UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K

Commission File Number 0-26582

World Air Holdings, Inc.

(Exact name of registrant as specified in its charter)

Registrant’s telephone number, including area code:

(770) 632-8002

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

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

Common Stock ($.001 par value)

(Title of Class)

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

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

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

      Aggregate market value of Common Stock held by non-affiliates as of June 30, 2004 was approximately $42,617,000.

      As of the close of business on March 30, 2005, 23,510,452 shares of Common Stock were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

      Portions of World Air Holdings, Inc.’s Notice of Annual Stockholder’s Meeting and Proxy Statement, to be filed within 120 days after the end of the registrant’s fiscal year, are incorporated by reference into Part III of this Report.

WORLD AIR HOLDINGS, INC.

2004 ANNUAL REPORT ON FORM 10-K

TABLE OF CONTENTS

      Throughout this Annual Report, all references to the “Company,” “World Air Holdings,” “we,” “us” and “our” refer to World Air Holdings, Inc., a Delaware corporation, and its wholly-owned subsidiaries, including, but not limited to, World Airways, Inc., a Delaware corporation (“World Airways”), unless otherwise indicated or the context otherwise requires.

PART I

      Effective January 10, 2005, World Airways, Inc. was reorganized into a holding company structure, which was effected through a merger conducted pursuant to Section 251(g) of the General Corporation Law of the State of Delaware, which does not require stockholder approval. The charter and bylaws of World Air Holdings are the same as the previous charter and bylaws of World Airways, and the directors of World Air Holdings are the same as the directors of World Airways. All of the outstanding shares of common stock of World Airways have been converted on a share-for-share basis into shares of common stock of World Air Holdings (the “Common Stock”), and all stockholders of World Airways became stockholders of World Air Holdings through a non-taxable transaction. Stock certificates representing shares of common stock of World Airways are deemed to represent shares of Common Stock of World Air Holdings until exchanged in the ordinary course as a result of transfers for stock certificates bearing the name of World Air Holdings. The principal executive offices of World Air Holdings are located in The HLH Building, 101 World Drive, Peachtree City, Georgia 30269, and the Company’s telephone number is (770) 632-8002.

      The accompanying consolidated financial statements include the accounts of World Air Holdings and its wholly owned subsidiaries, World Airways and World Risk Solutions, Ltd. (“World Risk Solutions”). World Airways Parts Company, LLC is a wholly-owned subsidiary of World Airways.

      World Airways was organized in March 1948 and is a U.S. certificated air carrier. Airline operations account for 100% of World Air Holdings’ operating revenue. World Airways provides long-range passenger and cargo charter and wet lease air transportation, serving the U.S. Government, international passenger and cargo air carriers, tour operators, international freight forwarders and cruise ship companies. As of December 31, 2004, the Company operated twelve MD-11 and four DC-10-30 aircraft.

      World Risk Solutions, a Bermuda corporation, was formed in November 2004 to improve risk management operations and to provide additional opportunities for growth. We believe it will initially provide certain insurance cost savings, enhanced risk management programs and better loss control practices to the Company. All significant risks of loss are reinsured by large third party insurance companies. Management has elected to report World Risk Solutions as a taxable entity in the United States.

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

Available Information

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

posted on the Company’s website. The Company will disclose any amendments to, or waivers of, this Code of Ethics on its website.

Recent Developments

      In March 2005, World Airways signed an ACMI (aircraft costs excluding fuel, crew, maintenance and insurance) contract to provide MD-11 freighter service for Thai Air Cargo, a recently formed joint venture between Thailand’s Commercial Transport International Group (“CTI”) and Qantas Airways Ltd., beginning in June 2005. World Airways will operate an MD-11 freighter aircraft between Thailand and markets in Southeast Asia, China and Europe under a one-year contract valued at approximately $22 million, with an option for a second year renewal. CTI was founded in 1997, and has developed into Thailand’s leading trade logistics facilitator, covering the full range of freight transport services, customs brokerage and warehousing facilities. With the establishment of the Thai Air Cargo airline, CTI is further integrating its services in the chain of physical distribution of goods, to also include air transportation.

      Also in March 2005, World Airways signed a two-year ACMI contract with Air Canada for international cargo service between Toronto, Canada and several cities in Asia, and between Toronto and Europe. Under this agreement, World Airways will operate an MD-11 freighter aircraft for Air Canada beginning May 2005, under a contract valued at approximately $44 million.

      In February 2005, the Company issued notice to the holders of its outstanding 8.0% Convertible Senior Subordinated Debentures due in 2009 (the “Debentures”), which were issued on December 30, 2003, that it had elected to redeem for cash all of the outstanding Debentures on March 24, 2005 (the “Redemption Date”), as the Company met the conditions for redemption. The holders of the Debentures had until the close of business on March 22, 2005 to exercise their conversion rights at a conversion price of $3.20 per share plus accrued and unpaid interest to the Redemption Date. All of the outstanding Debentures were converted by March 22, 2005. The annual interest expense reduction due to the combination of prior conversions and the redemption will total $2 million. Stockholders’ equity will increase $18.7 million in the first quarter of 2005 as a result of these conversions.

      In January 2005, The Boeing Company exercised warrants for one million shares of the Company’s Common Stock at an exercise price of $2.50 per share. The warrants were issued by the Company pursuant to amendments to lease agreements in 1999, and had an expiration date of March 29, 2005. Stockholders’ equity will increase $2.5 million in the first quarter of 2005 as a result of this exercise.

      In January 2005, the Company signed an ACMI contract with Menlo Worldwide to operate two DC-10 cargo aircraft through 2005 with round trips between Dayton, Ohio and Brussels, Belgium, as well as between Dayton and Los Angeles, California. The contract value for this service is estimated at approximately $22 million. The Company has been flying for Menlo (formerly Emery Worldwide) since 1998.

      In January 2005, World Airways signed a two-year ACMI contract with EVA Airways, valued at approximately $116 million. This is the largest commercial contract in World Airways’ 57-year history. Cargo service will be provided with three MD-11 freighter aircraft between Taipei, Taiwan and the United States on a staggered schedule beginning in March 2005. World Airways has been flying for EVA Airways since March 2004, operating round-trip cargo service with one MD-11 aircraft from Taipei to Los Angeles and Chicago.

      Also in January 2005, World Airways signed an agreement extending passenger service for a fifth year to June 2005 with Sonair Servicio Aereo (“Sonair”), valued at more than $29 million. The new contract extension also includes two one-year renewal options that could further extend the relationship to June 2007 and provide a total of approximately $85 million in revenue over the three-year term. The “Houston Express” provides non-stop, round-trip passenger service between Houston, Texas and Luanda, Angola. The service is the result of a collaborative effort between Sonair and the United States Africa Energy Association (“USAEA”). The flights provide exclusive nonstop travel for USAEA members.

      World Airways’ cockpit crewmembers are represented by the International Brotherhood of Teamsters (the “Teamsters”) and are subject to a collective bargaining agreement that became amendable June 30, 2003. In December 2003, World Airways announced that it would begin negotiations with the cockpit

crewmembers in January 2004. It was also announced that the Teamsters had requested mediation services from the National Mediation Board (the “NMB”). Following three days of negotiations in January 2004, World Airways and representatives of the Teamsters reached a tentative agreement for a contract extension. However, on February 27, 2004, World Airways received notification that the tentative agreement was not ratified by a majority of the Teamsters members. Negotiations with the Teamsters resumed at various times during 2004, and negotiations will continue in 2005 under the auspices of a federal mediator.

      In the fourth quarter of 2004, World Airways signed lease agreements for two MD-11 freighter aircraft, which will be delivered in the second quarter of 2005. These lease agreements have a five-year term, and the aircraft will be used to service the EVA Airways’ contract. World Airways is also exploring options to secure another DC-10 freighter aircraft to be used primarily as a backup for the Company’s existing cargo operation, although the availability of suitable aircraft is very limited.

      World Airways initiated installation of a customized satellite-based ground-to-air/air-to-ground global messaging and data services system during the first quarter of 2005. The new APEX system should be installed on all MD-11 aircraft by the end of the current calendar year and on the DC-10 fleet during the first quarter of 2006. The APEX System will facilitate real-time data and voice communications with the Company’s aircraft and personnel anywhere in the world, while reducing communication expenses.

      In a February 6, 2004 press release, World Airways announced its intention to introduce two Boeing 767-300ER passenger aircraft to its fleet in the fourth quarter of 2004. These new aircraft were intended to replace two DC-10 passenger aircraft that were scheduled to be returned to their lessors in 2004. World Airways executed commitment letters for these aircraft during the second quarter of 2004. However, following a thorough financial and competitive due diligence study, World Airways decided to cancel the inception of the 767 aircraft. The deposits that World Airways had supplied to the potential lessor were returned upon cancellation of the letters of intent at no loss to the Company.

Overview & Operating Environment

      The Company’s core customers are the United States Air Force (“USAF”) Air Mobility Command (“AMC”), freight operators, freight forwarders, cruise ship companies, tour operators and international airlines. The Company increases its potential customer base by being able to serve both passenger and cargo customers with its aircraft fleet. No other U.S. charter airline flying wide-body aircraft serves both the passenger and cargo markets. The Company can respond to rapidly changing market conditions and requirements because its fleet of passenger aircraft can be deployed in a variety of configurations.

      The Company’s operating philosophy is to build on its existing relationships to achieve a strong platform for future growth while at the same time expanding its commercial passenger and cargo business. The Company’s strategy is based, first and foremost, upon providing the highest level of service to its customers, thereby maintaining and expanding the amount of business being done with existing customers. Marketing efforts focus on the expansion of commercial passenger and cargo business.

      Contracts that require the Company to supply aircraft costs excluding fuel, crew, maintenance, and insurance are called “ACMI” or “wet leases”, and the Company’s customers are responsible for other operating costs, including fuel. “Full service” contracts are those under which, in addition to ACMI costs, the Company is responsible for most other costs associated with flight operations, including landing fees, ground handling and fuel. Fluctuations in the price of fuel have not had a significant impact on the Company’s operations because, in general, the Company’s contracts with its customers cover 95% of fuel purchased, which therefore limits the Company’s exposure to increases in fuel prices. In 2004, full service and ACMI contracts represented 82% and 18% of total operating revenue, respectively. By comparison, full service contracts in 2003 represented 86% of total operating revenue, while ACMI contracts accounted for 14% of total operating revenue. This shift is due to increases in ACMI cargo revenue in 2004 as well as a reduction in full-service USAF cargo flying compared to 2003. In any given year, the mix of full service versus ACMI can shift, depending on new contracts as well as the magnitude of flying for the USAF. The Company attempts to maximize profitability by entering into both ACMI contracts and full service agreements that meet the

requirements of its customers. Under both types of contracts, the customer bears the risk of utilizing the aircraft’s passenger and/or cargo capacity.

