over the past two fiscal years, the Company
believes its existing cash and cash equivalents, cash flow from operations,
and funds available from current and renewed
credit facilities will be adequate to meet its current and anticipated
working capital requirements through fiscal 2005. If these sources are
inadequate or become unavailable, then the Company may pursue additional
funds through the financing of unencumbered assets, although there is no
assurance these additional funds will be sufficient.

Actual results for fiscal 2005 will depend upon a number of factors
beyond the Company's control, including, in part, future significant
increases in the rate of inflation, including fuel prices, the timing,
speed and magnitude of the economic recovery, military funding of pending
future equipment orders, future levels of commercial aviation capital
spending, future terrorists acts and market value of used aviation parts
and components systems.

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 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, valuation of
revenue recognized under the percentage of completion method and valuation
of long-lived assets.

Following is a discussion of critical accounting policies and related
management estimates and assumptions.

Allowance for Doubtful Accounts. An allowance for doubtful accounts
receivable in the amount of $340,000 and $368,000, respectively, at
September 30, 2004 and March 31, 2004, was 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 financial
strength of 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 in the
amount of $1,611,000 and $1,585,000, respectively, at September 30, 2004
and March 31, 2004, are based on assessment of slow-moving and obsolete
inventories. Historical part usage, current period sales, 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, existing supplies of used
inventory available for sale, the retirement of aircraft or ground
equipment and changes in the financial strength of the aviation industry.

Deferred Taxes. Deferred tax assets and liabilities, net of valuation
allowance in the amount of $83,000, at September 30, 2004 and March 31,
2004, reflect the likelihood of the recoverability of these assets.
Company judgment 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 a 5.75% discount rate. Long-term deferred retirement benefit
obligations amounted to $1,536,000 and $1,462,000, respectively, at
September 30, 2004 and March 31, 2004. Values are affected by current
independent indices, which estimate the expected return on insurance
policies and the discount rates used. Changes in the discount rate used
will affect the amount of pension liability as well as pension gain or loss
recognized in other comprehensive income.

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. Billings in excess of
cost and estimated earnings for contracts under percentage of completion
amounted to $80,000 at September 30, 2004 and March 31, 2004. Revenues are
measured by the percentage of cost incurred to date, to estimated total
cost for each contract or work order; 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.

Valuation of Long-Lived Assets. The Company assesses long-lived
assets used in operations for impairment when events and circumstances
indicate the assets may be impaired and the undiscounted cash flows
estimated to be generated by those assets are less than their carrying
amount. In the event it is determined that the carrying values of long-
lived assets are in excess of the fair value of those assets, the Company
then will write-down the value of the assets to fair value. The Company
has applied the discontinued operations provisions of SFAS No. 144 for the
MAS operations and has reflected any remaining long-lived assets associated
with the discontinued MAS subsidiary at zero fair market value at September
30, 2004.

Resignation of Executive Officer

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

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.

During the third quarter of fiscal 2004 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 resulted in a $305,000 reductionthe
offset of which write-off 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.

During the third quarter of fiscal 2004 the Company also agreed to
buyback purchase from the former executive officer 118,480 shares of the
Company 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 approximately equal 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 and all
such stock will be subsequently retired.

The first two installment payments required to be made under the above
agreements were made on January 12 and July 7, 2004, the third and final,
installment is scheduled to be made on January 7, 2005.

Seasonality

Global's business has historically been seasonal. Due to the nature
of its product line, the bulk of Global's revenues and earnings have
historically occurred during the second and third fiscal quarters in
anticipation of the winter season, although in most recent periods the
Company's efforts to reduce seasonal fluctuations have ameliorated this
seasonal trend. 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. In June 1999, Global was awarded a four-year contract to supply
deicing equipment to the United States Air Force, and in June 2003 Global
was awarded a three-year extension on the contract. In January 2001 and
March 2003 Global received two large scale, fixed-stand deicer contracts,
which the Company believes contributed to management's plan to reduce
seasonal fluctuation in revenues during fiscal 2002 and 2004. However,
these fixed-stand deicer contracts have been completed, and seasonal trends
for Global's business may resume, unless offset by additional revenue from
other sources. The remainder of the Company's business is not materially
seasonal.

