Edgar Filing: AIR T INC

Type of Aircraft	Model Year		Form of Ownership	Number of Aircraft
Cessna Caravan 208B
(single turbo prop)		1985-1996	dry lease		71
Fokker F-27 (twin turbo prop)		1968-1985	dry lease		1
ATR-42 (twin turbo prop)	1992		dry lease		12
ATR-72 (twin turbo prop)	1992		dry lease		4
Short Brothers SD3-30
(twin turbo prop)	1981		owned		2

Total					90

Of the 90 cargo aircraft in the fleet, 88 aircraft (the Cessna Caravan, ATR-42, ATR-72 and Fokker F-27 aircraft) are owned by FedEx and operated by MAC and CSA under the above described dry-lease service contracts.

All FAA Part 135 aircraft, including Cessna Caravan 208B, and Short Brothers SD3-30 aircraft are maintained on FAA approved inspection programs. The inspection intervals range from 100 to 200 hours. The current overhaul period on the Cessna aircraft is 7,500 hours. The Short Brothers manufactured aircraft are maintained on an “on condition” maintenance program (i.e., maintenance is performed when performance deviates from certain specifications).

The Fokker F-27 aircraft is maintained under a FAA Part 121 maintenance program. The program consists of A, B, C, D and I service checks which are inspections designed to ensure the Company’s maintenance procedures are in compliance with the applicable FAA regulations. The engine overhaul period is 6,700 hours. This aircraft is being phased out as part of a recent fleet modernization program, which brought on the more modern ATR aircraft.

The ATR-42 and ATR-72 aircraft are maintained under a FAA Part 121 maintenance program. The program consist of A and C service checks. The engine overhaul period is “on condition”.

The Company operates in a niche market within a highly competitive contract cargo carrier market. MAC and CSA are two of seven carriers that operate within the United States as FedEx feeder carriers. MAC and CSA are benchmarked against the other five FedEx feeders, based on safety, reliability, compliance with Federal, state and applicable foreign regulations, price and other service related measurements. Accurate industry data is not available to indicate the Company’s position within its marketplace (in large measure because most of the Company’s competitors are privately held), but management believes that MAC and CSA, combined, constitute the largest contract carrier of the type described immediately above.

FedEx conducts periodic audits of CSA and MAC, and these audits are an integral part of the relationship between the carrier and FedEx. The audits test adherence to the Aircraft Dry Lease and Service Agreement and assess the carrier’s overall internal control environment, particularly as related to the processing of invoices of FedEx-reimbursable costs. The scope of these audits typically extends beyond simple validation of invoice data against the third-party supporting documentation. The audit teams generally investigate the operator’s processes and procedures for strong internal control procedures. The Company believes satisfactory audit results are critical to maintaining its relationship with FedEx. The audits conducted by FedEx are not designed to provide any assurance with respect to the Company’s financial statements, and investors, in evaluating the Company’s financial statements, may not rely in any way on any such examination of the Company or any of its subsidiaries.

The Company’s air cargo operations are not materially seasonal.

Aircraft Deice and Other Ground Support and Other Specialized Industrial Equipment Products.

In August 1997, the Company organized Global and acquired the Simon Deicer Division of Terex Aviation Ground Equipment. Global is located in Olathe, Kansas and manufactures, sells and services aircraft ground support and other specialized equipment sold to domestic and international passenger and cargo airlines, the U.S. Air Force and Navy, airports and industrial customers. Since its inception, Global has diversified its product line to include additional models of aircraft deicers, scissor-type lifts, military and civilian decontamination units and other specialized types of equipment. In the fiscal year ended March 31, 2007, sales of deicing equipment accounted for approximately 83% of Global’s revenues.

In the manufacture of its ground service equipment, Global assembles components acquired from third party suppliers. Components are readily available from a number of different suppliers. The primary components are the chassis (which is similar to the chassis of a medium to heavy truck), fluid storage, a boom mounted delivery system and heating and pumping equipment.

Global manufactures five basic models of mobile deicing equipment with capacities ranging from 700 to 3,200 gallons. Global also manufactures fixed-pedestal-mounted deicers. Each model can be customized as requested by the customer, including the addition of twin engine deicing systems, single operator configuration, fire suppressant equipment, modifications for open or enclosed cab design, a patented forced-air deicing nozzle to substantially reduce glycol usage, and color and style of the exterior finish. Global also manufactures four models of scissor-lift equipment, for catering, cabin service and maintenance service of aircraft, and has developed a line of decontamination equipment and other special purpose mobile equipment. In addition to manufacturing the above-mentioned equipment, Global also maintains and services aviation ground support equipment at four locations in the United States. Global competes primarily on the basis of the quality and reliability of its products, prompt delivery, service and price. The market for aviation ground service equipment is highly competitive and directly related to the financial health of the aviation industry, weather patterns and changes in technology.

Global’s mobile deicing equipment business is seasonal. The Company has continued its efforts to reduce Global’s seasonal fluctuation in revenues and earnings by broadening its international and domestic customer base and its product line. In June 1999, Global was awarded a four-year contract to supply deicing equipment to the United States Air Force. The contract was extended for two additional three-year periods, and is scheduled to expire in June 2009.

Revenue from Global’s contract with the U.S. Air Force accounted for approximately 24%, 18% and 24% of the Company’s consolidated revenue for the years ended March 31, 2007, 2006 and 2005, respectively.

Backlog.

The Company’s backlog for its continuing operations consists of “firm” orders supported by customer purchase orders for the equipment sold by Global. At March 31, 2007, the Company’s backlog of orders was $16.8 million, all of which the Company expects to be filled in the fiscal year ending March 31, 2008.

Governmental Regulation.

The Department of Transportation (“DOT”) has the authority to regulate economic issues affecting air service. The DOT has authority to investigate and institute proceedings to enforce its economic regulations, and may, in certain circumstances, assess civil penalties, revoke operating authority and seek criminal sanctions.

In response to the terrorist attacks of September 11, 2001, Congress enacted the Aviation and Transportation Security Act (“ATSA”) of November 2001. ATSA created the Transportation Security Administration (“TSA”), an agency within the DOT, to oversee, among other things, aviation and airport security. In 2003, TSA was transferred from the DOT to the Department of Homeland Security, however the basic mission and authority of TSA remain unchanged. ATSA provided for the federalization of airport passenger, baggage, cargo, mail, and employee and vendor screening processes.

Under the Federal Aviation Act of 1958, as amended, the FAA has safety jurisdiction over flight operations generally, including flight equipment, flight and ground personnel training, examination and certification, certain ground facilities, flight equipment maintenance programs and procedures, examination and certification of mechanics, flight routes, air traffic control and communications and other matters. The Company has been subject to FAA regulation since the commencement of its business activities. The FAA is concerned with safety and the regulation of flight operations generally, including equipment used, ground facilities, maintenance, communications and other matters. The FAA can suspend or revoke the authority of air carriers or their licensed personnel for failure to comply with its regulations and can ground aircraft if questions arise concerning airworthiness. The FAA also has power to suspend or revoke for cause the certificates it issues and to institute proceedings for imposition and collection of fines for violation of federal aviation regulations. The Company, through its subsidiaries, holds all operating airworthiness and other FAA certificates that are currently required for the conduct of its business, although these certificates may be suspended or revoked for cause. The FAA periodically conducts routine reviews of MAC and CSA’s operating procedures and flight and maintenance records.

The FAA has authority under the Noise Control Act of 1972, as amended, to monitor and regulate aircraft engine noise. The aircraft operated by the Company are in compliance with all such regulations promulgated by the FAA. Moreover, because the Company does not operate jet aircraft, noncompliance is not likely. Such aircraft also comply with standards for aircraft exhaust emissions promulgated by the Environmental Protection Agency pursuant to the Clean Air Act of 1970, as amended.

Because of the extensive use of radio and other communication facilities in its aircraft operations, the Company is also subject to the Federal Communications Act of 1934, as amended.

Maintenance and Insurance.

The Company, through its subsidiaries, maintains its aircraft under the appropriate FAA standards and regulations.

The Company has secured public liability and property damage insurance in excess of minimum amounts required by the United States Department of Transportation. The Company has also obtained all-risk hull insurance on Company-owned aircraft.

The Company maintains cargo liability insurance, workers’ compensation insurance and fire and extended coverage insurance for leased as well as owned facilities and equipment. In addition, the Company maintains product liability insurance with respect to injuries and loss arising from use of products sold by Global.

Employees.

