SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

Commission File Number 0-26582

WORLD AIR HOLDINGS, INC.

The HLH Building, 101 World Drive, Peachtree City, GA 30269
(Address of principal executive offices)

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

World Airways, Inc.

     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.

     Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

     The number of shares of the registrant’s Common Stock outstanding on May 2, 2005 was approximately 23,515,000.

WORLD AIR HOLDINGS, INC.

QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2005

TABLE OF CONTENTS

2

ITEM 1. FINANCIAL STATEMENTS
WORLD AIR HOLDINGS, INC.

ASSETS
(in thousands)
(unaudited)

(Continued)

3

WORLD AIR HOLDINGS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(continued)

LIABILITIES AND STOCKHOLDERS’ EQUITY
(in thousands except share amounts)
(unaudited)

See accompanying Notes to Condensed Consolidated Financial Statements

4

WORLD AIR HOLDINGS, INC.

See accompanying Notes to Condensed Consolidated Financial Statements

5

WORLD AIR HOLDINGS, INC.

See accompanying Notes to Condensed Consolidated Financial Statements

6

WORLD AIR HOLDINGS, INC.

See accompanying Notes to Condensed Consolidated Financial Statements

7

WORLD AIR HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

1.	Basis of Presentation
	The unaudited Condensed 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.
	Management believes that all adjustments necessary for a fair statement of results have been included in the unaudited Condensed Consolidated Financial Statements for the interim periods presented. 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 and the results of operations for the three months ended March 31, 2005 are not necessarily indicative of the results to be expected for the year ending December 31, 2005.
	The Condensed Consolidated Balance Sheet for December 31, 2004 is derived from the Consolidated Financial Statements included in the Company’s 2004 Form 10-K. These interim period Condensed Consolidated Financial Statements and accompanying footnotes should be read in conjunction with the Consolidated Financial Statements contained in World Air Holdings’ Annual Report on Form 10-K for the year ended December 31, 2004.
	Certain items in prior year financial statements included herein have been reclassified to conform to the 2005 financial statement presentation
2.	Long-Term Operating Deposits
	Long-term operating deposits of $18.1 million at March 31, 2005 consisted of aircraft and engine (flight equipment) deposits of $17.7 million and building and miscellaneous deposits of $0.4 million. At December 31, 2004, long-term operating deposits of $18.2 million consisted of aircraft and engine deposits of $17.8 million and building and miscellaneous deposits of $0.4 million.
3.	Earnings per Share
	Basic earnings per share are 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. The following table sets forth the computation of basic and diluted earnings per share (in thousands except per share data):

8

4.	Accounting for Stock-Based Compensation
	At March 31, 2005, the Company had three stock-based compensation plans. The Company accounts for those plans under the recognition and measurement principles of Accounting Principles Board (“APB”) Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations. No stock-based compensation cost is reflected in net earnings for the quarter ended March 31, 2005, as all options granted during those periods had an exercise price equal to the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net earnings and earnings per share if the Company had applied the fair value recognition provisions of FASB Statement No. 123, Accounting for Stock-Based Compensation, to stock-based compensation (in thousands, except per share data):

The per share weighted-average fair value of stock options granted during the first quarter of 2004 was $4.06 (no stock options were granted during the first quarter of 2005) on the date of grant using the Black Scholes option-pricing model with the following weighted-average assumptions:

9

5.	Virginia Lease Obligation
	The Company is obligated under an operating lease for office space at its former headquarters in Herndon, Virginia, through April 2006. In the first quarter of 2005, due to market conditions, the Company fully accrued for the remaining payments under this operating lease. The Company had a liability balance of $1.1 million at December 31, 2004. During the first quarter of 2005, the Company reviewed market conditions and determined that an additional net $0.6 million should be added to the liability. This resulted in a $1.7 million balance at March 31, 2005, which is the present value of the total remaining cash obligation under this lease. The liability is included in other accrued liabilities on the accompanying Condensed Consolidated Balance Sheets at March 31, 2005.
6.	Union Negotiations
	World Airways’ cockpit crewmembers, who constitute approximately 27% of its employees and are represented by the International Brotherhood of Teamsters (the “Teamsters”), are subject to a collective bargaining agreement that became amendable June 30, 2003. The Company continued negotiations with the Teamsters during the first quarter of 2005, under the auspices of the National Mediation Board.
	World Airways’ 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 World Airways’ employees are subject to this collective bargaining agreement. The Company continued negotiations with the TWU during the first quarter of 2005.
7.	Post-Retirement Health Care Benefits Plan
	World Airways’ cockpit crewmembers and eligible dependents are covered by a post-retirement health care benefits plan. A summary of the net periodic post-retirement benefit costs for the three months ended March 31 is as follows (in thousands):