      Although the Company’s customers bear the financial risk of utilizing the aircraft, the Company can be affected adversely if its customers are unable to operate the aircraft profitably, or if one or more of the Company’s customers experience a material adverse change in their market demand, financial condition, results of operations or liquidity. Under these circumstances, the Company could be adversely affected by customer demands for rate and utilization reductions, flight cancellations, unpaid fees or early termination of their agreements.

      The market for ACMI and full service charter business is highly competitive. The Company believes that the most important criteria for competition in the charter business include the range as well as passenger and payload capabilities of the aircraft, in addition to the price, flexibility, quality and reliability of the air transportation service provided. Competitors in the passenger charter market include North American Airlines, Omni Air International, Miami Air and ATA Airlines and in the cargo charter market include Atlas Air (including Polar Air Cargo), Gemini Air Cargo, Evergreen and Centurion Air Cargo, as well as scheduled and non-scheduled passenger carriers that have substantial belly capacity. The ability of the Company to compete depends, in part, upon its success in demonstrating time and cost savings for its customers.

      The Company operates in a challenging business environment. The air transportation industry is highly sensitive to general economic conditions. Since a substantial portion of passenger airline travel (both business and personal) is discretionary, the industry tends to experience adverse financial results during general economic downturns and can be adversely affected by unexpected global political developments. The financial results of air cargo carriers are also adversely affected by general economic downturns that result in reduced demand for air cargo transportation.

      Passenger revenue from USAF contracts is based on “available seat miles”, defined as the number of miles an aircraft flies multiplied by the number of seats available on the aircraft. Cargo revenue from USAF contracts is based on “available ton miles”, defined as the number of miles an aircraft flies multiplied by the number of tons available on the aircraft. The Company generally charges customers other than the USAF on a block hour basis rather than on a per seat, per pound or seat mile basis. ”Block hours” are defined as the elapsed time from the moment wheel blocks are removed from the aircraft at the point of origin to the time when the wheel blocks are again put in place at the aircraft’s destination. The Company charges a lower rate per block hour for ACMI contracts than for full service contracts, although it does not necessarily earn a lower profit.

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

      The Company has unsold capacity in the second quarter of 2005 and beyond. However, the Company historically has been successful in obtaining additional business to utilize some or all of its available capacity. Although there can be no assurance that it will be able to secure additional business to utilize unsold capacity, the Company is actively seeking additional business for 2005 and beyond.

Customers

      The Company is highly dependent on revenues from the USAF, and the loss of the USAF as a customer would have a material adverse effect on the Company. The Company’s principal customers, and the percent of revenues from those customers, for the last three years were as follows:

      USAF. The Company has provided air transportation services, principally on an international basis, to the USAF since 1956. In exchange for requiring pledges of aircraft to the Civil Reserve Air Fleet (“CRAF”) for use in times of national emergency, the USAF grants awards to CRAF participants for peacetime transportation of personnel and cargo.

      The USAF assigns points to air carriers in proportion to the number and type of aircraft made available to the CRAF. The Company utilizes teaming arrangements with other carriers in order to consolidate points and maximize the value of potential awards. The USAF grants fixed awards for transportation to CRAF participants based on the number of points assigned. These “fixed” awards provide for known and determinable amounts of revenue to be received during the contract period, which runs from October 1^st to September 30^th of each year, in exchange for air transportation services. In addition, CRAF participants may be awarded additional revenue during the contract period for air transportation services required beyond those specified in the fixed awards. The Company refers to this additional revenue as “expansion” revenue. The following table shows the original contract awards (in millions), which includes fixed and an expansion estimate for 2003 and 2002, and run from October 1^st to September 30^th of each year. The actual revenue from the USAF for each of the Company’s last three fiscal years is shown below the contract award amounts.

      Differences in the composition of the teaming arrangements, aircraft used to support the contract and a smaller long-term expansion budget led to the difference in the contract value for the Company between 2003 and 2002.

      The original contract award for the year beginning October 1, 2004 and ending September 30, 2005 is $94.0 million for fixed flying. The USAF did not incorporate long-term expansion flying into the contract for fiscal year 2005 or 2004. It is expected that the Company will receive additional expansion business during the fiscal year 2005 contract period for the less predictable flying and other short notice requirements.

      Revenue from the USAF should continue to be a significant portion of total revenues for the Company in 2005. However, the Company cannot determine how future military spending budgets, airlift requirements, national security considerations and balanced CRAF and teaming arrangements will combine to affect future business with the USAF.

      Menlo. The Company has provided an MD-11F freighter aircraft to Menlo since October 1998. The program for the aircraft, which expired in December 2004, primarily operated five days per week flying round trip between Dayton, Ohio and Brussels, Belgium. The Company provided additional ad hoc cargo services with its DC-10-30 freighter aircraft for Menlo during fiscal 2004. In January 2005, the Company signed a one-year aircraft services agreement to operate two DC-10 freighters, with round trips between Dayton and Brussels as well as between Dayton and Los Angeles, California. The contract value for this service is estimated at approximately $22 million.

      Sonair. In November 2000, the Company began operating regular private charter passenger air service for Sonair, a subsidiary of Angola’s National Oil Company, SONANGOL, to support Angola’s developing petroleum industry. Initial service was provided between Houston, Texas, and Luanda, Angola, twice a week. In January 2003, the Company began flying a third weekly flight for Sonair between Houston, Texas, and Malabo, Equatorial Guinea. In January 2005, the Company announced an agreement extending its contract with Sonair for a fifth year, providing three round trip flights per week between Houston and Luanda. The new contract extension to June 2005 also includes two one-year renewal options that could further extend the relationship to June 2007 and provide a total of approximately $85 million in revenue over the three-year term.

      EVA. In February 2004, the Company announced a new one-year ACMI agreement with EVA to operate an MD-11 freighter aircraft round-trip from Taipei, Taiwan to Los Angeles, California and Chicago, Illinois. This contract expires in March 2005 and was valued at $19 million. In January 2005, the Company signed a two-year ACMI cargo agreement with EVA valued at approximately $116 million, the largest commercial contract in World Airways’ 57-year history. The Company will provide three MD-11 freighter aircraft for EVA service between Taipei and the United States on a staggered schedule beginning in March 2005.

      China Airlines. In May 2004, the Company began operating an MD-11 freighter aircraft on behalf of China Airlines under a one-year ACMI lease agreement, with three round trip flights per week between Taipei, Taiwan and the United States. The value of the contract is approximately $17 million over its one-year term. The Company does not expect to renew this contract when it expires in May 2005.

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

Backlog

      The Company had a contract backlog of $96.2 million at December 31, 2004. At March 31, 2005, the Company has a contract backlog of $378.6 million for 2005 and beyond, which includes contracts signed during the first quarter of 2005. Approximately 44% of this backlog relates to the Company’s contract with the USAF, while $280.9 million of backlog relates to air transportation services for 2005. The Company had backlog of $158.4 million at December 31, 2003. See Note 10 of the Company’s ”Notes to Consolidated Financial Statements” in Item 8 for additional information regarding major customers and foreign source revenue.

Maintenance

      Airframe and engine maintenance costs, which account for most of the Company’s maintenance expenses, typically increase as the aircraft fleet ages. The Company outsources major airframe maintenance and engine work to several suppliers. The Company has agreements expiring in 2005 with Delta Air Lines for off-wing maintenance on the Pratt & Whitney 4462 engines that power the Company’s MD-11 aircraft, and repair of MD-11 aircraft and its components. The Company also has maintenance agreements with Triumph Air Repair for the repair of auxiliary power units on its MD-11 and DC-10-30 aircraft, which will expire in

2005. The Company has a maintenance agreement with Honeywell for wheel and brake repairs on both aircraft types that will expire in 2006. In addition, the Company had a landing gear overhaul/exchange program with McDonnell Douglas/ Boeing that has expired and is currently being re-negotiated.

Aviation Fuel

      The Company incurs fuel expenses for full-service flights provided to customers. Certain full service contracts contain terms that limit the Company’s exposure to increases in fuel prices. However, the terms of such contracts are renewed annually and take into consideration estimated market prices for fuel for the period under contract. Both the cost and availability of aviation fuel are subject to many economic and political factors and events occurring throughout the world and remain subject to various unpredictable economic and market factors that affect the supply of all petroleum products. Fluctuations in the price of fuel have not had a significant impact on the Company’s operations because, in general, the Company’s contracts with its customers cover 95% of fuel purchased, which therefore limits the Company’s exposure to increases in fuel prices. Notwithstanding this limited exposure, substantial increases in the price or the unavailability of aviation fuel could have a material adverse effect on the Company.

      The Company’s primary sources of aviation fuel are major oil companies at commercial airports and from United States military organizations at military bases. The Company’s current fuel purchasing policy consists of the purchase of fuel within seven days in advance of all flights based on current prices set by individual suppliers. The Company annually solicits quotes for prices of aviation fuel from a group of suppliers at each location. Since the Company’s exposure to fuel is limited, there is no need for the Company to purchase fuel under long-term contracts or enter into futures or fuel swap contracts.

Regulatory Matters

      Since it was founded in 1948, World Airways has been authorized to engage in commercial air transportation by the Department of Transportation (“DOT”) or its predecessor agencies. The Company is currently authorized to engage in scheduled and charter air transportation to provide combination (persons, property and mail) and all-cargo services between all points in the U.S., its territories and possessions. It also holds worldwide charter authority for both combination and all-cargo operations. In addition, the Company is authorized to conduct scheduled combination services to the foreign points listed in its DOT certificate and also holds certificates of authority to engage in scheduled all-cargo services to a limited number of foreign destinations. The Company does not currently operate any scheduled services on its own behalf.