At March 31, 2007, the Company and its subsidiaries had 392 full-time and full-time-equivalent employees, of which 29 are employed by the Company, 235 are employed by MAC, 53 are employed by CSA and 75 are employed by Global. None of the Company’s employees are represented by labor unions. The Company believes its relations with its employees are good.

Item 1A Risk Factors.

The following risk factors, as well as other information included in the Company’s Annual Report on Form 10-K, should be considered by investors in connection with any investment in the Company’s common stock. As used in this Item, the terms “we,” “us” and “our” refer to the Company and its subsidiaries.

We are significantly dependent on our contractual relationship with FedEx Corporation, the loss of which would have a material adverse effect on our business, results of operations and financial position.

In the fiscal year ended March 31, 2007, 54% of our consolidated operating revenues, and 100% of the operating revenues for our overnight air cargo segment, arose from services we provided to FedEx. Our agreements with FedEx are renewable on two to five year terms and may be terminated by FedEx at any time upon 30 days notice. FedEx has been a customer of the Company since 1980. The loss of these contracts with FedEx would have a material adverse effect on our business, results of operations and financial position.

Because of our dependence on FedEx, we are subject to the risks that may affect FedEx’s operations.

These risks are discussed in “Management’s Discussion and Analysis of Results of Operations and Financial Condition—Risk Factors” in FedEx Corporation’s Annual Report on Form 10-K for the fiscal year ended May 31, 2006. These risks include:

·	Economic conditions in the global markets in which it operates;

·	Any impacts on its business resulting from new domestic or international government regulation, including regulatory actions affecting aviation rights, security requirements, tax, accounting, environmental or labor rules;

·	The price and availability of jet and diesel fuel;

·	The impact of any international conflicts or terrorist activities on the United States and global economies in general, the transportation industry in particular, and what effects these events will have on the cost and demand for its services;

·	Dependence on its strong reputation and value of its brand;

·	Reliance upon technology, including the internet;

·	Competition from other providers of transportation services, including its ability to compete with new or improved services offered by its competitors;

·	The impact of technology developments on its operations and on demand for its services; and

·	Adverse weather conditions or natural disasters.

A material reduction in the aircraft we fly for FedEx could materially adversely affect on our business and results of operations.

Under our agreements with FedEx, we are not guaranteed a number of aircraft or routes we are to fly. Our compensation under these agreements, including our administrative fees, depends on the number of aircraft operated on routes assigned to us by FedEx. For example, in connection with delays in the fiscal year ended March 31, 2005 in the conversion of a portion of the fleet we operate for FedEx from Fokker F-27 aircraft to ATR-42 and ATR-72 aircraft, the number of aircraft we operated was reduced as certain Fokker F-27 aircraft were removed from service in advance of scheduled heavy maintenance checks while replacement ATR-42 and ATR-72 aircraft were not yet available to be placed in service due to delays in their conversion from passenger to cargo configuration. Although such a reduction in aircraft was temporary in that instance, any material permanent reduction in the aircraft we operate could materially adversely affect our business and results of operations. A temporary reduction could materially adversely affect our results of operations for that period.

If our agreement with the United States Air Force expires in June 2009 as scheduled, and is not extended or renewed, we may be unable to replace revenues from sales of ground equipment to the United States Air Force and seasonal patterns of this segment of our business may re-emerge.

In the fiscal years ended March 31, 2007, 2006 and 2005, approximately 24%, 18% and 24%, respectively, of our operating revenues arose from sales of de-icing equipment to the United States Air Force under a long-term contract. This initial four-year contract, awarded in 1999, was extended for two additional three-year periods, and is scheduled to expire in June 2009. We cannot provide any assurance that this agreement will be extended beyond its current 2009 expiration date. In the event that this agreement is not extended, our revenues from sales of ground support equipment may decrease unless we are successful in obtaining customer orders from other sources and we cannot assure you that we will be able to secure orders in that quantity or for the fully-equipped models of equipment sold to the Air Force. In addition, sales of de-icing equipment to the Air Force, has enabled us to ameliorate the seasonality of our ground equipment business. Thus if the contract with the Air Force is not extended, seasonal patterns for this business may re-emerge.

Other Business Risks

Our revenues for aircraft maintenance services fluctuate based on the heavy maintenance check schedule, which is based on aircraft usage, for aircraft flown by our overnight air cargo operations. The schedule for heavy maintenance checks resulted in reduced maintenance revenues in fiscal 2007 and this reduced level is likely to continue in fiscal 2008.

Our maintenance revenues fluctuate based on the level of heavy maintenance checks performed on aircraft operated by our air cargo operations. As a result of the delay in the introduction of ATR aircraft to replace 16 older Fokker F-27 aircraft operated by MAC, most of the ATR aircraft operated by MAC were placed in service during the fiscal year ended March 31, 2006. Maintenance revenues associated with the conversion of these aircraft from passenger operations to cargo operations resulted in increased maintenance revenues during that period. Because most of these aircraft were placed in service during a relatively short time span, they are on roughly the same maintenance schedule, and the next heavy maintenance checks due on these aircraft would not be anticipated to start until the fiscal year ending March 31, 2009. Unless there is an acceleration of the heavy maintenance checks schedule, which is based on aircraft usage, or we are able to attract additional maintenance projects, our maintenance revenues in fiscal 2008 are likely to be lower than in fiscal 2005 and 2006.

Incidents or accidents involving products that we sell may result in liability or otherwise adversely affect our operating results for a period.

Incidents or accidents may occur involving the products that we sell. For example, in February 2005, a 135-foot fixed-stand deicing boom sold by Global for installation at the Philadelphia, Pennsylvania airport collapsed on an Airbus A330 aircraft operated by US Airways. While the aircraft suffered some structural damage, no passengers or crew on the aircraft were injured. The operator of the deicing boom has claimed to suffer injuries in connection with the collapse. U.S. Airways, the city of Philadelphia and the boom operator have each initiated litigation. While we maintain products liability and other insurance in amounts we believe are customary and appropriate, and may have rights to pursue subcontractors in the event that we have any liability in connection with accidents involving products that we sell, it is possible that in the event of multiple accidents the amount of our insurance coverage would not be adequate.

In addition, in late June 2005, after an independent structural engineering firm’s investigation identified specific design flaws and structural defects in the remaining 11 booms sold by Global and installed at the Philadelphia Airport, and after Global’s subcontractor declined to participate in efforts to return the remaining 11 booms to service, Global agreed with the City of Philadelphia to effect specific repairs to the remaining 11 booms. Global incurred approximately $905,000 in the fiscal year ended March 31, 2006 in connection with its commercial undertaking with the City of Philadelphia to return these booms to service. While we have commenced litigation against our subcontractor to recover these amounts, we cannot assure you that we will be successful in recovering these amounts in a timely manner or at all.

The suspension or revocation of FAA certifications could have a material adverse effect on our business, results of operations and financial condition.

Our air cargo operations are subject to regulations of the FAA. The FAA can suspend or revoke the authority of air carriers or their licensed personnel for failure to comply with its regulations and can ground aircraft if questions arise concerning airworthiness. The FAA also has power to suspend or revoke for cause the certificates it issues and to institute proceedings for imposition and collection of fines for violation of federal aviation regulations. Our air cargo subsidiaries, MAC and CSA, operate under separate FAA certifications. Although it is possible that, in the event that the certification of one of our subsidiaries was suspended or revoked, flights operated by that subsidiary could be transferred to the other subsidiary, we can offer no assurance that we would be able to transfer flight operations in that manner. Accordingly, the suspension or revocation of any one of these certifications could have a material adverse effect our business, results of operations and financial position. The suspension or revocation of all of these certifications would have a material adverse effect on our business, results of operations and financial position.

Sales of de-icing equipment can be affected by weather conditions.

Our de-icing equipment is used to de-ice commercial and military aircraft. The extent of de-icing activity depends on the severity of winter weather. Mild winter weather conditions permit airports to use fewer de-icing units, since less time is required to de-ice aircraft in mild weather conditions.

Item 1B Unresolved Staff Comments.

Not applicable.

Item 2. Properties.

The Company leases the Little Mountain Airport in Maiden, North Carolina from a corporation whose stock is owned in part by William H. Simpson and John J. Gioffre, officers and/or directors of the Company, and the estate of David Clark, of which, Walter Clark, the Company’s chairman and Chief Executive Officer, is a co-executor and beneficiary, and Allison Clark, a director, is a beneficiary. The facility consists of approximately 68 acres with one 3,000 foot paved runway, approximately 20,000 square feet of hangar space and approximately 12,300 square feet of office space. The operations of the Company and MAC are headquartered at this facility. The two leases for this facility extend through May 31, 2008 at a monthly rental payment of $12,737. The lease agreement includes an option permitting the Company to renew the lease for an additional two-year period, with the monthly rental payment to be adjusted to reflect the Consumer Price Index (CPI) change from June 1, 2006 to April 1, 2008. The lease agreement provides that the Company shall be responsible for maintenance of the leased facilities and for utilities, taxes and insurance.