Results of Operations

Consolidated revenue increased $6,773,000 (27.5%) to $31,452,000 and
$2,743,000 (20.1%) to $16,365,000, respectively, for the six and three-
month periods ended September 30, 2004 compared to their equivalent 2003
periods. The six and three-month current period net increase in revenue
primarily resulted from increased revenues in both the air cargo and ground
equipment business segment, as detailed above in Overview.

Operating expenses increased $6,619,000 (28.7%) to $29,670,000 for the
six-month period ended September 30, 2004 and $2,777,000 (21.9%) to
$15,455,000 for the three-month period ended September 30, 2004 compared to
their equivalent 2003 periods. The change in operating expenses for the
six-month period consisted of the following: cost of flight operations
increased $1,085,000 (15.8%) primarily as a result of increased direct
operating costs, including fuel, airport fees, pilot staffing, and costs
associated with pilot travel, due to increased cost of oil and customer
flight schedule changes and increased administrative staffing due to fleet
modernization and route expansion programs; maintenance expense increased
$1,807,000 (32.6%) primarily as a result of increases in cost of
maintenance personnel, cost of travel, contract services, parts and outside
maintenance related to customer fleet modernization and route expansion;
ground equipment increased $3,328,000 (50.1%), as a result of increased
cost of parts and supplies and assembly line personnel related to increased
customer order backlog; depreciation and amortization increased $24,000
(8.8%) as a result of purchases of capital assets; and general and
administrative expense increased $374,000 (10.0%) primarily as a result of
increased professional fees, corporate aircraft costs, telephone costs, and
staffing, offset by decreased profit sharing provision due to management
changes.

The change in operating expenses for the three-month period consisted
of the following: cost of flight operations increased $504,000 (13.6%),
primarily as a result of increased direct operating cost associated with
route schedule changes and expansion which increased the cost of fuel,
pilot salaries, travel and airport fees and administration; maintenance
expense increased $645,000 (20.6%), primarily as a result of increased cost
of parts, outside maintenance, travel and maintenance salaries stated
above; ground equipment increased $1,540,000 (40.7%), as a result of higher
cost of parts and labor associated with increased Global sales; and general
and administrative expense increased $87,000 (4.5%) primarily as a result
of increased professional fees, corporate aircraft costs and telephone
costs, offset by decreased profit sharing provision due to management
changes.

The current six-month period's increased operating income ($154,000)
resulted primarily from increased ground equipment sector revenues and
operating income related to current period's higher levels of military
equipment orders, partly offset by the prior period completion of a large
scale airport contract; the equipment sector's increase was offset by a net
decrease in the air cargo sector's operating income. The net decrease in
air cargo operating income was due to a combination of temporarily
decreased administrative fees which resulted from delays in the
introduction of replacement aircraft, currently undergoing conversion to
cargo configuration, as older cargo aircraft are phased out of service, and
higher levels of current period administrative costs as additional staffing
has been put in place to oversee the phase-in of the newer aircraft and
route expansion.

Net non-operating expense increased $155,000 and $79,000,
respectively, for the six and three-month periods ended September 30, 2004
compared to September 30, 2003. The six and three-month months increase in
non-operating expense was principally due to increased interest expense
recognized by continuing operations during the current periods and a
reduction in investment income from marketable securities during the
periods ended September 30, 2004.

Pretax earnings from continuing operations decreased $1,000 and
$114,000, respectively, for the six and three-month periods ended September
30, 2004, compared to their respective September 30, 2003 periods,
principally due to the above stated increased administrative cost and
decreased administrative fees associated with the, respective, air cargo
aircraft fleet modernization and delayed introduction of replacement
aircraft.

The provision for income taxes decreased $40,000 and $17,000 for the
six and three-month periods ended September 30, 2004, respectively compared
to their respective 2003 periods, primarily due to the decreased earnings
from continuing operations for the periods ended September 30, 2004. The
effective tax rate for the three and six-month periods ended September 30,
2004 and 2003 averaged approximately 40%.