      The Company is subject to the jurisdiction of the Federal Aviation Administration (“FAA”) with respect to aircraft maintenance, flight operations, equipment, aircraft noise, ground facilities, dispatch, communications, training, weather observation, flight time, crew qualifications, aircraft registration and other matters affecting air safety. The FAA requires air carriers to obtain an operating certificate and operations specifications authorizing the carriers to operate to particular airports on approved international routes using specified equipment. These certificates and specifications are subject to amendment, suspension, revocation, or termination by the FAA. In addition, all of the Company’s aircraft must have and maintain certificates of airworthiness issued or approved by the FAA. The Company currently holds an FAA air carrier operating certificate and operations specifications under Part 121 of the Federal Aviation Regulations. The FAA has the authority to suspend temporarily or revoke permanently the authority of the Company or its licensed personnel for failure to comply with regulations promulgated by the FAA and to assess civil penalties for such failures.

      The Company believes it is in compliance in all material respects with all requirements necessary to maintain in good standing its operating authority granted by the DOT and its air carrier operating certificate issued by the FAA. A modification, suspension, or revocation of any of the Company’s DOT or FAA authorizations or certificates could have a material adverse effect upon the Company. The Company also is subject to state and local laws and regulations at locations where it operates and the regulations of various local authorities, which operate the airports that the Company serves. Certain airport operations have adopted local regulations that, among other things, impose curfews and noise abatement regulations. While the Company believes it is currently in compliance in all material respects with all appropriate standards and has all required

licenses and authorities, any material non-compliance with such standards or the revocation or suspension of licenses or authorities could have a material adverse effect on the Company.

      In 2000, the FAA issued an Airworthiness Directive (“AD”) that will require the replacement of insulation blankets on the Company’s MD-11 aircraft by June 2005. The Company has begun replacement of the affected insulation blankets on MD-11 aircraft. Compliance with the AD is proceeding in phases and during scheduled maintenance work, to minimize the impact on operational availability. The Company presently estimates the cost of replacement, including labor and material, will total approximately $0.4 million per aircraft, and approximately 90% of this work was complete as of December 31, 2004.

      In March 2001, the FAA issued a rule that requires the Company to install enhanced ground proximity warning systems (“EGPWS”) in its aircraft by March 2005. The Company currently estimates that the cost of such installation will be approximately $77,000 per MD-11 aircraft and $129,000 per DC-10-30 aircraft. At December 31, 2004, the Company had one MD-11 and three DC-10 aircraft remaining to undergo the required modifications.

      In October 2001, the FAA also issued an AD that requires the Company to modify the engine thrust reversers on its DC-10-30 aircraft by October 1, 2006. The Company currently estimates that the cost of this modification will be approximately $0.6 million per aircraft. This modification is scheduled on two of the Company’s DC-10 aircraft.

      In response to the events of September 11^th, the FAA issued Special Federal Aviation Regulation (“SFAR”) 92 in October 2001 regarding general aircraft and cockpit security. The Company has complied with SFAR 92 by installing new cockpit doors on all of its aircraft. There may be other aircraft modifications that may be required in the future under the SFAR.

      In the fall of 2003, the FAA issued an AD that requires the replacement of the ring case located in the compressor area of the Company’s MD-11 engines and will cost approximately $0.3 million per engine. This work must be accomplished on two-thirds of the operating engine fleet by August 2006, with the remainder completed by June 2009. At December 31, 2004, the Company had completed approximately 40% of its operating engine fleet.

      In May 2004, the DOT issued a proposed consent order for alleged public charter regulation violations. The DOT is investigating this matter and the Company is negotiating the terms of a settlement with the DOT, without admitting any wrongdoing or denying any allegations. The Company believes that the settlement will not have a material effect on the Company’s financial condition, results of operations or liquidity. See Item 3 in Part I as well as Note 12 in the “Notes to Consolidated Financial Statements” in Item 8 for additional information.

      Due to increased airport security needs as a result of the September 11^th events and the potential for future terrorist attacks, Congress enacted the Aviation and Transportation Security Act (the “Security Act”) in November 2001, which established the Transportation Security Administration (the “TSA”) within the DOT. Consistent with the Security Act, the TSA imposed a security service fee, effective February 1, 2002, in the amount of $2.50 per enplanement on passengers of domestic and foreign air carriers engaged in air transportation, foreign air transportation, and intrastate air transportation originating at airports in the United States. The passengers are not charged for more than two enplanements per one-way trip or four enplanements per round trip. Beginning in 2002, the Company also has to remit, until further notice, an additional $319,000 annually to cover TSA’s aviation security infrastructure fees. This additional fee was imposed on air carriers because current passenger fees were insufficient to cover TSA’s costs of providing civil aviation security services. The air carriers must remit these imposed fees monthly to the TSA by the last calendar day of the following month. From June 2003 through September 2003, the TSA suspended all airlines’ requirement to remit both the per passenger fee and the monthly infrastructure fee.

      Additional laws and regulations have been considered from time to time which could significantly increase the cost of airline operations by imposing additional requirements or restrictions on operations. There is no assurance that laws and regulations currently enacted or enacted in the future will not adversely affect the Company’s ability to maintain its current level of operations.

      Several aspects of airline operations are subject to regulation or oversight by Federal agencies other than the DOT or FAA. For instance, labor relations in the air transportation industry are generally regulated under the Railway Labor Act, which vests the National Mediation Board (“NMB”) with certain regulatory powers relating to disputes between airlines and labor unions that arise under collective bargaining agreements. In addition, the Company is subject to the jurisdiction of other governmental entities, including (i) the Federal Communications Commission regarding its use of radio facilities pursuant to the Federal Communications Act of 1934, as amended, (ii) the Commerce Department, the Customs and Border Protection, and the Animal and Plant Health Inspection Service of the Department of Agriculture regarding the Company’s international operations, (iii) the Environmental Protection Agency regarding compliance with standards for aircraft exhaust emissions, and (iv) the Department of Justice regarding certain merger and acquisition transactions. The Company believes it is in substantial compliance with all applicable regulatory requirements.

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

      Pursuant to federal law, no more than 25% of the voting interest in the Company may be owned or controlled by foreign citizens. In addition, under existing precedent and policy, actual control of the Company must reside with U.S. citizens. As a matter of regulatory policy, the DOT has stated that it would not permit aggregate equity ownership of a domestic air carrier by foreign citizens in an amount in excess of 49%. The Company believes it fully complies as of the date hereof with U.S. citizen ownership requirements.

      Due to its participation in the CRAF program of the USAF, the Company is subject to inspections by the military approximately every two years as a condition of retaining its eligibility to perform military charter flights. The last such inspection took place in 2003, and the Company met the requirements for continued participation in the CRAF program. The next inspection is anticipated to occur in 2005. The USAF may terminate its contract with the Company if (i) the Company fails to pass such inspection or otherwise fails to maintain satisfactory performance levels, (ii) the Company loses its airworthiness certificate, or (iii) the aircraft pledged to the contracts lose their U.S. registry or are leased to unapproved carriers.

Employees

      As of December 31, 2004, the Company had 1,371 full time equivalent employees classified as follows:

      The Company’s cockpit crewmembers are represented by the Teamsters and are subject to a collective bargaining agreement that became amendable June 30, 2003. In December 2003, the Company announced that it would begin negotiations with the cockpit crewmembers in January 2004. It was also announced that the Teamsters had requested mediation services from the National Mediation Board (“NMB”). Following three days of negotiations in January 2004, the Company and representatives of the Teamsters reached a tentative agreement for a contract extension. However, on February 27, 2004, the Company received notification that the tentative agreement was not ratified by a majority of the Teamsters members. The

Company resumed negotiations with the Teamsters at various times during 2004, and negotiations will continue in 2005 under the auspices of a federal mediator.

      On September 2, 2003, the Company’s flight attendants, who are also represented by the Teamsters, ratified a new three-year collective bargaining agreement that has a new amendable date of August 31, 2006. The agreement includes pay increases and other benefit changes requested by the flight attendants, while providing the Company with work-rule changes in support of its financial goals. In 1994, the Company’s flight attendants argued that the “scope clause” of the collective bargaining agreement was violated by the Company’s use of foreign flight attendant crews on the Company’s flights for Garuda Indonesia which had been historically the Company’s operating procedure. In contracts with certain customers, the Company is obligated to permit its customers to deploy their own flight attendants. While the arbitrator in this matter denied in 1997 the Teamsters’ request for back pay to affected flight attendants for flights relating to the 1994 Hadj pilgrimage, the arbitrator concluded that the Company’s contract with its flight attendants requires the Company to first actively seek profitable business opportunities that allow for the use of the Company’s flight attendants, before the Company may accept wet lease business opportunities that use the flight attendants of the Company’s customers. Since 1997, the flight attendants have filed a number of similar “scope clause” grievances with respect to other wet-lease contracts and in 2001, they filed another “scope clause” grievance with respect to the 2001 Garuda Hadj agreement. An adverse decision on one or more of the grievances could have a material adverse impact on the financial condition, results of operations or liquidity of the Company.

      The Company’s aircraft dispatchers, who are represented by the Transport Workers Union (“TWU”), are subject to a collective bargaining agreement that became amendable December 31, 2003. Fewer than 15 Company employees are covered by this collective bargaining agreement. The Company and the TWU commenced formal negotiations in January 2004. In August 2004, the TWU requested mediation services from the NMB. In March 2005, the Company reached a tentative agreement with the TWU. However, on March 15, 2005, the Company received notification that the majority of the aircraft dispatchers did not ratify the tentative agreement. The Company continues to negotiate with the TWU through the mediation process.

      On February 11, 2005, the Company was notified that the Teamsters filed a representation application with the NMB to hold an election among its mechanic and related employees. On March 14^th, the Teamsters sent a letter to the NMB withdrawing its representation application. Based on the Teamsters’ letter, the NMB issued an official dismissal of the representation application on March 16^th. According to NMB rules no other union, including the Teamsters, is allowed to file a representation application to hold a union election among the Company’s mechanic and related employees for a one-year period or until March 16, 2006.

      The Company is unable to predict whether any of its employees not currently represented by a labor union will elect to be represented by a labor union or collective bargaining unit. The Company is not aware of any other parties or group of employees who have indicated any intent of petitioning for such an election. The election by such employees of representation in such an organization could result in employee compensation and working condition demands that could have a material adverse effect on the financial results of the Company.