The Company also leases approximately 1950 square feet of office space and approximately 4,800 square feet of hangar space at the Ford Airport in Iron Mountain, Michigan. CSA’s operations are headquartered at these facilities which are leased from a third party under an annually renewable agreement.

On November 16, 1995, the Company entered into a twenty-one and one-half year premises and facilities lease with Global TransPark Foundation, Inc. to lease approximately 53,000 square feet of a 66,000 square foot aircraft hangar shop and office facility at the North Carolina Global TransPark in Kinston, North Carolina. This lease is cancelable under certain conditions at the Company’s option. The Company currently considers the lease to be cancelable and has calculated rent expense under the current lease term.

Global leases a 112,500 square foot production facility in Olathe, Kansas. The facility is leased, from a third party, under a three-year lease agreement, which expires in August 2009. The monthly rental payment, as of March 31, 2007, was $33,342 and the monthly rental will increase to no more than $34,689 over the life of the lease, based on increases in the Consumer Price Index.

As of March 31, 2007, the Company leased hangar space from third parties at 35 other locations for aircraft storage. Such hangar space is leased, from third parties, at prevailing market terms.

The table of aircraft presented in Item 1 lists the aircraft operated by the Company’s subsidiaries and the form of ownership.

Item 3. Legal Proceedings.

The Company and its subsidiaries are subject to legal proceedings and claims that arise in the ordinary course of their business. For a description of material pending legal proceedings, see Note 15 of Notes to Consolidated Financial Statements included in Item 8 of this report, which is incorporated herein by reference.

Item 4. Submission of Matters to a Vote of Security Holders.

No matter was submitted to a vote of security holders during the fourth quarter of the fiscal year covered by this report.

PART II

Item 5. Registrant’s Common Equity and Related Stockholder Matters.

The Company’s common stock is publicly traded in the Nasdaq Small Cap Market under the symbol “AIRT.”

As of May 23, 2007 the number of holders of record of the Company’s Common Stock was approximately 275. The range of high and low bid quotations per share for the Company’s common stock on the Nasdaq Small Cap Market from April 2005 through March 2007 is as follows:

	Common Stock
Quarter Ended	High		Low
June 30, 2005	$	19.92	$	13.75
September 30, 2005		16.43		9.75
December 31, 2005		13.23		9.50
March 31, 2006		14.50		10.50


June 30, 2006	$	12.35	$	10.94
September 30, 2006		11.51		7.50
December 31, 2006		10.63		8.50
March 31, 2007		9.31		7.52

The Company’s Board of Directors has adopted a policy to pay a regularly scheduled annual cash dividend in the first quarter of each fiscal year. On May 22, 2007, the Company declared a fiscal 2007 cash dividend of $0.25 per common share payable on June 29, 2007 to stockholders of record on June 8, 2007.

On November 10, 2006, the Company announced that its Board of Directors authorized a program to repurchase in aggregate up to $2,000,000 of the Company’s common stock from time to time on the open market. The program has no specified termination date. The following table summarizes the Company’s share repurchase activity for the three-month period ended March 31, 2007.

AIR T PURCHASES OF EQUITY SECURITIES

Period	Total Number of Shares Purchased		Average Price Paid per Share Purchased		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs		Approximate Dollar Value of Shares that May yet be Purchased Under the Plans or Programs

January 1 to January 31, 2007		-		-		-	$	1,909,000
February 1 to February 28, 2007		62,523	$	7.93		62,523		1,413,000
March 1 to March 31, 2007		88,688		7.90		88,688		713,000

TOTAL		151,211	$	7.91		151,211	$	713,000

Subsequent to March 31, 2007 and through May 31, 2007, the Company has repurchased an additional 66,392 shares of its common stock at a total cost of $532,268, pursuant to this program.

Item 6. Selected Financial Data

(In thousands except per share data)

	Year Ended March 31,
	2007		2006		2005		2004			2003

Operating Revenues	$	67,303	$	79,529	$	69,999	$	55,997		$	42,872

Earnings from continuing operations		2,486		2,055		2,106		2,164			366

Loss from discontinued operations		-		-		-		(426	)		(1,590	)

Net earnings (loss)		2,486		2,055		2,106		1,738			(1,224	)

Basic earnings per share
Continuing operations	$	0.94	$	0.77	$	0.79	$	0.80		$	0.13
Discontinued operations		-		-		-		(0.16	)		(0.58	)
Total basic net earnings per share	$	0.94	$	0.77	$	0.79	$	0.64		$	(0.45	)

Diluted earnings per share:
Continuing operations	$	0.94	$	0.77	$	0.78	$	0.80		$	0.13
Discontinued operations		-		-		-		(0.16	)		(0.58	)
Total diluted net earnings per share	$	0.94	$	0.77	$	0.78	$	0.64		$	(0.45	)

Total assets	$	24,615	$	23,923	$	24,109	$	19,574		$	21,328

Long-term obligations, including
current portion	$	798	$	950	$	1,245	$	279		$	2,509

Stockholders' equity	$	15,449	$	14,500	$	13,086	$	11,677		$	9,611


Average common shares outstanding-Basic		2,650		2,671		2,677		2,716			2,726

Average common shares outstanding-Diluted		2,650		2,672		2,693		2,728			2,726


Dividend declared per common share (1)	$	0.25	$	0.25	$	0.20	$	-		$	0.12

Dividend paid per common share (1)	$	0.25	$	0.25	$	0.20	$	-		$	0.12

____________________________________

(1)	On May 22, 2007, the Company declared a cash dividend of $0.25 per common share payable on June 29, 2007 to stockholders of record on June 8, 2007. Due to losses sustained in fiscal 2003, no common share dividend was paid in fiscal 2004.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

The Company operates in two business segments, providing overnight air cargo services to the express delivery services industry and aviation ground support and other specialized equipment products to passenger and cargo airlines, airports, the military and industrial customers. Each business segment has separate management teams and infrastructures that offer different products and services. The Company’s air cargo operations, which are comprised of its Mountain Air Cargo, Inc. (“MAC”) and CSA Air, Inc. (“CSA”) subsidiaries, accounted for 54% of revenue in fiscal 2007. The Company’s ground support operations, comprised of its Global Ground Support, LLC subsidiary (“Global”), accounted for the remaining 46% of 2007 revenues. Following is a table detailing revenues by segment and by major customer category:

(=000)
	2007				2006				2005

Overnight Air Cargo Segment:
FedEx	$	36,091	54	%	$	43,447	55	%	$	41,312	59	%

Ground Equipment Segment:
Military		16,342	24	%		14,183	18	%		16,591	24	%
Foreign countries		2,161	3	%		11,872	15	%		651	1	%
Other-Commercial		12,709	19	%		10,027	13	%		11,445	16	%
		31,212	46	%		36,082	45	%		28,687	41	%

	$	67,303	100	%	$	79,529	100	%	$	69,999	100	%

MAC and CSA are short-haul express air freight carriers and provide air cargo services exclusively to one customer, FedEx Corporation (“FedEx”). Under the terms of the dry-lease service agreements, which currently cover the majority of the revenue aircraft operated, the Company receives an administrative fee based on the number of aircraft operated in revenue service and passes through to its customer certain cost components of its operations without markup. The cost of fuel, flight crews, landing fees, outside maintenance, parts and certain other direct operating costs are included in operating expenses and billed to the customer as cargo and maintenance revenue, at cost. These agreements are renewable on two to five year terms and may be terminated by FedEx at any time upon 30 days notice. The Company believes that the short term and other provisions of its agreements with FedEx are standard within the air freight contract delivery service industry. FedEx has been a customer of the Company since 1980. Loss of its contracts with FedEx would have a material adverse effect on the Company.

Separate agreements cover the five types of aircraft operated by MAC and CSA for FedEx—Cessna Caravan, ATR-42, ATR-72, Fokker F-27, and Short Brothers SD3-30. The Cessna Caravan, ATR-42, ATR-72 and Fokker F-27 aircraft (a total of 88 aircraft at March 31, 2007) are owned by and dry-leased from FedEx, and the Short Brothers SD3-30 aircraft (two aircraft at March 31, 2007) are owned by the Company and operated periodically under wet-lease arrangements with FedEx. Pursuant to such agreements, FedEx determines the type of aircraft and schedule of routes to be flown by MAC and CSA, with all other operational decisions made by the Company.