Liquidity and Capital Resources

As of September 30, 2004 the Company's working capital amounted to
$10,515,000, an increase of $2,187,000 compared to March 31, 2004. The net
increase primarily resulted from increases in cash and cash equivalents and
accounts receivable, partially offset by an increase in accounts payable.

In August 2004 the Company amended its $7,000,000 secured long-term
revolving credit line to extend its expiration date to August 31, 2006. In
order to more closely match the credit line's limits to the Company's
financing needs, the credit line limits were amended to $3,500,000 from
September 1, 2004 to December 31, 2004 and $7,000,000 from January 1, 2005
to expiration date. 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. As of September 30, 2004, 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. At September 30, 2004, $2,791,000 was available under the
terms of the credit facility. 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 September 30, 2004
was 1.84%. At September 30, 2004 and March 31, 2004, the amounts
outstanding against the line were $709,000 and $132,000, respectively.

In March 2004, the Company utilized its revolving credit line to
acquire a corporate aircraft for $975,000. In April 2004, the Company
refinanced the aircraft under a secured 4.35% fixed rate five-year term
loan, based on a ten year amortization with a balloon payment at the end of
the fifth year.

The Company assumes various financial obligations and commitments in
the normal course of its operations and financing activities. Financial
obligations are considered to represent known future cash payments that the
Company is required to make under existing contractual arrangements such as
debt and lease agreements. A table representing the scheduled maturities
of the Company's contractual obligations as of March 31, 2004 was included
under the heading "Contractual Obligations" on page 14 of the Company's
2004 Annual report on Form 10-K filed with the SEC on June 24, 2004. There
were no significant changes from the table referenced above during the
quarter ended September 30, 2004, except for the aircraft refinancing
discussed above.

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 respective six-month periods ended September 30, 2004 and 2003
resulted in the following changes in cash flow: operating activities
provided $821,000 and $481,000 in 2004 and 2003, respectively, investing
activities used $158,000 in 2004 and provided $1,805,000 in 2003, and
financing activities provided $850,000 in 2004 and used $1,953,000 in 2003.
Net cash increased $1,513,000 and $333,000 during the six months ended
September 30, 2004 and 2003, respectively.

Cash provided by operating activities was $340,000 more for the six-
months ended September 30, 2004 compared to the similar 2003 period,
principally due to increased earnings and accounts payable and decreased
inventories, partly offset by increased accounts receivables.

Cash used in investing activities for the six-months ended September
30, 2004 was approximately $1,963,000 more than the comparable period in
2003 due to the sale of discontinued operations and proceeds from a sale of
marketable securities in the six-months ended September 30, 2003.

Cash provided by financing activities was $2,803,000 more in the 2004
six-month period than in the corresponding 2003 period due to current
period aircraft financing and net borrowings on the line of credit,
partially offset by the payment of a 2004 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, based on profitablility and
other factors, in the first quarter of each fiscal year, in an amount to be
determined by the Board. The Company paid a $0.20 per share cash dividend
in June 2004.

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 $62,044
included in accumulated other comprehensive income (loss) at date of
termination is being ratably amortized into interest expense over the
remaining term of the Company's credit line.

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. As of September 30, 2004, $64,000 has been reflected as a current
liability and $147,000 has been reflected as a long-term liability
associated with this death benefit.

Impact of Inflation

If interest rates continue to rise, the Company believes the impact
of inflation and changing prices on its revenues and net earnings could
have a material effect on its manufacturing operations if the Company
cannot increase prices to pass the additional costs on to its customers.
Although the Company's air cargo business can pass through the major direct
operating cost components of its operations, without markup, under its
current contract terms, higher rates of inflation could affect our
customer's current business plans.

Recent Accounting Pronouncements

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".

The initial recognition and initial measurement provisions of this
Interpretation are applicable on a prospective basis to guarantees issued
or modified after December 31, 2002. The Company has evaluated all of its
guarantees under the provisions of FIN 45 and does not believe the effect
of its adoption on its financial position and results of operations will be
material.