Risk Factors

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

      At December 31, 2004, the Company had $49.9 million of long-term debt outstanding. This included $24.0 million of long-term and $6.0 million of current maturities outstanding under the $30.0 million term

loan (the “ATSB Loan”), which closed December 30, 2003, of which $27.0 million is guaranteed by the Air Transportation Stabilization Board (the “ATSB”) and $3.0 million is guaranteed by a third party, and $18.1 million aggregate principal amount of the Debentures. As of March 22, 2005, all of the Debentures have been converted to shares of Common Stock, which reduces the Company’s long-term debt to $30.0 million at March 31, 2005. In addition, the Company has significant long-term obligations relating to operating leases in connection with its aircraft and spare engines and its leased real property. At December 31, 2004, these obligations totaled $161.3 million through 2009 and $31.3 million thereafter.

      The Company is subject to the following restrictions related to its debt and lease instruments:

      The ATSB Loan and the operating leases relating to some of the Company’s aircraft contain restrictive covenants that impose significant operating and financial restrictions on the Company. In connection with the corporate restructuring, World Air Holdings became a party to the loan agreement (the “ATSB Loan Agreement”) governing the ATSB Loan and unconditionally guaranteed all of World Airways’ obligations thereunder. Under the ATSB Loan Agreement, the Company is subject to certain covenants pursuant to which the Company must satisfy various financial covenants requiring it to maintain a certain amount of unrestricted cash or cash equivalents and to comply with certain financial ratios.

      In addition, the ATSB Loan Agreement also contains a number of negative covenants, including, but not limited to, restrictions on:

      These restrictions and requirements may limit the Company’s financial and operating flexibility. In addition, if the Company fails to comply with these restrictions or to satisfy these requirements, its obligations under the ATSB Loan and its operating leases may be accelerated. The Company cannot assure its stockholders that it would be able to satisfy all of these obligations upon acceleration. The failure to satisfy these obligations would materially adversely affect the Company’s business, operations, financial results or liquidity as well as the value of the Company’s Common Stock.

      Under the ATSB Loan, $27.0 million of the Company’s indebtedness bears interest at fluctuating interest rates based on the lender’s weighted average cost of issuing commercial paper, and if the loan is assigned to a third party, will bear interest based on the London interbank offered rate (“LIBOR”). The balance of the Company’s indebtedness under the ATSB Loan bears interest at fluctuating rates based on LIBOR. Commercial paper and LIBOR rates tend to fluctuate based on general economic conditions, general interest rates, including the prime rate, and the supply of and demand for commercial paper or for credit in the London interbank market. The Company has not hedged its interest rate exposure and, accordingly, the Company’s interest expense for any particular period may fluctuate based on commercial paper and LIBOR rates. To the extent these rates increase, the Company’s interest expense will increase, in which event the Company may have difficulties making interest payments and funding its other fixed costs and its available cash flow for general corporate requirements may be adversely affected.

      The Company is highly dependent on revenues from the USAF. Revenues from the USAF represented 77.5% and 74.7% of the Company’s total revenues for the years ended December 31, 2004 and 2003, respectively. The Company provides transportation services to the USAF under annual contracts. The USAF has conducted numerous studies showing that it would be cost-prohibitive to provide an organic fleet of aircraft to replace the commercial capacity. If the Company loses these contracts with the USAF, or if the USAF reduces substantially the amount of business it awards to the Company in a given year, the Company may not be able to replace the lost business and its financial condition and results of operations could be materially adversely affected. The Company believes that the USAF will continue to contribute a significant portion of the Company’s total revenues in 2005, but the lessening of military activities in connection with the conflict in Iraq and Afghanistan could reduce the USAF’s demand for transportation services, which could negatively affect the Company’s results of operations in 2005 and beyond.

      Non-military customers who have contracted with the Company may cancel or default on their contracts, and the Company may not be able to obtain other business to cover the resulting loss in revenues. For the year ended December 31, 2004, the Company’s five largest non-military customers accounted for approximately 16% of its total operating revenues. If these contract customers cancel or default on their obligations and the Company is not able to obtain other business, its financial position could be materially adversely affected.

      Due to the high fixed costs of leasing and maintaining the Company’s aircraft and costs for cockpit crew members and flight attendants, each of the Company’s aircraft must have high utilization in order for the Company to operate profitably. Although the Company’s preferred strategy is to enter into long-term contracts with its customers, the terms of the Company’s existing customer contracts are in most cases substantially shorter than the terms of the Company’s lease obligations with respect to its aircraft. The Company cannot provide assurance that it will be able to enter into additional contracts with new or existing customers or that the Company will be able to obtain enough additional business to fully utilize each aircraft. The Company’s

financial position, results of operations or liquidity could be materially adversely affected by periods of low aircraft utilization and yields.

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

      The Company is required by company policy, contractual obligations with lessors, and the DOT to carry liability insurance. The Company currently maintains liability insurance for passengers and third party damages, excluding those caused by war or terrorist attacks, in the amount of $1.5 billion. In addition, the Company currently maintains liability insurance for passenger liability and third party damages caused by war or terrorist attacks in the amount of $1.5 billion per occurrence with an annual aggregate limit of $3.0 billion provided by the U.S. Government. Additionally, the Company carries aircraft hull, aircraft spare parts and leased engines insurance in amounts required by company policy and contractual obligations.

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

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

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

      The Company’s cockpit crewmembers and flight attendants are represented by the Teamsters. In September 2003, the Company’s flight attendants ratified a collective bargaining agreement that was extended to become amendable in August 2006. The Company and the Teamsters are presently in negotiations with the assistance of the NMB to extend the cockpit crewmembers collective bargaining agreement, which became amendable June 30, 2003.

      The Company’s aircraft dispatchers, who are represented by the Transport Workers Union (“TWU”), are subject to a collective bargaining agreement that became amendable December 31, 2003. Fewer than 15 Company employees are covered by this collective bargaining agreement. The Company and the TWU

commenced formal negotiations in January 2004. In August 2004, the TWU requested mediation services from the NMB. In March 2005, the Company reached a tentative agreement with the TWU. However, on March 15, 2005, the Company received notification that the majority of the aircraft dispatchers did not ratify the tentative agreement. The Company continues to negotiate with the TWU through the mediation process.

      On February 11, 2005, the Company was notified that the Teamsters filed a representation application with the NMB to hold an election among its mechanic and related employees. On March 14^th, the Teamsters sent a letter to the NMB withdrawing its representation application. Based on the Teamsters’ letter, the NMB issued an official dismissal of the representation application on March 16^th. According to NMB rules no other union, including the Teamsters, is allowed to file a representation application to hold a union election among the Company’s mechanic and related employees for a one-year period or until March 16, 2006.

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

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

      The Company periodically receives correspondence from the FAA with respect to minor noncompliance matters. While the Company believes that it is currently in compliance in all material respects with all appropriate FAA standards and has obtained all required licenses and authorities, any material non-compliance with such standards or the revocation or suspension of licenses or authorities could have a material adverse effect on the Company’s financial condition, results of operations or liquidity.

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

      The market for outsourcing air passenger and cargo ACMI services and full service charter business is highly competitive. The Company believes that the most important bases for competition in the ACMI outsourcing business are the age of the aircraft fleet, the passenger, payload and cubic capacities of the aircraft, and the price, flexibility, quality and reliability of the air transportation services provided. The Company’s competitors in the passenger charter market include North American Airlines, Omni Air International, Miami Air and ATA Airlines and in the cargo charter market include Atlas Air (including Polar Air Cargo), Gemini Air Cargo, Evergreen and Centurion Air Cargo, as well as scheduled and non-scheduled passenger carriers that have substantial belly capacity. The Company’s ability to continue to grow depends upon its success in convincing major international airlines that outsourcing some portion of their air passenger and cargo business remains more cost-effective than undertaking passenger or cargo operations with their own incremental capacity and resources. The allocation of military air transportation contracts by the USAF is based upon the number and type of aircraft a carrier, alone or through a teaming arrangement, makes available for use in times of peace and national emergencies. The formation of competing teaming arrangements comprised of larger partners than those sponsored by the Company, an increase by other air carriers in their commitment of aircraft to the emergency program, or the withdrawal of the Company’s current partners, could adversely affect the size of the USAF contracts which may be awarded to the Company in future years.

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

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

      The terrorist attacks of September 11, 2001 have had, and continue to have, a wide-ranging negative impact on the air transportation industry because they resulted in, among other things:

      The terrorist attacks of September 11, 2001 resulted in significant losses to the insurance industry. These losses caused a significant increase in the Company’s insurance premiums, which has negatively impacted its financial results, and could lead to future increases in its insurance premiums. In addition, these losses caused general instability in the insurance industry that could adversely affect some of the Company’s existing insurance carriers or its ability to obtain future insurance coverage. To the extent that the Company’s existing insurance carriers are unable to provide the insurance coverage contracted for, the Company’s insurance costs may further increase.

      Moreover, since September 11, 2001, the U.S. government has been providing insurance coverage for certain claims resulting from acts of terrorism, war or similar events. Should the federal insurance program terminate, the Company would likely face a material increase in the cost of such insurance. Because of competitive pressures in the Company’s industry, the Company’s ability to pass these additional costs to customers would be limited and the increased costs could be material to its financial condition, results of operations or liquidity.

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

      At March 22, 2005, there were outstanding warrants to purchase an aggregate of 2,267,112 shares of the Company’s Common Stock. In addition, pursuant to a notice of redemption mailed by the Company to the holders of the Debentures in February 2005, $18,113,000 principal amount of the Debentures has been converted into 5,660,312 shares of Common Stock. Sales in the public market of shares issued upon the conversion of the Debentures and the exercise of the Company’s outstanding warrants could adversely affect the market value of the Company’s stock.

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

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

Flight Equipment

      As of December 31, 2004, the Company’s operating fleet consisted of twelve MD-11 and four DC-10-30 aircraft, all of which are operated under operating leases. The MD-11 fleet includes nine passenger aircraft (five of which are extended-range versions) and three freighter aircraft. The DC-10-30 fleet includes two freighter aircraft and two passenger aircraft.