	The Company anticipates that it will contribute approximately $159,000 to fund its health care obligations in 2005. As of March 31, 2005, $40,000 of contributions have been made.
8.	Other Comprehensive Income (Loss)
	The Company reports other comprehensive income in its Consolidated Statement of Changes in Stockholders’ Equity. For the quarters ending March 31, 2005 and 2004, there were no items of other comprehensive income or loss for the Company.
9.	Legal Proceedings
	The Company’s flight attendants, representing approximately 44% of the Company’s employees, are represented by the International Brotherhood of Teamsters (“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

10

	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.
	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. At this time, the Company cannot determine the impact, if any, this matter will have on the Company’s financial condition, results of operations or liquidity.
	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 on the costs of litigation and any resulting 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 Department of Transportation (“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 amount of the Old Debentures for a like amount of the newly-issued 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

11

	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 approximating $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 Federal Aviation Administration (“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, World Airways 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 .
10.	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 SFAS No. 153, but does not expect any material impact on its consolidated results of operations, financial condition or liquidity.
	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 annual periods beginning after December 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).
11.	Subsequent Events
	On April 27, 2005, World Air Holdings acquired North American Airlines, Inc. (“North American”), a privately held air

12

carrier based in Jamaica, N.Y., for $35 million in cash. North American had 2004 operating revenues of $213 million. This acquisition expands World Air Holdings’ product mix in the military and commercial charter markets, with North American’s three Boeing 767 and five Boeing 757 passenger aircraft. World Airways and North American will be managed independently under their respective operating certificates. North American will maintain its operational headquarters at John F. Kennedy International Airport in New York, with World Airways and World Air Holdings continuing to be based in Peachtree City, Georgia.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Part I, Item 2 of this report should be read in conjunction with Part II, Item 7 of World Air Holdings, Inc.’s (“World Air Holdings” or the “Company”) Annual Report on Form 10-K for the year ended December 31, 2004. The information contained herein is not a comprehensive management overview and analysis of the financial condition and results of operations of the Company, but rather updates disclosures made in the aforementioned filing.

The Company desires to take advantage of the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995 (the “Act”). Therefore, this report contains forward looking statements that are subject to risks and uncertainties, including, but not limited to, the reliance on key strategic alliances, fluctuations in operating results, the ability to operate and manage successfully North American Airlines and other risks detailed from time to time in the Company’s filings with the Securities and Exchange Commission (the “Commission”). These risks could cause the Company’s actual results for 2005 and beyond to differ materially from those expressed in any forward looking statements made by, or on behalf of, the Company.

OVERVIEW

General

For the first quarter of 2005, the Company’s operating income was $17.2 million compared to $13.6 million for the same period in 2004, an improvement of $3.6 million. Net earnings for the 2005 first quarter were $9.9 million compared to $7.9 million for the first quarter of 2004, an increase of $2.0 million.

The following table provides statistical data, used by management in evaluating the operating performance of the Company, for the quarters ended March 31, 2005 and 2004.

* ACMI contracts are where the Company provides the aircraft, crew, maintenance and insurance.

For 2005, the Company expects to:

	•	continue working to diversify the revenue mix by adding more commercial customers, while continuing to provide excellent service to the Company’s largest customer, the U.S. military;
	•	continue to actively manage the Company’s major cost categories;
	•	work on concluding a new collective bargaining agreement with its pilots and dispatchers;
	•	manage fleet plans to meet customer needs; and
	•	complete organizational changes, synergy enhancements and financial reporting standardization tied to the acquisition

13

of North American Airlines.

Significant Customer Relationships

The Company is highly dependent on revenues from the U.S. Air Force (“USAF”). The loss of the USAF as a customer would have a material adverse effect on the Company. The Company’s largest customers, and the percent of revenues from those customers, for the quarter ended March 31, 2005 and 2004, are as follows:

RESULTS OF OPERATIONS

Three Months Ended March 31, 2005 Compared to Three Months Ended March 31, 2004

Revenues. Revenues increased $29.9 million, or 23.1%, to $159.5 million in the first quarter of 2005 from $129.6 million in the first quarter of 2004. The Company reported significant growth in military passenger flying for the USAF as well as commercial cargo ACMI flying, offset by reductions in military cargo revenues for the USAF and commercial passenger full-service flying. Two key variables that impact the amount of revenues are listed below:

Operating Expenses. Total operating expenses increased $26.5 million to $142.4 million for the first quarter of 2005, compared to $115.9 million for the comparable quarter in 2004. Below is information on the Company’s operating expense per block hour:

Flight expenses include all costs related directly to the operation of the aircraft other than maintenance, aircraft rent, insurance and fuel. Also included are expenses related to flight dispatch and flight operations administration. Flight expenses increased $4.4 million, or 10.7%, to $45.2 million in the first quarter of 2005 compared to $40.8 million in the same period of 2004. Flight costs were higher due to increases in the following areas:

	•	$2.1 million in pilot and flight attendant costs;
	•	2.0 million in catering costs; and
	•	$0.5 million in flight communication costs.