MAC and CSA’s revenue contributed approximately $36,091,000 and $43,447,000 to the Company’s revenues in fiscal 2007 and 2006, respectively, a current year net decrease of $7,356,000 (17%). The Company and its air cargo segment’s financial results in fiscal 2007 continue to be affected by FedEx’s 2004 decision to modernize a portion of the aircraft fleet operated by MAC by replacing older Fokker F-27 aircraft with newer ATR-42 and ATR-72 aircraft. MAC was engaged to assist in the certification and conversion of ATR aircraft from passenger to cargo configuration and experienced a substantial increase in maintenance revenue in fiscal 2005 as the conversion program hit its peak, then experienced a decrease in maintenance revenue in fiscal 2006 as the conversion program was completed and the aircraft were placed in revenue service. The Company experienced a further significant reduction in maintenance revenue in fiscal 2007 with no revenue from the conversion program and also because the aircraft that were converted had not yet reached a full cycle for recurring heavy maintenance. The majority of these conversion activities, representing the cost of aircraft parts, have been billed to the customer without mark-up. The Company also increased its operating income in fiscal 2005 and 2006 as a result of the aircraft conversions, as the increased labor hours resulted in increased productivity and margins. The Company saw a marked decrease in revenues in fiscal 2007, principally attributable to a return to normalized operations after the aircraft conversion program. The air cargo, segment’s operating income for fiscal 2007 was $1,685,000 compared to $2,234,000 in fiscal 2006, a 25% decrease.

In addition, the Company’s maintenance revenues fluctuate based on the level of heavy maintenance checks performed on aircraft operated by its air cargo operations. Because most of the ATR aircraft were placed in service during a relatively short time span, they are on roughly the same maintenance schedule, and the next heavy maintenance checks due on these aircraft would not be anticipated to start until the fiscal year ending March 31, 2009. Unless there is an acceleration of the heavy maintenance checks schedule, which is based on aircraft usage, or the Company is able to attract additional maintenance projects, maintenance revenues in fiscal 2008 are likely to be lower than in fiscal 2005 and 2006. Cost cutting measures implemented at MAC during the latter half of fiscal 2007 partially offset the effect of reduced maintenance revenues in that period and are anticipated to have a continuing impact going forward.

Global manufactures, services and supports aircraft deicers and ground support equipment and other specialized industrial equipment on a worldwide basis. Global’s revenues contributed approximately $31,212,000 and $36,081,000 to the Company’s revenues in fiscal 2007 and 2006, respectively, a current year decrease of 13.5%. In fiscal 2007, Global revenues were 46% of consolidated revenues, only slightly above the 45% in fiscal 2006, but this percentage has increased significantly from 30% in fiscal 2003. This trend shows the increasing significance of Global to the consolidated results of the Company. Revenues in 2007 were affected by a significant decrease in the number of commercial deicers sold compared to 2006 (both domestically and foreign), somewhat offset by increased unit sales to the military and increased service and training income. Although sales revenue decreased, Global had a substantially higher gross margin and profit in fiscal 2007. Global’s segment operating income for fiscal 2007 was $4,506,000, a 53% increase over fiscal 2006 segment operating income of $2,940,000. The reasons for the increase in segment operating income were an improved customer and product mix and a decrease in costs associated with the Philadelphia boom incident, discussed below.

In June 1999, Global was awarded a four-year contract to supply deicing equipment to the United States Air Force. In June 2003 Global was awarded a three-year extension of that contract and a further three-year extension was awarded in June 2006. In fiscal 2007, revenues from sales to the Air Force accounted for approximately 52% of the ground equipment segment’s revenues (as compared to 39% in fiscal 2006).

Global’s results in fiscal 2006 were adversely affected as the result of the collapse of one of twelve fixed-stand deicing booms sold by Global for installation at the Philadelphia airport. Following the collapse of the boom, Global undertook to examine and repair the eleven remaining booms and incurred expense of approximately $905,000 in connection these activities. No similar costs were incurred in fiscal 2007. Although Global has initiated legal action to recover these expenses from its subcontractor, the Company, cannot provide assurance of the amount or timing of any such recovery. See Note 15 of Notes to Consolidated Financial Statements.

The following table summarizes the changes and trends in the Company’s operating expenses for continuing operations as a percentage of revenue:

	Fiscal year ended March 31,
	2007			2006			2005
Operating Revenues (in thousands)	$	67,303		$	79,529		$	69,999
Operating expenses as a percent of revenue:
Flight operations		26.55	%		24.38	%		24.41	%
Maintenance		19.10			22.41			25.65
Ground equipment		33.43			36.32			32.11
General and administrative		14.24			12.06			11.96
Depreciation and amortization		0.99			0.86			0.91
Total Operating Expenses		94.31	%		96.03	%		95.04	%

The Company, which incurred an increase in professional fees in fiscal 2005 due to the anticipated internal controls audit requirements of Section 404 of the Sarbanes-Oxley Act (SOX) of 2002, reduced SOX related professional fees in fiscal 2006 and 2007 due to SEC approved extensions in the Section 404 implementation deadlines for smaller companies, including the Company. The requirements of Section 404 of SOX are currently scheduled to apply to the Company's 2008 fiscal year. Section 404 requires management of the Company to document, test, and issue an opinion as to the adequacy of internal control over financial reporting. In addition, Section 404 requires the Company's independent accountants to review the Company's internal control documentation and testing results, and to issue its opinion as to the adequacy of internal control over financial reporting, which requirement is currently scheduled to be applicable for the Company's 2009 fiscal year. The Company anticipates that under the current phase-in schedule, compliance with these requirements of Section 404 will increase professional fees in fiscal 2008 and 2009.

Fiscal 2007 vs. 2006

Consolidated revenue from operations decreased $12,225,000 (15%) to $67,303,000 for the fiscal year ended March 31, 2007 compared to the prior fiscal year. The decrease in 2007 revenue resulted from a decrease in air cargo revenue of $7,356,000 (17%) to $36,091,000 in fiscal 2007, combined with a decrease in ground equipment revenue of $4,869,000 (14%) to $31,212,000, as described in “Overview” above. The decrease in air cargo revenue was primarily the result of a decrease in expenses that are passed through to the customer at cost, primarily relating to the aircraft conversion program that was undertaken in fiscal 2005 and completed in fiscal 2006. Air cargo revenues have returned to levels similar to fiscal 2004, prior to commencement of the customer fleet modernization program. We expect this level of air cargo revenues to be more indicative of air cargo revenues for fiscal 2008. The decrease in ground equipment revenue was primarily the result of a decrease in the number of commercial deicing units sold by Global, largely due to a decrease in foreign sales in China, the United Kingdom and Canada. The decrease in foreign sales has been partially offset by increased sales to the United States military and increases in service and training income

Operating expenses on a consolidated basis decreased $12,894,000 (17%) to $63,477,000 for fiscal 2007 compared to fiscal 2006. The decrease in air cargo operating expenses consisted of the following changes: cost of flight operations decreased $1,515,000 (8%) primarily as a result of decreased direct operating costs, including pilot salaries and related benefits, fuel, airport fees, and costs associated with pilot travel and decreased administrative staffing due to flight schedule changes. This was also a byproduct of the aircraft conversion program as pilot costs were up significantly during the program as MAC ramped up for a new aircraft type and had dual staffing and training requirements. These costs have returned to historic levels as MAC has resumed normal operations with the new fleet of aircraft in fiscal 2007. Aircraft maintenance expenses decreased $4,967,000 (28%) primarily as a result of decreases in maintenance costs that are passed through to the customer at cost, the cost of contract services, maintenance personnel, travel, and outside maintenance related to completion of the customer fleet modernization in fiscal 2006. Ground equipment costs decreased $6,386,000 (22%), which included decreased cost of parts and supplies and labor related to the decreased customer orders and sales by Global in fiscal 2007. We also made some strategic purchasing decisions during fiscal 2007 that increased interim inventory levels but resulted in decreased production costs. In addition, we incurred $905,000 in remediation costs in fiscal 2006 associated with the incident involving one of Global’s deicing booms in Philadelphia.