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.

Product warranty reserve activity during the six-months ended September 30,
2004 and 2003 are as follows:

Six Months Ended
September 30,
2004 2003

Beginning balance $ 147,000 $ 116,000
Additions to reserve 65,000 66,000
Use of reserve (56,000) (32,000)
Ending balance $ 156,000 $ 150,000

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. Because
the Company has elected to continue to account for its stock-based
compensation under the provisions of Accounting Principles bulletin No. 25,
SFAS No. 148 has no impact on the Company's consolidated statement of
operations for the periods ended September 30, 2004 and 2003.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Quantitative and qualitative disclosures about market risk are included in
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Continuing Operations.

Item 4. Controls and Procedures

As of the end of the period covered by this report, management,
including the Company's Chief Executive Officer and Chief Financial
Officer, evaluated the effectiveness of the design and operation of our
disclosure controls and procedures with respect to the information
generated for use in this report. Based upon, and as of the date of that
evaluation, the Chief Executive Officer and the Chief Financial Officer
concluded that the disclosure controls and procedures were effective to
provide reasonable assurance that information required to be disclosed in
the reports we file or submit under the Securities Exchange Act of 1934 is
recorded, processed, summarized and reported within the time periods
specified in the Commission's rules and forms.

There were no changes in the Company's internal control over financial
reporting during or subsequent to the three months ended September 30, 2004
that has materially affected, or is reasonably likely to materially affect,
our internal control over financial reporting.

It should be noted that while the Company's management, including the
Chief Executive Officer and the Chief Financial Officer, believe that the
Company's disclosure controls and procedures provide a reasonable level of
assurance, they do not expect that the disclosure controls and procedures
or internal controls will prevent all error and all fraud. A control
system, no matter how well conceived or operated, can provide only
reasonable, not absolute, assurance that the objectives of the control
system are met. Further, the design of a control system must reflect the
fact that there are resource constraints, and the benefits of controls must
be considered relative to their costs. Because of the inherent limitations
in all control systems, no evaluation of controls can provide absolute
assurance that all control issues and instances of fraud, if any, within
the Company have been detected. These inherent limitations include the
realities that judgments in decision-making can be faulty, and that
breakdowns can occur because of simple error or mistake. Additionally,
controls can be circumvented by the individual acts of some persons, by
collusion of two or more people, or by management override of the controls.
The design of any system of controls is based in part upon certain
assumptions about the likelihood of future events, and there can be no
assurance that any design will succeed in achieving its stated goals under
all potential future conditions; over time, controls may become inadequate
because of changes in conditions, or the degree of compliance with the
policies or procedures may deteriorate. Because of the inherent
limitations in a cost-effective control system, misstatements due to error
or fraud may occur and not be detected.

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 September 30, 2001

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

10.1 Amendment No 3 to Loan Agreement among Bank of America N.A. the
Company and its subsidiaries, dated as of August 31, 2004, incorporated
by reference to Exhibit 10.1 of the Company's Current Report on Form 8-
K dated October 25, 2004

31.1 Certification of Walter Clark

31.2 Certification of John J. Gioffre

32.1 Section 1350 Certification

b. Reports on Form 8-K

The Company furnished a Current Report Form 8-K on July 29, 2004,
which was amended later on July 29, 2004, to report under Item 12
the financial results for the three months ended June 30, 2004.

On July 30, 2004, the Company furnished two amendments to previously
filed Current Reports on Form 8-K that had reported financial
results for prior periods pursuant to Item 12 to correct Formatting
errors in those Current Reports.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.

AIR T, INC.

By: /s/ Walter Clark
Walter Clark, Chief Executive Officer
(Principal Executive Officer)

Date: November 4, 2004

By: /s/ John J. Gioffre
John J. Gioffre, Chief Financial Officer
(Principal Financial and Accounting Officer)

Date: November 4, 2004

AIR T, INC.
EXHIBIT INDEX

Exhibit Number Document

31.1 Certification of Walter Clark
31.2 Certification of John Gioffre
32.1 Section 1350 certification