The higher flight expenses are directly attributable to an overall increase in total block hours, as well as a required crew rest location change for certain USAF flights in the first quarter of 2005.

Maintenance expenses increased $7.1 million, or 39.8%, to $25.0 million in the first quarter of 2005 compared to $17.9 million in the same period of 2004. In the first quarter of 2005, the Company incurred $5.3 million for scheduled engine and thrust reverser overhauls and $2.1 million for maintenance reserve expenses related to the increase in total block hours.

Aircraft costs, which include aircraft rent and insurance, increased $1.2 million, or 6.4%, to $20.9 million in the first quarter of 2005 compared to $19.7 million in the first quarter of 2004. This increase was primarily due to additional aircraft rent. World Airways added an MD-11 passenger aircraft in December 2004 at a fixed monthly cost, experienced higher utilization of an MD-11 passenger aircraft under a power-by-the-hour operating lease, and leased two additional short-term spare engines in the first quarter

14

of 2005. This increase was partially offset by the return of two DC-10 cargo and one DC-10 passenger aircraft in 2004, and a DC-10 passenger aircraft in the first quarter of 2005.

Fuel expenses were higher by $12.3 million, or 67.4%, to $30.5 million in the first quarter of 2005 from $18.2 million in the first quarter of 2004. Fluctuations in the price of fuel did not have a significant impact in the first quarter of 2005 because the Company’s contracts with its customers provided for a pass-through of fuel costs of 97% of fuel purchased and thereby limited the Company’s exposure to increases in fuel prices.

Commissions increased $2.6 million, or 40.6%, to $8.9 million in the first quarter of 2005, compared to $6.3 million in the first quarter of 2004. This increase was primarily due to the higher military revenue associated with the USAF contract in the first quarter of 2005 compared to the same period in 2004.

Sales, general and administrative expenses (“SG&A”) decreased $0.3 million, or 2.8%, to $10.0 million in the first quarter of 2005 compared to $10.3 million in the same quarter of 2004. In the first quarter of 2005, due to market conditions, the Company fully accrued for the remaining payments under an operating lease for office space at its former headquarters in Herndon, Virginia. Rental expense is higher by $0.4 million in the first quarter of 2005, compared to the same quarter in 2004. In the first quarter of 2004, the Company recorded $0.8 million of bad debt expense related to a contract with TM Travel Services, Inc. (“TM Travel”). The Department of Transportation decided to not renew TM Travel’s public charter prospectus, prompting the Company to evaluate TM Travel’s ability to meet its contractual obligations and the recording of this bad debt expense.

LIQUIDITY AND CAPITAL RESOURCES

At March 31, 2005, the Company had $76.2 million of cash and cash equivalents compared to $50.0 million at December 31, 2004. Restricted cash was $4.2 million at March 31, 2005, which consisted of $3.7 million for letters of credit that had to be collateralized and $0.5 million of prepayments from customers for flights that are scheduled to be flown within 30 days of the balance sheet date (unearned revenue). Restricted cash was $4.9 million at December 31, 2004, which consisted of $4.8 million for letters of credit and $0.1 million related to unearned revenue. The restricted cash balance at December 31, 2004 included 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. No monies were drawn from the two surety bonds, and they expired in July 2004. The letters of credit were cancelled in the first quarter of 2005, and the cash collateral was returned to unrestricted cash.

At March 31, 2005, the Company’s current assets were $139.8 million and its current liabilities were $96.9 million. The ratio of the Company’s current assets to its current liabilities (“current ratio”) was 1.4:1.

In the first quarter of 2005, The Boeing Company exercised warrants to purchase 1,000,000 shares of Common Stock at $2.50 per share. In addition, the Air Transportation Stabilization Board (“ATSB”) exercised warrants to purchase 111,111 shares, and pursuant to the net exercise provisions of the warrants, received 76,345 shares of the Company’s Common Stock.

On February 22, 2005, World Air Holdings issued a notice of redemption of its 8.0% Convertible Senior Subordinated Debentures due in 2009 (the “Debentures”), giving the holders until March 22, 2005 to exercise their conversion rights at a conversion price of $3.20 per share. The holders converted all of the Debentures outstanding by March 22, 2005. Future annual interest expense will be reduced by approximately $2 million due to the conversion of all of the Debentures.