Gross margin on ground equipment increased from $7,195,000 (20%) in fiscal 2006 to $8,711,000 (28%) in fiscal 2007. This was the result of the change in customer mix, with fewer commercial units and an increase in military units, as well as increased service and training income. The military units are of similar configuration resulting in production efficiencies. The military units also generally include higher margin options. In addition, the Philadelphia remediation costs negatively impacted the 2006 gross margin.

General and administrative expense remained fairly constant with a net decrease of $9,000. The Company incurred compensation expense related to stock options of $305,000 in fiscal 2007 as a result of adopting SFAS 123(R) Share-Based Payment (“SFAS 123(R)”) at the beginning of the fiscal year. Staffing and benefits and staff travel costs decreased in fiscal 2007 as a result of a number of management personnel retirements and also to return to staffing levels prior to the aircraft conversion program.

Operating income for the year ended March 31, 2007 was $3,827,000, a $669,000 (21%) improvement over fiscal 2006. The majority of the improvement came in the ground support segment. Global’s current fiscal year operating income increased compared to its prior fiscal year primarily due to current period’s higher levels of equipment margins and the $905,000 in cost associated with the repair of deicing booms in Philadelphia in fiscal 2006.

Non-operating income, net was a net income amount of $76,000 in fiscal 2007 compared to a net expense of $77,000 in fiscal 2006. Interest expense was consistent from year to year. Investment income increased by $99,000 in fiscal 2007 due to increased rates on investments, as well as an increase in the amounts invested in 2007.

Income tax expense of $1,416,000 in fiscal 2007 represented an effective tax rate of 36.3%, which included the benefit of municipal bond income as well as the impact of U.S. production deduction authorized under tax law changes enacted in fiscal 2005. Income tax expense of $1,026,000 in fiscal 2006 represented an effective tax rate of 33.3%, which included a reduction associated with a true-up of deferred tax assets in the prior fiscal year.

Net earnings were $2,486,000 or $0.94 per diluted share for the year ended March 31, 2007, a 21% improvement over $2,055,000 or $0.77 per diluted share in fiscal 2006.

Fiscal 2006 vs. 2005

Consolidated revenue from operations increased $9,529,000 (14%) to $79,529,000 for the fiscal year ended March 31, 2006 compared to the prior fiscal year. The increase in 2006 revenue resulted from an increase in air cargo revenue of $2,135,000 (5%) to $43,447,000 in fiscal 2006, combined with a $7,394,000 (26%) increase in ground equipment revenues to $36,081,000 in fiscal 2006. The increase in air cargo revenue was primarily the result of an increase in expenses that are passed through to the customer at cost, primarily relating to the aircraft conversion program that was undertaken in fiscal 2005 and completed in fiscal 2006, as discussed in “Overview” above. The increase in ground equipment revenue was primarily the result of an increase in the number of commercial deicing units sold by Global in fiscal 2006, largely due to orders from China, the United Kingdom and Canada.

Operating expenses on a consolidated basis increased $9,840,000 (15%) to $76,371,000 for fiscal 2006 compared to fiscal 2005. The increase in air cargo operating expenses consisted of the following changes: cost of flight operations increased $2,295,000 (13%) primarily as a result of increased direct operating costs, including pilot salaries and related benefits, fuel, airport fees, and costs associated with pilot travel, due to increased cost of oil, flight schedule changes and increased administrative staffing due to fleet modernization and route expansion programs; maintenance expenses decreased $129,000 (1%) primarily as a result of decreases in cost of contract services, maintenance personnel, travel, and outside maintenance related to the completion of customer fleet modernization, partially offset by increased operating cost related to the route expansion. Ground equipment costs increased $6,406,000 (29%), which included increased cost of parts and supplies and support personnel related to increased customer orders and $905,000 in remediation costs associated with the incident involving one of Global’s deicing booms in Philadelphia.

Gross margin on ground equipment increased from $6,207,000 (22%) in fiscal 2005 to $7,195,000 (20%) in fiscal 2006. This was the result of increased foreign sales in 2006, although the gross margin percentage was down as a result of the costs associated with the Philadelphia boom incident.

General and administrative expense increased $1,218,000 (15%) primarily as a result of a provision for bad debt expense, increased staffing and benefits, staff travel and profit sharing provision, offset by decreased professional fees due to a deferral in the implementation of SOX Section 404 compliance.

Operating income for the year ended March 31, 2006 was $3,158,000, a $311,000 reduction from fiscal 2005, resulting from changes in both the ground equipment and air cargo sectors. In the fiscal year ended March 31, 2006, Global had operating income of $2,940,000, a 1% decrease compared to fiscal 2005 operating income of $2,957,000. Global’s fiscal 2006 operating income decreased compared to fiscal 2005 primarily due to higher levels of commercial equipment orders in 2006, which more than offset the $905,000 in cost associated with the repair of deicing booms in Philadelphia. Operating income for the Company’s overnight air cargo operations was $2,234,000 in the fiscal year ended March 31, 2006, an increase of 4% from $2,143,000 in fiscal 2005. The increase in air cargo operating income was due to FedEx’s 2004 decision to modernize the aircraft fleet being operated by MAC under dry-lease agreements by replacing older Fokker F-27 aircraft with newer ATR-42 and ATR-72 aircraft. MAC’s administrative fees which are based on the number of aircraft operated in active or stand-by service, although adversely affected in fiscal 2005 as a result of delays in the introduction of newer ATR aircraft which were not received in time to replace the older Fokker F-27 aircraft that were removed from service as they neared major scheduled maintenance, increased in fiscal 2006 as the ATR aircraft entered revenue service. F-27 revenue routes, affected by the delayed introduction of the ATR’s, were temporarily flown in fiscal 2005 by standby MAC and CSA aircraft or wet lease aircraft. MAC, which had been engaged to assist in the certification and conversion of ATR aircraft from passenger to cargo configuration and had experienced a substantial increase in maintenance revenue in fiscal 2005, experienced a decrease in maintenance revenue in fiscal 2006 due to the completion of work once the aircraft were placed in revenue service. The majority of these conversion activities, a portion of which represents cost of aircraft parts, have been billed to the customer without mark-up.

Non-operating expense was $76,000 in fiscal 2006 compared to $22,000 in fiscal 2005. Interest expense was $65,000 higher in fiscal 2006 related to increased borrowings on the Company’s bank line. This increase was partly offset by a 25,000 increase in interest earned on investments.

Income tax expense of $1,026,000 in fiscal 2006 represented an effective tax rate of 33.3%, which included a reduction associated with a true-up of deferred tax assets in the prior fiscal year. Income tax expense of $1,341,000 in fiscal 2005 represented an effective tax rate of 38.9%, which represented the combined federal and state statutory tax rates.

Net earnings was $2,055,000 or $0.77 per diluted share for the year ended March 31, 2006, a 2% decline from $2,106,000 or $0.78 per diluted share in fiscal 2005.

Liquidity and Capital Resources

As of March 31, 2007, the Company’s working capital amounted to $12,725,000, an increase of $1,645,000 compared to March 31, 2006. The net increase primarily resulted from an increase in inventories and cash and cash equivalents, partially offset by a decrease in accounts receivable, as discussed further below.

In August 2006, the Company amended its $7,000,000 secured long-term revolving credit line to extend its expiration date to August 31, 2008. The revolving credit line contains customary events of default, a subjective acceleration clause and restrictive covenants that, among other matters, require the Company to maintain certain financial ratios. There is no requirement for the Company to maintain a lock-box arrangement under this agreement. As of March 31, 2007, the Company was in compliance with all of the restrictive covenants. The amount of credit available to the Company under the agreement at any given time is determined by an availability calculation, based on the eligible borrowing base, as defined in the credit agreement, which includes the Company’s outstanding receivables, inventories and equipment, with certain exclusions. At March 31, 2007, $7,000,000 was available under the terms of the credit facility. The credit facility is secured by substantially all of the Company’s assets. Amounts advanced under the credit facility bear interest at the 30-day “LIBOR” rate plus 137 basis points. The LIBOR rate at March 31, 2007 was 5.32%. At March 31, 2007 and 2006 there were no outstanding loan balances.

The Company is exposed to changes in interest rates on its line of credit. Although the line had no outstanding balance at March 31, 2007 and 2006, the line of credit did have a weighted average balance outstanding of approximately $1,386,000 during the year ended March 31, 2007. If the LIBOR interest rate had been increased by one percentage point, based on the weighted average balance outstanding for the year, annual interest expense would have increased by approximately $14,000.

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

The Company assumes various financial obligations and commitments in the normal course of its operations and financing activities. Financial obligations are considered to represent known future cash payments that the Company is required to make under existing contractual arrangements such as debt and lease agreements.