      At December 31, 2004, the Company’s operating fleet consisted of the following:

Notes

      Three DC-10 aircraft were returned to their lessors in 2004. One additional DC-10 was returned to its lessor in the first quarter of 2005. The Company’s fleet will contain three DC-10 aircraft at the end of 2005, with the lease term for one aircraft expiring in 2006, and the remaining two expiring in 2008.

      The lease terms for three of the MD-11 aircraft expire throughout 2005 and 2006. The lease terms for six MD-11 aircraft expire throughout 2008 and 2009. The three leases that expire in 2008 previously had lease terms that would have expired in 2005, but were extended in conjunction with the closing of the ATSB Loan. The three leases that expire in 2009 were previously scheduled to expire in 2006, but were extended for an additional three years in the first quarter of 2005. The three remaining MD-11 aircraft leases were amended in the first quarter of 2004, and include changes to the lease expiration dates of the aircraft. The lease term for one aircraft will expire in January 2006, and may be automatically extended for a one-year period depending on the market price of the Company’s Common Stock during a specified time period. If the lease is extended, there is a further provision that would allow for a second automatic one-year extension through January 2008, which is also dependent on the market price of the Company’s Common Stock during a specified period of time. If at any time during the term of the lease, the Company’s Common Stock is no longer traded publicly, the lease term for this aircraft is automatically extended to expire in January 2008. The remaining two MD-11 leases, which were also restructured in the first quarter of 2004, will now expire in 2011.

Ground Facilities

      The Company leases office space in Peachtree City, Georgia, for its corporate headquarters and substantially all of the administrative employees of the Company. The Company is also obligated under a lease for office space in Herndon, Virginia, the location of its former headquarters. See Note 6 in the “Notes to Consolidated Financial Statements” in Item 8 for additional information.

      Also, the Company leases office and warehouse space in Anchorage, Alaska; Los Angeles, California; Morrow, Tyrone and Atlanta, Georgia; Baltimore, Maryland; Jamaica, New York; Dayton, Ohio; Houston, Texas; Norfolk, Virginia; Seattle, Washington; and Frankfurt, Germany. Additional small office and maintenance material storage space is leased at often frequented airports to provide administrative and maintenance support for commercial and military contracts.

      The Company’s flight attendants, representing approximately 44% of the Company’s employees, are represented by the Teamsters. On September 2, 2003, a new collective bargaining agreement was ratified, with an amendable date of August 31, 2006. The agreement includes pay increases and other benefit changes requested by the flight attendants while providing the Company with work-rule changes in support of its financial goals. In 1994, the Company’s flight attendants argued that the “scope clause” of the collective bargaining agreement was violated by the Company’s use of foreign flight attendant crews on the Company’s flights for Garuda Indonesia which had historically been the Company’s operating procedure. In contracts with certain customers, the Company is obligated to permit its customers to deploy their own flight attendants. While the arbitrator in this matter denied in 1997 the Union’s request for back pay to affected flight attendants for flying relating to the 1994 Hadj, the arbitrator concluded that the Company’s contract with its flight attendants requires the Company to first actively seek profitable business opportunities that require using the Company’s flight attendants, before the Company may accept wet lease business opportunities that use the flight attendants of the Company’s customers. Since 1997, the flight attendants have filed a number of similar “scope clause” grievances with respect to other wet-lease contracts and in 2001, they filed another “scope clause” grievance with respect to the 2001 Garuda Hadj agreement. An adverse decision on one or more of the grievances could have a material adverse impact on the financial condition, results of operations or liquidity of the Company.

      A claim was filed in the 19th Civil Court District Court, Frankfurt, Germany, against the Company by a tour operator seeking approximately $4.2 million in compensation related to the cancellation of a summer program in 1996. In May 2004, the German Supreme Court upheld a lower court judgment against the Company for 75% of the plaintiff’s probable damages. At a hearing held in Frankfurt on February 4, 2005 to determine damages only, the court noted that the plaintiff had failed to produce sufficient proof for a proper evaluation and adjourned the matter until March 21, 2005 when the court stated that it would appoint an expert to calculate the proper measure of damages if the parties could not settle the matter before then. The Company reserved $2.6 million for this litigation in 2004. In March 2005, both parties agreed to settle this matter for $2,390,000 in full and fair satisfaction of all claims, and a final court date to enter the judgment for that amount has been set for April 6, 2005.

      Miami-Dade County is currently investigating and remediating various environmental conditions at the Miami International Airport (MIA). During the second quarter of 2001, the County filed a lawsuit against a number of defendants, which does not currently include World Airways, in an attempt to recover its past and future clean-up costs. This claim has been filed in the Florida Circuit Court for the 11th Judicial District in Dade County Florida. In addition to the defendants named in the lawsuit, several hundred other agencies and companies that were prior tenants at MIA (potentially responsible parties, or “PRP’s”), including World Airways, were issued letters advising them of the lawsuit and indicating that any PRP’s could be named as additional defendants in the future depending upon a determination as to the levels of contamination and the extent to which any PRP may have contributed to any alleged contamination. At this time, certain PRP’s, including World Airways, have joined a joint defense group to respond to the County’s inquiries and investigation of the PRP’s. This group is conducting preliminary investigations of the site in question to

determine each PRP’s potential exposure. This process is ongoing and the potential exposure to the Company has yet to be determined.

      In January 2004, ten purported class action complaints (six in the United States District Court for the Eastern District of New York, one in the United States District Court for the Southern District of New York, one in the Superior Court of DeKalb County, Georgia, one in the United States District Court for the Northern District of New Jersey and one in the United States District Court for the Northern District of Illinois) and four individual complaints (all in the United States District Court for the Eastern District of New York), and thirteen small claims actions (one in California, three in New Jersey, one in Georgia and eight in New York) were filed against the Company arising out of the discontinuance of charter flights upon the expiration of the Company’s obligation to provide services under an air services agreement. Seven of the eight small claims actions in New York were settled for a total of $14,000 (or $2,000 per plaintiff). The purported class action cases were consolidated for discovery purposes into the Eastern District of New York. The Company had operated the charter flights between cities in the United States and Lagos, Nigeria for Ritetime Aviation and Travel Services, Inc. (“Ritetime”). The Company’s obligation to perform air services for Ritetime ended with the last chartered flight on December 30, 2003. From the allegations made by the various plaintiffs, it appears that Ritetime continued to sell tickets to passengers for flights purportedly scheduled to depart after the expiration of the Company’s contractual obligations for air services. The plaintiffs purport to act for themselves and on behalf of other persons who held tickets issued by Ritetime for the non-contracted flights. Ritetime is also named as a defendant in each of these lawsuits. The plaintiffs seek compensatory, punitive and/or treble damages and costs and expenses, including attorneys fees, based on various legal theories including breach of contract, fraud, negligent misrepresentation, unjust enrichment, illegal/excess tax and violations of U.S. federal laws and regulations governing air transportation and of the Federal Racketeer Influenced and Corrupt Organization Statute. The Company’s insurance carrier has responded and assumed the defense of these cases and agreed to conditionally indemnify the Company for the costs of litigation and any judgment. In March 2004, Ritetime filed a Demand to Arbitrate in Peachtree City, Georgia, and subsequently the Company responded and filed a counterclaim. The matter was heard in October 2004, and the arbitrator awarded the Company the amount of $2.2 million against Ritetime, plus indemnification on all judgments, fees and expenses incurred by the Company in the Ritetime litigation. However, it is doubtful that Ritetime has assets to pay the award. The DOT is investigating this matter and the Company is negotiating the terms of a settlement with the DOT, without admitting or denying any allegations, which settlement the Company believes will not be material to the Company’s financial condition, results of operations or liquidity.

      On January 9, 2004, Whitebox Convertible Arbitrage Partners, L.P. and Pandora Select Partners, L.P. filed a complaint in the United States District Court for the District of Minnesota alleging breach of contract by the Company in connection with its exchange in December 2003 of $22,545,000 aggregate principal amount of 8.0% Convertible Senior Subordinated Debentures due 2004 (the “Old Debentures”) for a like amount of the Debentures. On May 10, 2004, by order of the United States District Court for the District of Minnesota, this matter was transferred to the United States District Court for the Northern District of Georgia. The plaintiffs in this lawsuit allege that they have held at all relevant times $2,530,000 and $780,000 principal amount, respectively, of the Old Debentures and that the Company breached the terms of the indenture governing the Old Debentures by purchasing the Old Debentures from a selected group of holders rather than from holders determined by lot or from all holders on a pro rata basis. The plaintiffs are seeking damages in an amount equal to the difference in value between the Debentures and the Old Debentures held by the plaintiffs and the interest lost by the plaintiffs on the Old Debentures through maturity on August 26, 2004, as well as costs and reasonable attorney fees. The Company believes that this claim is without merit and intends to defend itself vigorously in this lawsuit, although it cannot give any assurance that this litigation will not have a material adverse effect on the Company’s financial condition, results of operation or liquidity.

      On May 27, 2004, one of the Company’s MD-11 freighter aircraft flying for China Airlines, Ltd. (“China Airlines”) was tail-tipped while a ground handling company, hired by China Airlines, was unloading cargo in Los Angeles. The aircraft sustained significant damages exceeding $1.7 million and was out of service for over a one-month period. The Company has filed a claim with its insurance carrier for the damages and it is

expected that the carrier will in turn file claims against China Airlines, the ground handler and their respective insurance carriers. In February 2005, China Airlines instituted an arbitration proceeding against the Company seeking to recover $1,690,172 in prepaid rental fees during the period the aircraft was out of service ($150,172 for three days in May, 2004 and $1,540,000 for the entire month of June, 2004). Under the terms of the wet lease, China Airlines was expressly responsible for loading and unloading all cargo. The Company believes that this claim is without merit and intends to defend itself vigorously, although it cannot give any assurance that this arbitration will not have a material adverse effect on the Company’s financial condition, results of operation or liquidity.

      In February 2004, World Airways made a self-disclosure to the FAA concerning aircraft record irregularities discovered upon preparing for the return of two leased DC-10-30 aircraft. The Company subsequently received a letter from the FAA opening an investigation into a possible violation of the Code of Federal Regulations. The Company has complied with all requests of the FAA and is waiting to receive notification of the FAA’s findings. At this time, the Company cannot determine what impact, if any, the FAA’s findings will have on the Company’s financial condition, results of operations or liquidity.