In April 2005, World Air Holdings purchased North American for $35 million in an all-cash transaction. Although this was a significant use of cash, the Company believes that both entities will be able to provide sufficient cash from operations in order to meet funding requirements.

The Company has significant long-term obligations relating to operating leases for aircraft and spare engines. In 2002 and 2001, the Company paid amounts less than its original contractual aircraft rent obligations under agreements with its lessors that amended the terms of the original aircraft lease agreements to provide for the repayment of the unpaid contractual rent obligations. At March 31, 2005, the accrual for these unpaid contractual aircraft rent obligations was $1.7 million and is included as accrued rent in the current liabilities section of the Condensed Consolidated Balance Sheets. The Company paid this $1.7 million obligation in April 2005. In the first quarter of 2004, the Company reached an agreement with one of its MD-11 lessors to restructure certain leases. In exchange for reduced fixed monthly lease rates, the Company agreed to an annual restructuring fee based on net income. Payments commenced in 2005 based on 2004 results, and continue through the lease terminations in 2011, which will be paid in 2012. Over the term of the agreement, the total 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,

15

expense recognized in a given year may exceed the cash obligation to be disbursed in the following year. In April 2005, the Company paid $1.6 million of this liability based on 2004 results.

The Company’s indebtedness outstanding under its $30.0 million term loan, which is supported by a $27.0 million guarantee issued by the Air Transportation Stabilization Board (the “ATSB Loan”) and a $3.0 million guarantee by another third party, is secured by substantially all of the Company’s assets. 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. 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 as well as certain negative covenants. In addition, the ATSB Loan contains restrictive provisions that require prepayments in the event the Company sells any significant assets, receives proceeds from future borrowings from other sources or issuances of certain securities, or receives net proceeds from insurance or condemnation. 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, World Air Holdings 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.

Cash Flows from Operating Activities

Operating activities provided $24.2 million in cash during the three months ended March 31, 2005 compared to providing $30.3 million for the comparable 2004 period. The cash provided in the 2005 period principally reflects the $9.9 million net earnings, a $5.3 million increase in cash due to changes in operating assets and liabilities excluding trade accounts receivable, net non-cash statement of operations charges of $3.2 million, and a $5.8 million increase due to trade accounts receivable decreasing. The cash provided in the 2004 period principally reflects the $7.9 million net earnings, a $26.7 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 $2.6 million, less a $6.9 million decrease due to trade accounts receivable increasing.

Cash Flows from Investing Activities

Investing activities used $1.0 million in the first three months of 2005 compared to using $0.5 million in the comparable period of 2004. In both 2005 and 2004, cash was used for the purchase of rotable spare parts and other fixed assets.

The Company’s capital expenditures for 2005 are expected to be approximately $7.0 million, principally for the purchase of aircraft related assets, which it expects to finance from working capital.

Cash Flows from Financing Activities

Financing activities provided $3.0 million in cash for the three months ended March 31, 2005, which was primarily due to $2.5 million of proceeds related to the exercise of warrants and $0.5 million of proceeds related to the exercise of stock options. For the three months ended March 31, 2004, financing activities used $18.5 million, which was primarily due to the $18.0 million used to pay the principal on the convertible bonds that were called on December 30, 2003, and redeemed on January 28, 2004.

16

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Part I, Item 3, of this report should be read in conjunction with Part II, Item 7a of the Company’s Annual Report on Form 10-K for the year ended December 31, 2004. The information contained herein is not a quantitative and qualitative discussion about market risk the Company faces, but rather updates disclosures made in the aforementioned filing.

World Air Holdings continues to have no material exposure to market risks.

ITEM 4. CONTROLS AND PROCEDURES

We maintain a system of controls and procedures designed to provide reasonable assurance as to the reliability of the financial statements and other disclosures included in this Quarterly Report, as well as to safeguard assets from unauthorized use or disposition. We evaluated the effectiveness of the design and operation of our disclosure controls and procedures under the supervision and with the participation of management, including the Chief Executive Officer and Chief Financial Officer, as of the end of the period covered by this Quarterly Report. Based upon this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective in timely alerting them to material information required to be included in our periodic filings with the Securities and Exchange Commission. No significant changes were made to our internal controls or other factors that could significantly affect these controls subsequent to the date of their evaluation.

PART II

ITEM 1. LEGAL PROCEEDINGS

The information required by this Item is incorporated by reference to Note 9 to the Condensed Consolidated Financial Statements included elsewhere herein.

ITEM 6. EXHIBITS

17

† Management contract or compensatory plan or arrangement.

*    *   *   *   *   *   *   *   *   *   *   *   *   *   *

18

SIGNATURES

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

Date: May 13, 2005

19