The following table of material contractual obligations at March 31, 2007 summarizes the effect these obligations are expected to have on the Company’s cash flow in the future periods, as discussed below.

Contractual Obligations	Total		Less than 1 year		1-3 Years		3-5 Years		More than 5 years

Long-term bank debt	$	684,196	$	108,992	$	575,204	$	-	$	-
Operating leases		529,189		490,617		35,338		3,234		-
Capital leases		74,947		23,301		31,195		20,451		-
Deferred retirement obligation		646,084		12,391		-		633,693		-
Total	$	1,934,416	$	635,301	$	641,737	$	657,378	$	-

The following is a table of changes in cash flow for the respective years ended March 31, 2007, 2006 and 2005;

	2007			2006			2005
Net Cash Provided by Operating Activities	$	2,463,000		$	530,000		$	3,273,000
Net Cash (Used In) Investing Activities		(198,000	)		(355,000	)		(375,000	)
Net Cash (Used in) Provided by Financing Activities		(2,072,000	)		(970,000	)		140,000
Net Increase (Decrease) in Cash		193,000			(795,000	)		3,038,000

Cash provided by operating activities was $1,933,000 more for fiscal 2007 compared to fiscal 2006. An increase in net earnings in fiscal 2007 and an executive retirement obligation of $693,000 paid in fiscal 2006 were significant components of the increase. In addition, accounts receivable decreased and inventories increased from fiscal 2007. Accounts receivable have decreased as a significant portion of fourth quarter sales were to the military with favorable payment terms to the Company. Inventories have increased to meet product demand and to take advantage of strategic purchase opportunities. Cash used in investing activities for fiscal 2007 was approximately $157,000 less than fiscal 2006, due to decreased capital expenditures in the current year. Cash used by financing activities was $1,102,000 more in fiscal 2007 compared to fiscal 2006 principally due to the stock repurchase program initiated by the Company in December 2006.

During the fiscal year ended March 31, 2007 the Company repurchased 161,295 shares of its common stock for $1,287,047, including a commission of $.05 per share. No stock repurchases were made in fiscal 2006. During the fiscal year ended March 31, 2005 the Company repurchased 78,534 shares of its common stock for $356,796, as described following, under “Resignation of Executive Officer”.

There are currently no commitments for significant capital expenditures. The Company’s Board of Directors, on August 7, 1997, adopted the policy to pay an annual cash dividend in the first quarter of each fiscal year, in an amount to be determined by the board. On May 4, 2005, the Company declared a $0.25 per share cash dividend, to be paid on June 28, 2005 to shareholders of record June 11, 2005. On May 23, 2006 the Company declared a $.25 per share cash dividend, to be paid on June 28, 2006 to shareholders of record June 9, 2006. On May 22, 2007 the Company declared a $.25 per share cash dividend, to be paid on June 29, 2007 to shareholders of record June 8, 2007.

Off-Balance Sheet Arrangements

The Company defines an off-balance sheet arrangement as any transaction, agreement or other contractual arrangement involving an unconsolidated entity under which a Company has (1) made guarantees, (2) a retained or a contingent interest in transferred assets, (3) an obligation under derivative instruments classified as equity, or (4) any obligation arising out of a material variable interest in an unconsolidated entity that provides financing, liquidity, market risk or credit risk support to the Company, or that engages in leasing, hedging, or research and development arrangements with the Company.

The Company is not currently engaged in the use of any of the arrangements defined above.

Impact of Inflation

The Company believes that the recent increases in inflation have not had a material effect on its manufacturing operations, because increased costs to date have been passed on to its customers. Under the terms of its air cargo business contracts the major cost components of its operations, consisting principally of fuel, crew and other direct operating costs, and certain maintenance costs are reimbursed, without markup by its customer. Significant increases in inflation rates could, however, have a material impact on future revenue and operating income.

Resignation of Executive Officer

Effective December 31, 2003, an executive officer and director of the Company resigned his employment. In consideration of approximately $300,000, payable in three installments over a one-year period starting January 12, 2004, the executive agreed to forgo certain retirement and other contractual benefits for which the Company had previously accrued aggregate liabilities of $715,000. The Company also agreed to purchase from the former executive officer 118,480 shares of AirT common stock held by him (representing approximately 4.3% of the outstanding shares of common stock at December 31, 2003) for $4.54 per share (80% of the January 5, 2004 closing price). The stock repurchase took place in three installments over a one-year period, starting January 12, 2004, and totaled approximately $536,000. The repurchase of the former executive’s stock was recorded in the period that the repurchase occurred. As of March 31, 2005 all payments required to be made under the above agreements had been made.

Seasonality

Global’s business has historically been seasonal. The Company has continued its efforts to reduce Global’s seasonal fluctuation in revenues and earnings by increasing military and international sales and broadening its product line to increase revenues and earnings throughout the year. In June 1999, Global was awarded a four-year contract to supply deicing equipment to the United States Air Force, and Global has been awarded two three-year extensions on the contract. Although sales remain somewhat seasonal, this diversification has lessened the seasonal impacts and allowed the Company to be more efficient in its planning and production. The air cargo segment of business has no susceptibility to seasonality.

Critical Accounting Policies and Estimates

The Company’s significant accounting policies are more fully described in Notes to the Consolidated Financial Statements in Item 8. The preparation of the Company’s financial statements in conformity with accounting principles generally accepted in the United States requires the use of estimates and assumptions to determine certain assets, liabilities, revenues and expenses. Management bases these estimates and assumptions upon the best information available at the time of the estimates or assumptions. The Company’s estimates and assumptions could change materially as conditions within and beyond our control change. Accordingly, actual results could differ materially from estimates. The most significant estimates made by management include allowance for doubtful accounts receivable, reserves for excess and obsolete inventories, warranty reserves, deferred tax asset valuation, and retirement benefit obligations.

Allowance for Doubtful Accounts. An allowance for doubtful accounts receivable in the amount of $413,000 and $482,000, respectively, in fiscal 2007 and 2006, was established based on management’s estimates of the collectability of accounts receivable. The required allowance is determined using information such as customer credit history, industry information, credit reports, customer financial condition and the collectability of outstanding accounts receivables. The estimates can be affected by changes in the financial strength of the aviation industry, customer credit issues or general economic conditions.

Inventories. The Company’s parts inventories are valued at the lower of cost or market. Provisions for excess and obsolete inventories in the amount of $664,000 and $451,000, respectively, in fiscal 2007 and 2006, are based on assessment of the marketability of slow-moving and obsolete inventories. Historical part usage, current period sales, estimated future demand and anticipated transactions between willing buyers and sellers provide the basis for estimates. Estimates are subject to volatility and can be affected by reduced equipment utilization, existing supplies of used inventory available for sale, the retirement of aircraft or ground equipment and changes in the financial strength of the aviation industry.

Warranty reserves. The Company warranties its ground equipment products for up to a two-year period from date of sale. Product warranty reserves are recorded at time of sale based on the historical average warranty cost and are adjusted as actual warranty cost becomes known. As of March 31, 2007 and 2006, the Company’s warranty reserve amounted to $196,000 and $285,000, respectively.

Deferred Taxes. Deferred tax assets and liabilities, net of valuation allowance in the amount of $62,000 and $82,000, respectively, in fiscal 2007 and 2006, reflect the likelihood of the recoverability of these assets. Company judgment of the recoverability of these assets is based primarily on estimates of current and expected future earnings and tax planning.

Retirement Benefits Obligation. The Company currently determines the value of retirement benefits assets and liabilities on an actuarial basis using a 5.75% discount rate. Values are affected by current independent indices, which estimate the expected return on insurance policies and the discount rates used. Changes in the discount rate used will affect the amount of pension liability as well as pension gain or loss recognized in other comprehensive income.

Revenue Recognition. Cargo revenue is recognized upon completion of contract terms and maintenance revenue is recognized when the service has been performed. Revenue from product sales is recognized when contract terms are completed and title has passed to customers.

Valuation of Long-Lived Assets. The Company assesses long-lived assets used in operations for impairment when events and circumstances indicate the assets may be impaired and the undiscounted cash flows estimated to be generated by those assets are less than their carrying amount. In the event it is determined that the carrying values of long-lived assets are in excess of the fair value of those assets, the Company then will write-down the value of the assets to fair value. The Company has applied the discontinued operations provisions of SFAS No. 144, Accounting for the Impairment or Disposal of Long-lived Assets, for the MAS operations and has reflected any remaining long-lived assets associated with the discontinued MAS subsidiary at zero fair market value at March 31, 2007 and 2006.