      In addition, the Company is party to routine litigation and administrative proceedings incidental to its business, none of which is believed by the Company to be likely to have a material adverse effect on the financial condition, results of operations or liquidity of the Company.

PART II

      The Company’s Common Stock currently trades on the Nasdaq SmallCap Market of The Nasdaq-Amex Market Group^SM under the symbol “WLDA.” The high and low bid prices of the Company’s Common Stock, as reported by Nasdaq, for each quarter in the last two fiscal years are as follows:

      The Company has not declared or paid any cash dividends or distributions on its Common Stock since 1992. The Company currently intends to retain future earnings to fund the development and growth of its business and, therefore, does not anticipate paying any cash dividends in the foreseeable future. Any future decision concerning the payment of dividends on its Common Stock will depend upon the results of operations, financial condition, liquidity, capital expenditure plans of the Company, provisions of certain financing instruments as well as such other factors as the Board of Directors, in its sole discretion, may consider relevant. In December 2003, the Company entered into a $30 million term loan agreement that restricts the Company’s ability to pay dividends or purchase treasury stock.

      The approximate number of shareholders of record at December 31, 2004 was 299, which does not include those shareholders who hold shares in street name accounts.

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

      Effective January 1, 2000, the Company changed its method of accounting for certain aircraft maintenance costs from the accrual method of accounting to the direct expense method. Under the new accounting method, maintenance costs are recognized as expense as maintenance services are performed and as flight hours are flown for nonrefundable maintenance payments required by lease agreements.

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

      The preparation of the financial statements requires the Company to make estimates and judgments that affect the reported amount of assets, liabilities, revenue and expenses, and related disclosure of contingent

assets and liabilities at the date of the financial statements. Actual results may differ from these estimates under different assumptions or conditions.

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

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

      The Company’s maintenance costs are prone to greater fluctuations from year to year under the direct expense method of accounting as opposed to the accrual method of accounting, which was used prior to the change in accounting effective January 1, 2000. Under the direct expense method, costs are recognized as maintenance services are performed and as nonrefundable maintenance payments required by lease agreements and maintenance contracts with outside maintenance providers become due.

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

      Under certain circumstances, such as an accident or foreign object damage to an aircraft’s engine, the Company’s insurance providers cover a portion of the repair costs. The Company had $4.7 million of accounts receivable related to insurance claims as of December 31, 2004. There were no accounts receivable related to insurance claims at December 31, 2003.

      The Company is obligated under an operating lease for office space at its former headquarters in Herndon, Virginia, through April 2006. The Company’s total remaining cash obligation at December 31, 2004 under the lease was $2.1 million. The Company received rental income, sufficient to offset its lease expense through March 2002, after which time no rental income was received except $0.4 million in 2003. The Company is currently seeking a new sub-lessee for this office space.

      The Company recognized a $2.0 million liability at December 31, 2003 for costs that would continue to be incurred, without economic benefit to the Company, over the remaining term of its lease of this office space. During 2004, the Company used $1.4 million of the liability, reviewed its estimates and assumptions on a quarterly basis, and determined that an additional $0.5 million should be added to the liability, resulting in a $1.1 million balance at December 31, 2004. The liability was determined based on the remaining lease rentals, reduced by estimated sublease rentals that can be reasonably obtained for the property. The liability is

included in other accrued liabilities on the accompanying Consolidated Balance Sheet, and the cost is included in sales, general and administrative on the accompanying Consolidated Statement of Operations.

      Management was required to make significant estimates and assumptions in determining this liability. These estimates and assumptions included an estimated three-month period, starting January 1, 2005, to find a sub-lessee for one-half of the building space and an eight-month period to find another sub-lessee for the remainder of the building space. The Company also estimated a 44% discount that would be provided to a suitable sub-lessee from the Company’s current monthly lease rentals. These assumptions were determined based upon consultation with the Company’s broker and in consideration of current market conditions for commercial office space in Herndon, Virginia and the metropolitan Washington, D.C. area.

      If the Company is not successful in finding a suitable sub-lessee in the anticipated timeframe or if the sublease rentals from a new sub-lessee are less than anticipated, the Company will be required to recognize an additional liability for these costs. This liability will be adjusted for changes, if any, resulting from revisions to estimated cash flows, measured using the credit-adjusted risk-free rate of 8% that was initially used to measure the liability.

      In November 2003, the Company agreed to convert the total amount due from the previous sub-lessee into equity, and received 5.1 million shares of common stock of the sub-lessee. This investment is not currently reflected on the Consolidated Balance Sheet, as management has determined that these shares have no value.

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

      The Company is subject to various legal proceedings and claims, the outcomes of which are subject to significant uncertainty. In the normal course of business, the Company is required to assess the likelihood of any adverse judgments or outcomes to these matters, as well as potential ranges of possible losses. A determination of the amount of the reserves required, if any, for these contingencies is based on a careful analysis of each individual issue with the assistance of outside legal counsel. The required reserves may change in the future due to new developments in each matter or changes in approach such as a change in a settlement strategy in dealing with these matters. See Note 12 to the Consolidated Financial Statements for additional information.

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

      During the year ended December 31, 2004, the Company recorded $2.5 million in bad debt expense related to revenues generated from a contract with TM Travel, as the Company determined that TM Travel

would not be able to meet its financial obligations and its accounts receivable from TM Travel were uncollectible. During the year ended December 31, 2003, the Company recorded $1.9 million of bad debt expense associated with air services provided to Ritetime Aviation Services (“Ritetime”), as the Company determined that the accounts receivable from Ritetime would be uncollectible.

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

      The Company’s effective tax rate approximated 24.8%, 19.9% and 0% for the years ended December 31, 2004, 2003, and 2002, respectively.

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

      In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based upon the level of historical taxable income and projections for future taxable income over the periods in which the deferred tax assets are deductible, management believes it is more likely than not that the Company will realize the benefits of these deductible differences, net of the existing valuation allowance at December 31, 2004. The amount of the deferred tax asset considered realizable, however, could be reduced in the near term if estimates of future taxable income during the carryforward period are reduced.

Overview and Results of Operations

      The Company’s net earnings were $25.6 million for the year ended December 31, 2004, as compared to $15.3 million for the year ended December 31, 2003 and $2.0 million for the year ended December 31, 2002.

      The Company’s net earnings for 2004 increased significantly from 2003, due to the increase in operating revenue as well as aircraft cost savings year over year, offset primarily by increases in flight expenses, commissions, sales, general and administrative expenses and income taxes.

      The following table provides statistical data, used by management in evaluating the operating performance of the Company, for the years ended December 31, 2004, 2003 and 2002:

      Our results for each of these years were negatively impacted by various significant transactions which are described below.

2004

2003

2002

      In 2004, the Company achieved profitability for the third consecutive year, and built a strong foundation for 2005 and the years ahead.

      The Company had the following achievements in 2004:

      For 2005, the Company expects to achieve the following goals:

Results of Operations

      Operating Revenues. Operating revenues increased $29.1 million, or 6.1%, to $503.9 million in 2004 from $474.8 million in 2003. The higher operating revenue was primarily attributable to a $36.0 million

increase in flying under the contract with the USAF, as well as an increase of $27.4 million in commercial cargo ACMI flying. These increases were offset by lower commercial cargo full-service revenue of $19.7 million and commercial passenger revenue of $13.9 million. Two key variables that impact the amount of operating revenues are listed below:

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

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

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

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

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

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

      These decreases were offset by higher expenses related to:

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

      Fuel expenses decreased $2.0 million, or 2.6%, in 2004 to $74.5 million from $76.5 million in 2003. This decrease was primarily due to the lower military cargo block hours, compared to the previous year, coupled

with the fact that military cargo block hours were contractually set at a higher rate per gallon. Fuel expense did increase in the fourth quarter of 2004 compared to the previous year. The FY 2005 AMC contract, which began on October 1, 2004, specified that fuel costs would be set at a higher rate per gallon than the prior year’s contract. Fluctuations in the price of fuel did not have a significant impact in 2004 because the Company’s contracts with its customers covered 95% of fuel purchased and thereby limited the Company’s exposure to increases in fuel prices.

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

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

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

      Other Expense/ Net. Total other expense, net decreased by $3.1 million in 2004 compared with 2003. In 2003, the Company recorded the following:

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

      Operating Revenues. Operating revenues increased $90.4 million, or 23.5%, to $474.9 million in 2003 from $384.5 million in 2002. The higher operating revenue was primarily attributable to a $77.1 million increase in flying under the contract with the USAF, as well as an increase of $21.7 million in commercial

passenger flying. These increases were offset by lower commercial cargo revenue of $11.5 million. Two key variables that impact the amount of operating revenues are listed below:

      The revenue per block hour increased on average due to a greater percentage of full service flights.

      Operating Expenses. Total operating expenses increased to $446.4 million in 2003 from $377.4 million in 2002, or 18.3% year over year. Below is information on the Company’s operating expense per block hour:

      Flight expenses include all expenses related directly to the operation of the aircraft other than maintenance, aircraft rent, insurance and fuel. Also included are expenses related to flight dispatch and flight operations administration. Flight expenses increased $27.6 million, or 23.8%, in 2003 to $143.6 million from $116.0 million in 2002. Flight costs were higher primarily due to increases in the following areas:

      These higher costs are directly attributable to increased flying for the USAF as well as more full-service flights in 2003 compared to 2002. Flight expenses in 2003 also included $3.7 million for a crew profit sharing bonus as stipulated in the union contracts, compared to $0.6 million in 2002.

      Maintenance expenses increased $15.9 million, or 26.6%, in 2003 to $75.5 million from $59.6 million in 2002. The Company had increases in the following areas:

      Much of this increase was due to the 15.8% increase in block hours flown, the timing of scheduled maintenance checks as well as supporting two additional aircraft that were added to the fleet during 2003.

      Aircraft costs decreased $1.3 million, or 1.6%, in 2003 to $85.5 million from $86.8 million in 2002. This decrease was due to the purchase of a leased DC-10-30 aircraft in December 2002 for airframe and engine parts, offset by higher aircraft rent expense due to more block hours flown and additional aircraft in 2003.