Recent Accounting Pronouncements

In June 2006, the Financial Accounting Standards Board (“FASB”) issued Interpretation (“FIN”) No. 48, Accounting for Uncertainty in Income Taxes-an interpretation of SFAS Statement No. 109. This Interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return, and provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. This Interpretation is effective for fiscal years beginning after December 15, 2006. The Company has not yet completed its analysis of the effects of this interpretation.

In September 2006, the FASB issued Statement No. 157 (“SFAS 157”), Fair Value Measurements. SFAS 157 establishes a framework for measuring fair value within generally accepted accounting principles, clarifies the definition of fair value within the framework, and expands disclosures about the use of fair value measurements. SFAS 157 does not require any new fair value measurements in generally accepted accounting principles; however, the definition of fair value in SFAS 157 may affect assumptions used by companies in determining fair value. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The Company has not determined the impact of adopting SFAS 157 on its consolidated financial statements.

Forward Looking Statements

Certain statements in this Report, including those contained in “Overview,” are “forward-looking” statements within the meaning of the Private Securities Litigation Reform Act of 1995 with respect to the Company’s financial condition, results of operations, plans, objectives, future performance and business. Forward-looking statements include those preceded by, followed by or that include the words “believes”, “pending”, “future”, “expects,” “anticipates,” “estimates,” “depends” or similar expressions. These forward-looking statements involve risks and uncertainties. Actual results may differ materially from those contemplated by such forward-looking statements, because of, among other things, potential risks and uncertainties, such as:

·	Economic conditions in the Company’s markets;

·	The risk that contracts with FedEx could be terminated or that the U.S. Air Force will defer orders under its contract with Global or that this contract will not be extended;

·	The impact of any terrorist activities on United States soil or abroad;

·	The Company’s ability to manage its cost structure for operating expenses, or unanticipated capital requirements, and match them to shifting customer service requirements and production volume levels;

·	The risk of injury or other damage arising from accidents involving the Company’s air cargo operations or equipment sold by Global;

·	Market acceptance of the Company’s new commercial and military equipment and services;

·	Competition from other providers of similar equipment and services;

·	Changes in government regulation and technology;

·	Mild winter weather conditions reducing the demand for deicing equipment.

A forward-looking statement is neither a prediction nor a guarantee of future events or circumstances, and those future events or circumstances may not occur. We are under no obligation, and we expressly disclaim any obligation, to update or alter any forward-looking statements, whether as a result of new information, future events or otherwise.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk.

Information concerning market risk is included in Item 7-Management’s Discussion and Analysis of Financial Condition and Results of Operations under the heading “Liquidity and Capital Resources”.

Item 8. Financial Statements and Supplementary Data.

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders of

Air T, Inc.

Maiden, North Carolina

We have audited the accompanying consolidated balance sheets of Air T, Inc. and subsidiaries (the “Company”) as of March 31, 2007 and 2006, and the related consolidated statements of operations, stockholders’ equity and comprehensive income, and cash flows for each of the three years in the period ended March 31, 2007. Our audit also included the financial statement schedule listed in the index at Item 15(a)2. These consolidated financial statements and schedules are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Air T, Inc. and subsidiaries as of March 31, 2007 and 2006, and the results of their operations and their cash flows for each of the three years in the period ended March 31, 2007, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

/s/Dixon Hughes PLLC

Charlotte, NC

June 14, 2007

AIR T, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

	Years Ended March 31,
	2007			2006			2005
Operating Revenues:
Overnight air cargo	$	36,091,405		$	43,447,244		$	41,312,475
Ground equipment		31,211,940			36,081,387			28,686,963
		67,303,345			79,528,631			69,999,438

Operating Expenses:
Flight-air cargo		17,870,347			19,385,644			17,090,249
Maintenance-air cargo		12,857,670			17,824,277			17,953,353
Ground equipment		22,500,712			28,886,513			22,480,127
General and administrative		9,582,151			9,591,353			8,373,195
Depreciation and amortization		665,818			683,099			633,818
		63,476,698			76,370,886			66,530,742

Operating Income		3,826,647			3,157,745			3,468,696

Non-operating Expense (Income):
Interest		177,905			177,159			111,946
Investment income		(227,373	)		(128,561	)		(104,026	)
Other		(26,271	)		28,126			14,384
		(75,739	)		76,724			22,304


Earnings From Operations Before Income Taxes		3,902,386			3,081,021			3,446,392

Income Taxes		1,416,340			1,026,110			1,340,832


Net Earnings	$	2,486,046		$	2,054,911		$	2,105,560


Basic Net Earnings Per Share	$	0.94		$	0.77		$	0.79
Diluted Net Earnings Per Share	$	0.94		$	0.77		$	0.78

Weighted Average Shares Outstanding:
Basic		2,650,121			2,671,293			2,677,114
Diluted		2,650,452			2,671,779			2,692,880

See notes to consolidated financial statements.

AIR T, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

	March 31,
	2007			2006
ASSETS
Current Assets:
Cash and cash equivalents	$	2,895,499		$	2,702,424
Marketable securities		860,870			807,818
Accounts receivable, less allowance for
doubtful accounts of $413,341 in 2007 and
$481,837 in 2006		7,643,391			8,692,971
Notes and other non-trade receivables-current		68,730			104,086
Inventories		8,085,755			5,705,591
Deferred tax asset		724,534			576,640
Income taxes receivable		-			108,553
Prepaid expenses and other		325,533			334,064
Total Current Assets		20,604,312			19,032,147

Property and Equipment:
Furniture, fixtures and improvements		5,413,075			6,370,193
Flight equipment and rotables inventory		2,700,288			2,705,870
		8,113,363			9,076,063
Less accumulated depreciation		(5,820,852	)		(5,907,520	)
Property and Equipment, net		2,292,511			3,168,543

Deferred Tax Asset		170,353			194,996
Cash Surrender Value of Life Insurance Policies		1,296,703			1,231,481
Notes and Other Non-Trade Receivables-LongTerm		200,529			214,653
Other Assets		50,576			81,537
Total Assets	$	24,614,984		$	23,923,357

See notes to consolidated financial statements.

	March 31,
	2007		2006
LIABILITIES AND STOCKHOLDERS' EQUITY

Current Liabilities:
Accounts payable	$	5,304,022	$	5,354,713
Accrued expenses		2,236,106		2,411,262
Income taxes payable		194,840		-
Current portion of long-term obligations		144,684		186,492
Total Current Liabilities		7,879,652		7,952,467

Capital Lease and Other Obligations (less current
portion)		77,702		50,577

Long-term Debt (less current portion)		575,204		712,883
Deferred Retirement Obligations (less current
portion)		633,693		707,388
Stockholders' Equity:
Preferred stock, $1 par value, authorized
50,000 shares, none issued		-		-
Common stock, par value $.25; authorized
4,000,000 shares; 2,509,998 in 2007
and 2,671,293 in 2006 shares were
issued and outstanding		627,499		667,823
Additional paid in capital		6,058,070		6,939,357
Retained earnings		8,658,606		6,840,383
Accumulated other comprehensive income, net		104,558		52,479
Total Stockholders' Equity		15,448,733		14,500,042
Total Liabilities and Stockholders’ Equity	$	24,614,984	$	23,923,357