      Fuel expenses increased $18.6 million, or 32.2%, in 2003 to $76.5 million from $57.9 million in 2002. This increase was due to more full-service block hours being flown, together with higher per-gallon costs. However, fluctuations in the price of fuel did not have a significant impact in 2003 on the Company’s operations because, in general, the Company’s contracts with its customers covered 96% of fuel purchased and thereby limited the Company’s exposure to increases in fuel prices.

      Sales, general and administrative expenses increased $7.5 million, or 23.1%, to $40.2 million in 2003 from $32.6 million in 2002. The increase in 2003 was primarily attributable to the following:

      Other Expense/ Net. Total other expense, net increased by $4.2 million in 2003 compared with 2002. This increase was primarily due to the following:

Liquidity and Capital Resources

      At December 31, 2004, the Company had $50.0 million of cash and cash equivalents, compared to $30.5 million at December 31, 2003. Restricted cash was $4.9 million, which consisted of $4.8 million for letters of credit that had to be collateralized and $0.1 million of prepayments from customers for flights that are scheduled to be flown within 30 days of the balance sheet date. At December 31, 2003, the Company had $23.3 million of restricted cash. This was due to $18.8 million required to pay the principal and interest on the convertible debentures called for redemption on December 30, 2003 (which were redeemed on January 28, 2004), $3.4 million for letters of credit that were secured by collateral, and $1.1 million of prepayments from customers. Included in the restricted cash balance at December 31, 2004 is a $1.0 million letter of credit which was issued on behalf of TM Travel and provided to an insurance company to support surety bonds issued to the Department of Transportation (“DOT”) and the State of Hawaii. The DOT advised the Company that it was not going to renew TM Travel’s public charter prospectus beyond May 2, 2004. The surety bonds had been necessary for TM Travel to qualify as a public charter operator. No funds were drawn from the two surety bonds, and they expired in July 2004. The letter of credit was cancelled in the first quarter of 2005.

      At December 31, 2004, World Air Holdings’ current assets were $122.3 million and its current liabilities were $91.5 million. The ratio of the Company’s current assets to its current liabilities (“current ratio”) was 1.3:1. As of December 31, 2004, the Company had a $30.0 million ATSB Loan, payable in three annual principal payments of $6.0 million commencing December 2005 and a final payment of $12.0 million due in December 2008. The $6.0 million due in December 2005 is included in current liabilities. The Company also had outstanding long-term debt of $19.9 million consisting of the Debentures, which had a principal amount of $18.1 million and were due to mature in December 2009. However, in February 2005, World Air Holdings issued notice to the holders of its Debentures that it had elected to redeem for cash all of the outstanding Debentures on March 24, 2005, as the Company met the conditions for redemption. The holders of the Debentures had until the close of business on March 22, 2005 to exercise their conversion rights at a conversion price of $3.20 per share. All of the Debentures were converted by March 22, 2005. In addition, the Company has significant long-term obligations relating to operating leases for aircraft and spare engines.

      The following table presents aggregated information about the Company’s contractual obligations at December 31, 2004:

      Two MD-11 leases, which at December 31, 2003 had expiration dates in 2021, were restructured in the first quarter of 2004 and have new lease terms that will expire in 2011. The reduction in the lease terms for these two aircraft lowered the Company’s operating lease contractual obligations, which reduction is reflected in the table above.

      In prior years, the Company paid amounts less than its contractual aircraft rent obligations in order to conserve cash. The Company continued to recognize expense for the full amount of its contractual rent payments due. The accrual for unpaid contractual rent obligations was $1.7 million and $8.9 million at December 31, 2004 and 2003, respectively. This accrual is included as accrued rent in the current liabilities section of the Consolidated Balance Sheet. The Company’s aircraft lessors agreed to amended terms of the aircraft lease agreements to provide for the repayment of the unpaid contractual rent obligations. During the second quarter of 2004, the Company paid $7.2 million of this liability based on 2003 earnings. In 2005, the Company will be repaying the remaining $1.7 million of this liability based on 2004 net earnings.

      In the first quarter of 2004, the Company reached an agreement with one of its MD-11 lessors to restructure certain leases. In exchange for reduced fixed monthly lease rates, the Company agreed to an annual restructuring fee based on net income. Payments commence in 2005 based on 2004 results, and continue through the lease terminations in 2011, which will be paid in 2012. Over the term of the agreement, the total obligation of the Company is limited to no more than $24.2 million on a cumulative basis. In individual years, the cash disbursement is capped at $1.6 million in 2005, $3.6 million per year for 2006 through and including 2011, and $1.0 million in 2012. Although cash disbursements are capped each year, due to the cumulative nature of the agreement, expense recognized in a given year may exceed the cash obligation to be disbursed in the following year. For 2004, expense recorded for this obligation totaled $4.5 million. The current portion of the liability, $1.6 million, is reflected in the current liabilities section of the Consolidated Balance Sheet and the remainder of $2.9 million is shown as a long-term liability.

      The Company is subject to the following restrictions related to its debt and lease instruments:

      The ATSB Loan and the operating leases relating to some of its aircraft contain restrictive covenants that impose significant operating and financial restrictions on the Company. Under the agreement governing the ATSB Loan, the Company is subject to certain covenants pursuant to which it must satisfy various financial requirements to maintain a certain amount of unrestricted cash or cash equivalents and to comply with certain financial ratios. In addition, the agreement governing the ATSB Loan also contains a number of negative covenants, including, but not limited to, restrictions on:

      These restrictions and requirements may limit the Company’s financial and operating flexibility. In addition, if the Company fails to comply with these restrictions or to satisfy the related covenant requirements, its obligations under the ATSB Loan and its operating leases may be accelerated. The Company cannot provide assurance that it could satisfy all of these obligations upon acceleration. The failure to satisfy these obligations would materially adversely affect the Company’s business, operations, financial results or liquidity.

      Although there can be no assurances, the Company believes that the combination of its existing contracts and additional business that it expects to obtain, along with its existing cash and financing arrangements, will be sufficient to allow the Company to meet its cash requirements related to operating and capital requirements through 2005.

      Operating activities provided $25.2 million in cash for the year ended December 31, 2004 as compared to $6.9 million in 2003. The cash provided in 2004 principally reflects the $25.6 million net earnings, a $15.5 million increase in cash due to changes in operating assets and liabilities excluding trade accounts receivable, and net non-cash statement of operations charges of $5.0 million, less a $20.9 million decrease due to trade accounts receivable increasing.

      Investing activities used $2.0 million in cash for the year ended December 31, 2004, compared to using $2.8 million in 2003. In 2004 and 2003, cash was used to purchase new rotable spare parts, computer equipment, leasehold improvements and other fixed assets.

      Financing activities used $3.7 million in cash for the year ended December 31, 2004, compared to generating $5.5 million in 2003. In 2004, the Company used $7.2 million to repay its deferred aircraft rent obligations, offset by $4.0 million of proceeds the Company received from the exercise of warrants and stock options. Significant items in 2003 included the receipt by the Company of $30.0 million from the ATSB Loan, offset by the use of $17.1 million of cash to terminate the Foothill credit facility and $8.4 million to repay deferred aircraft rent obligations.

      On December 30, 2003, the Company closed the $30.0 million ATSB Loan of which $27.0 million (“Tranche A Loan”) is guaranteed by the ATSB and $3.0 million (“Tranche B Loan”) is guaranteed by another third party. The Company’s obligations under the loan agreement are secured by substantially all of the assets of the Company and its subsidiaries. The Tranche A Loan bears an interest rate equal to the lender’s weighted average cost of issuing commercial paper plus 0.5% per annum. The Tranche B Loan bears interest at a rate equal to LIBOR plus 1.0% per annum. Interest on the ATSB Loan is payable semi-annually on June 12^th and December 12^th of each year. At December 31, 2004, the blended rate on both Tranches approximated 2.27%. The Company is required to pay semi-annually in advance guarantee fees commencing on the date of the closing of the ATSB Loan (a) to the ATSB at an annual rate of 4.5% of the principal

amount of the Tranche A Loan scheduled to be outstanding for the interest periods ending on June 12 and December 12, 2004, increasing by 0.5% each year for subsequent semi-annual interest periods through December 12, 2008; and (b) to the guarantor of the Tranche B Loan at an annual rate of 3.0% of the principal amount of the Tranche B Loan scheduled to be outstanding for the interest periods ending on June 12^th and December 12^th through December 12, 2008. The principal amount of the ATSB Loan will be repaid in three annual installments of $6.0 million each, commencing on December 12, 2005, and a final fourth installment of $12.0 million due on December 12, 2008. At December 31, 2004, the $6.0 million that is due in December 2005 is reflected as a current liability in the Consolidated Balance Sheet.

      On December 30, 2003, in connection with the closing of the ATSB Loan, the Company terminated the Foothill loan facility. The Company repaid all borrowings outstanding with Foothill, incurred $1.3 million of fees and expenses connected with the early termination of the loan facility and wrote off $0.5 million of deferred issuance fees.

      In addition, on December 30, 2003, the Company issued $25.5 million aggregate principal amount of the Debentures in exchange for $22.5 million aggregate principal amount of its then outstanding Old Debentures and $3.0 million in cash. The Company called for redemption the remainder, or $18.0 million aggregate principal amount, of its Old Debentures and redeemed the Old Debentures on January 28, 2004. Interest on the Debentures was payable semi-annually on June 30^th and December 30^th of each year. The Debentures were convertible, at any time, into the Company’s Common Stock at a conversion price of $3.20 per share. The Debentures were redeemable by the Company at 100% of the principal amount on or after December 30, 2004 if the average closing price of the Company’s Common Stock was equal to or greater than 200% of the conversion price for 20 of 30 consecutive trading days, and on or after December 30, 2005 if the average closing price of the Company’s Common Stock was equal to or greater than 150% of the conversion price for 20 of 30 consecutive trading days. On or after December 30, 2006, the Debentures were redeemable at any time at 100% of the principal amount regardless of the stock price. In February 2005, after satisfying the requirement applicable to the redemption of the Debentures on or after December 30, 2004, World Air Holdings issued notice to the holders of its debentures that it had elected to redeem for cash all of the outstanding Debentures on March 24, 2005, plus any accrued and unpaid interest. The holders of the Debentures had until the close of business on March 22, 2005 to exercise their conversion rights at a conversion price of $3.20 per share, plus any accrued and unpaid interest. All of the outstanding Debentures were converted by March 22, 2005.

      At December 31, 2004, the Company had $4.6 million of letters of credit outstanding, which were collateralized by $4.8 million of restricted cash. In 2004, the Company moved its current outstanding letters of credit to Wachovia Bank, N.A. (“Wachovia”). Letters of credit with Wachovia are subject to a fee of 0.75% of the face amounts of the letters of credit issued and outstanding, and their terms are one year or less.

      The FAA has issued and proposed a number of Airworthiness Directives (“ADs”) that will require the Company to make modifications to its aircraft. They are as follows:

      The Company expects to finance the cost of compliance with ADs through internally generated funds. The estimated future total cost of these modifications based on the Company’s current fleet is $10.6 million as of December 31, 2004.

      World Air Holdings’ capital expenditures for 2005, other than the cost of ADs, are currently expected to be approximately $6.7 million, principally for the purchase of aircraft related assets as well as installation of satellite communication equipment in all of the Company’s MD-11 aircraft, which will totally automate voice and data exchange from the aircraft to the Company’s operations center and data bases. The Company expects to finance these capital expenditures from working capital.

Recently Issued Accounting Standards

      In December 2004, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 153, Exchanges of Nonmonetary Assets, an amendment of APB Opinion No. 29 (“SFAS No. 153”). SFAS No. 153 addresses the measurement of exchanges of nonmonetary assets in eliminating the exception from fair value measurement for nonmonetary exchanges of similar productive assets and replacing it with an exception for exchanges that do not have commercial substance. SFAS No. 153 indicates a nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. The provisions of SFAS No. 153 will be effective for non-monetary asset exchanges in fiscal years beginning after June 15, 2005, with earlier application permitted. The Company has not completed evaluating the impact of the adoption of SFAS No. 153, but does not expect any material impact on its consolidated results of operations, financial condition and cash flows.

      In December 2004, the FASB issued SFAS No. 123 (revised 2004) (“SFAS No. 123(R)”), Share-Based Payment. This Statement requires a public entity to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award (with limited exceptions). That cost will be recognized over the period during which an employee is required to provide service in exchange for the award — the requisite service period (usually the vesting period). No compensation cost is recognized for equity instruments for which employees do not render the requisite service. Employee share purchase plans will not result in recognition of compensation cost if certain conditions are met. A public entity will initially measure the cost of employee services received in exchange for an award of liability instruments based on its current fair value; the fair value of that award will be remeasured subsequently at each reporting date through the settlement date. Changes in fair value during the requisite service period will be recognized as compensation cost over that period. SFAS No. 123(R) is effective for all periods beginning after June 15, 2005. As of the required effective date, all public entities will apply this Statement using a modified version of prospective application. Under that transition method, compensation cost is recognized on or after the required effective date for the portion of outstanding awards for which the requisite service has not yet been rendered, based on the grant-date fair value of those awards calculated under SFAS No. 123(R) for either recognition or pro forma disclosures. For periods before the required effective date, entities may elect to apply a modified version of retrospective application under which financial statements for prior periods are adjusted on a basis consistent with the pro forma disclosures required for those periods by Statement 123(R). The Company has not completed evaluating the impact of SFAS No. 123(R).

Other Matters

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

      In 2004, the company that owned the building containing World Air Holdings’ corporate headquarters, of which World Airways’ previous Chairman and CEO is a principal, sold the building to a real estate investment trust. In conjunction with this transaction, the Company executed a new 15-year lease that provides for

reduced rental rates and increased flexibility for expansion. Before approving the terms of the new lease, the Company’s Board of Directors retained both an independent outside law firm to provide a comparative analysis as well as a national, commercial real estate firm to independently verify that the new lease terms did not have a material incremental financial impact on the Company. Obligations for rent under the lease aggregating $12.1 million at December 31, 2004 are included with the future lease payments for operating leases in Note 6 to “Notes to Consolidated Financial Statements” in Item 8.

      In June 2003, the Georgia Department of Revenue approved the Company’s application for the Georgia Headquarters Job Tax Credit (the “HQC”). The HQC is available for corporate taxpayers (a) establishing or relocating their headquarters to Georgia, (b) investing a minimum of $1 million in certain property, and (c) employing a minimum number of new full-time employees in the State of Georgia that pay at or above a required wage level. This credit may be used for either corporate state income tax or payroll withholding tax. The Company recorded $340,000 and $760,000 of tax credits in 2003 and 2004, respectively. If the Company continues to meet the statutory requirements for each year that it is eligible, its total potential net estimated benefit could be in excess of $2.0 million on a pre-tax basis.

      World Air Holdings does not have any material exposure to market risks.

      With respect to interest rate risks at December 31, 2004, interest rates on the Company’s $18.1 million long-term convertible debt obligations due in December 2009 were fixed. Under the ATSB Loan, based on the balance outstanding at December 31, 2004, each 1% change in the benchmark interest rate would have increased or decreased the Company’s pre-tax annual interest cost by approximately $300,000. The principal amount of the term loan will be repaid in three annual installments of $6.0 million each, commencing on December 12, 2005, and a final fourth installment of $12.0 million due on December 12, 2008. At December 31, 2004, the $6.0 million that is due in December 2005 is reflected as a current liability in the Consolidated Balance Sheet. At December 31, 2004, the Company had $4.6 million of letters of credit outstanding, which were collateralized by $4.8 million of restricted cash. Letters of credit are subject to a fee of 0.75% of the face amount of the letters of credit. See Note 5 of “Notes to the Consolidated Financial Statements” in Item 8. The Company has not entered into any obligations for trading purposes.

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

      The Company is not exposed to commodity price risks except with respect to the purchase of aviation fuel. However, fluctuations in the price of fuel have not had a significant impact on the Company’s operations in recent years because, in general, the Company’s contracts with its customers limit the Company’s exposure to increases in fuel prices. The Company does not purchase fuel under long-term contracts or enter into futures or swap contracts at this time.

WORLD AIR HOLDINGS, INC.

CONSOLIDATED BALANCE SHEETS

WORLD AIR HOLDINGS, INC.

CONSOLIDATED BALANCE SHEETS — (Continued)

See accompanying Notes to Consolidated Financial Statements

WORLD AIR HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

See accompanying Notes to Consolidated Financial Statements

WORLD AIR HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF CHANGES

IN STOCKHOLDERS’ EQUITY (DEFICIENCY)

Years ended December 31, 2004, 2003, and 2002

See accompanying Notes to Consolidated Financial Statements

WORLD AIR HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

See accompanying Notes to Consolidated Financial Statements

WORLD AIR HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

      The accompanying consolidated financial statements include the accounts of World Air Holdings, Inc. (“World Air Holdings” or the “Company”) and its wholly-owned subsidiaries, World Airways, Inc. (“World Airways”) and World Risk Solutions, Ltd. (“World Risk Solutions”). World Airways Parts Company LLC is a wholly-owned subsidiary of World Airways. All significant inter-company accounts and transactions have been eliminated.

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

      World Airways was organized in March 1948 and is a U.S. certificated air carrier. Air transportation operations account for 100% of World Air Holdings’ operating revenue. World Airways provides long-range passenger and cargo charter and wet lease air transportation, serving the U.S. Government, international passenger and cargo air carriers, tour operators, international freight forwarders and cruise ship companies (see Note 10). World Risk Solutions, a Bermuda corporation, was formed in November 2004, with the objective of providing certain insurance cost savings, enhanced risk management programs, and better loss control practices to the Company. Management will elect to report World Risk Solutions as a taxable entity in the United States.

      Certain items in the prior year financial statements included herein have been reclassified to conform to the 2004 financial statement presentation.

      World Airways operates within one segment, the air transportation industry.

      The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

      The Company considers all liquid investments purchased with an original or remaining maturity of ninety days or less to be cash equivalents.

WORLD AIR HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      Restricted cash consists of amounts required for letters of credit that have to be secured by cash collateral, and prepayments from customers for flights that are scheduled to be flown within 30 days of the balance sheet date. The restricted cash as of December 31, 2003 also included amounts required to pay the principal and interest on the convertible debentures called for redemption on December 30, 2003.

      The following methods and assumptions were used to estimate the fair value of each class of financial instruments at December 31, 2004.

        The carrying value approximates fair value because of the short maturity of these financial instruments.

        The estimated fair value of the Company’s variable rate $30 million term loan facility approximates the carrying value of the debt since the variable interest rates are market based, and the Company believes such debt could be refinanced on materially similar terms.

        Note 5 to the Consolidated Financial Statements contains information about the carrying value and fair value determination at inception with respect to the Company’s 8.0% Convertible Senior Subordinated Debentures due in 2009 (the “Debentures”). These Debentures, in the principal amount of $25.5 million, were recorded at their estimated fair market value of $28.5 million at the time of their issuance on December 30, 2003. During 2004, conversions reduced the principal amount of the Company’s outstanding Debentures by $7.4 million. In February 2005, World Air Holdings issued notice to the holders of its Debentures that it had elected to redeem for cash all of the Debentures on March 24, 2005 (the “Redemption Date”), as the Company had met the conditions for redemption. The debenture holders had until the close of business on March 22, 2005 to exercise their conversion rights at a conversion price of $3.20 per share plus accrued and unpaid interest to the Redemption Date. All of the outstanding Debentures were converted by March 22, 2005. The $19.9 million carrying value of the Debentures at December 31, 2004 approximates the fair value of these financial instruments because of the short period of time to the date fixed for redemption.

        Long-term operating deposits of $18.2 million at December 31, 2004 consisted of aircraft and engine (flight equipment) deposits of $17.8 million and building and miscellaneous deposits of $0.4 million. At December 31, 2003, long-term operating deposits of $17.7 million consisted of aircraft and engine deposits of $16.2 million and building and miscellaneous deposits of $1.5 million.

      Revenues are recognized as air transportation services are provided.

      The Company provides for income taxes using the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and

WORLD AIR HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

liabilities of a change in tax rates is recognized in the financial statements in the period that includes the enactment date.

      Basic earnings (loss) per share is computed by dividing net earnings by the weighted average number of shares outstanding during the period. Diluted earnings per share include the effects of common equivalent shares outstanding during the period.