AIR T, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

			Years Ended March 31,
			2007			2006			2005
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings			$	2,486,046		$	2,054,911		$	2,105,560
Adjustments to reconcile net earnings to net
cash provided by operating activities:
	Change in accounts receivable and inventory reserves			144,768			223,867			(48,563	)
	Depreciation and amortization			665,818			683,099			633,818
	Change in cash surrender value of life insurance			(65,222	)		(68,481	)		-
	Deferred tax (benefit) provision			(169,566	)		187,005			565,149
	Periodic pension (benefit) cost			(13,211	)		(27,207	)		(1,288	)
	Warranty reserve			123,000			251,000			197,000
	Compensation expense related to stock options			305,436			-			-
	Change in assets and liabilities which provided (used) cash
	Accounts receivable			1,118,076			(1,514,914	)		(2,197,540	)
	Notes receivable and other non-trade receivables			49,480			107,709			123,273
	Inventories			(2,220,781	)		88,862			131,702
	Prepaid expenses and other			50,170			(283,519	)		(35,322	)
	Accounts payable			(50,691	)		(737,473	)		2,751,836
	Accrued expenses			(339,719	)		(98,516	)		(254,255	)
	Deferred retirement obligation			-			(692,959	)		-
	Billings in excess of costs and estimated
		earnings on uncompleted contracts		-			-			(80,129	)
	Income taxes payable			332,821			357,057			(617,969	)
	Deferred tax asset			46,315			-			-
	Total adjustments			(23,306	)		(1,524,470	)		1,167,712
Net cash provided by operating activities				2,462,740			530,441			3,273,272
CASH FLOWS FROM INVESTING ACTIVITIES:
Net proceeds from sale of assets				-			7,124			20,655
Capital expenditures				(197,925	)		(362,570	)		(395,685	)
Net cash used in investing activities				(197,925	)		(355,446	)		(375,030	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net aircraft term loan (payments) proceeds				(104,352	)		(99,918	)		885,153
Net proceeds (repayments) on line of credit				27,362			(202,679	)		133,559
Payment of cash dividend				(667,823	)		(667,633	)		(535,658	)
Payment on capital leases				(39,880	)		-			-
Repurchase of common stock				(1,287,047	)		-			(356,796	)
Executive pension payment				-			-			(200,000	)
Proceeds from exercise of stock options				-			-			213,710
Net cash (used in) provided by financing activities				(2,071,740	)		(970,230	)		139,968
NET INCREASE (DECREASE) IN CASH & CASH EQUIVALENTS				193,075			(795,235	)		3,038,210
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR				2,702,424			3,497,659			459,449
CASH AND CASH EQUIVALENTS AT END OF YEAR			$	2,895,499		$	2,702,424		$	3,497,659

SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Capital leases entered into during fiscal year			$	35,492		$	39,200		$	-
Increase (decrease) in fair value of marketable securities				58,070			5,055			(91,247	)
Increase in value of deferred compensation				25,009			-			-
Change in fair value of derivatives				-			22,156			53,184
Tax benefit from stock option				60,000			-			-
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest			$	206,606		$	215,457		$	112,523
Income taxes				1,218,693			473,144			1,411,989

See notes to consolidated financial statements.

AIR T, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME

													Accumulated
	Common Stock						Additional						Other			Total
							Paid-In			Retained			Comprehensive			Stockholders'
	Shares			Amount			Capital			Earnings			Income			Equity
Balance, March 31, 2004		2,686,827		$	671,706		$	6,834,279		$	4,127,484		$	43,331		$	11,676,800

Comprehensive Income:
Net earnings											2,105,560
Other comprehensive income:
Unrealized loss on securities,
net of tax														(71,247	)
Change in fair value of derivative														53,184
Total Comprehensive Income																	2,087,497
Exercise of stock options		63,000			15,750			197,960									213,710
Repurchase and retirement
of common stock		(78,534	)		(19,633	)		(92,882	)		(244,281	)					(356,796	)
Cash dividend ($0.20 per share)											(535,658	)					(535,658	)
Balance, March 31, 2005		2,671,293			667,823			6,939,357			5,453,105			25,268			13,085,553

Comprehensive Income:
Net earnings											2,054,911
Other comprehensive income:
Unrealized gain on securities														5,055
Change in fair value of derivative														22,156
Total Comprehensive Income																	2,082,122
Cash dividend ($0.25 per share)											(667,633	)					(667,633	)
Balance, March 31, 2006		2,671,293			667,823			6,939,357			6,840,383			52,479			14,500,042

Comprehensive Income:
Net earnings											2,486,046
Other comprehensive income:
Unrealized gain on securities,
net of tax														27,070
Total Comprehensive Income																	2,513,116
Adjustment to initially apply SFAS
No. 158, net of tax														25,009			25,009
Cash dividend ($0.25 per share)											(667,823	)					(667,823	)
Tax benefit from stock option exercise								60,000									60,000
Compensation expense related to stock options								305,436									305,436
Stock repurchase		(161,295	)		(40,324	)		(1,246,723	)								(1,287,047	)
Balance, March 31, 2007		2,509,998		$	627,499		$	6,058,070		$	8,658,606		$	104,558		$	15,448,733


See notes to consolidated financial statements.

AIR T, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

YEARS ENDED MARCH 31, 2007, 2006, AND 2005

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principal Business Activities– Air T, Inc. (the Company), through its operating subsidiaries, is an air cargo carrier specializing in the overnight delivery of small package air freight and a manufacturer of aircraft ground support and specialized industrial equipment.

Principles of Consolidation– The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries, CSA Air, Inc. (CSA), Global Ground Support, LLC (Global), Mountain Air Cargo, Inc. (MAC) and MAC Aviation Services, LLC (MACAS). All significant intercompany transactions and balances have been eliminated.

Concentration of Credit Risk– The Company’s potential exposure to concentrations of credit risk consists of trade accounts and notes receivable, and bank deposits. Accounts receivable are normally due within 30 days and the Company performs periodic credit evaluations of its customers’ financial condition. Notes receivable payments are normally due monthly. The required allowance for doubtful accounts is determined using information such as customer credit history, industry information, credit reports, customer financial condition and the collectability of past-due outstanding accounts receivables. The estimates can be affected by changes in the financial strength of the aviation industry, customer credit issues or general economic conditions.

At various times throughout the year, the Company has deposits with banks in excess of amounts covered by federal depository insurance. These financial institutions have strong credit ratings and management believes that the credit risk related to these deposits is minimal.

A majority of the Company’s revenues are concentrated in the aviation industry and revenues can be materially affected by current economic conditions and the price of certain supplies such as fuel, the cost of which is passed through to the Company’s cargo customer. The Company has customer concentrations in two areas of operations, air cargo which provides service to one major customer and ground support equipment which provides equipment and services to approximately 90 customers, one of which is considered a major customer. The loss of a major customer would have a material impact on the Company’s results of operations. See Note 9 “Revenues From Major Customers”.

Cash Equivalents– Cash equivalents consist of liquid investments with maturities of three months or less when purchased.

Marketable Securities– Marketable securities consists solely of investments in mutual funds. The Company has classified marketable securities as available-for-sale and they are carried at fair value in the accompanying consolidated balance sheets. Unrealized gains and losses on such securities are excluded from earnings and reported as a separate component of accumulated other comprehensive income (loss) until realized. Realized gains and losses on marketable securities are determined by calculating the difference between the basis of each specifically identified marketable security sold and its sales price.

Inventories– Inventories related to the Company’s manufacturing operations are carried at the lower of cost (first in, first out) or market. Aviation parts and supplies inventories are carried at the lower of average cost or market. Consistent with industry practice, the Company includes expendable aircraft parts and supplies in current assets, although a certain portion of these inventories may not be used or sold within one year.

Property and Equipment– Property and equipment is stated at cost or, in the case of equipment under capital leases, the present value of future lease payments. Rotables inventory represents aircraft parts, which are repairable, capitalized and depreciated over their estimated useful lives. Depreciation and amortization are provided on a straight-line basis over the shorter of the asset’s useful life or related lease term. Useful lives range from three years for computer equipment and continue to seven years for flight equipment.

Revenue Recognition – Cargo revenue is recognized upon completion of contract terms and maintenance revenue is recognized when the service has been performed. Revenue from product sales is recognized when contract terms are completed and title has passed to customers.

Operating Expenses Reimbursed by Customer– The Company, under the terms of its air cargo dry-lease service contracts, passes through to its air cargo customer certain cost components of its operations without markup. The cost of flight crews, fuel, landing fees, outside maintenance, parts and certain other direct operating costs are included in operating expenses and billed to the customer, at cost, and included in overnight air cargo revenue on the accompanying statements of operations.

Stock Based Compensation – The Company adopted SFAS No. 123(R), Accounting for Stock-Based Compensation as of April 1, 2006, using the modified prospective approach, and as such, accounts for awards of stock-based compensation based on the fair value method. Prior to April 1, 2006, the Company accounted for awards of stock-based compensation based on the intrinsic value method under the provisions of APB Opinion No. 25, Accounting for Stock Issued to Employees. As such, no stock-based compensation is recorded in the determination of Net Earnings, as options granted have an option price equal to the market price of the underlying stock on the grant date. The following table illustrates the effect on Net Earnings and Earnings Per Share (EPS) had the Company applied the fair value method of accounting for stock-based employee compensation under SFAS 123, Accounting for Stock-Based Compensation:

	Year Ended March 31,
	2006			2005
Net earnings - as reported	$	2,054,911		$	2,105,560
Compensation expense, net of income taxes		(36,900	)		(6,740	)
Net earnings – proforma	$	2,018,011		$	2,098,820
Basic earnings per share – as reported	$	0.77		$	0.79
Basic earnings per share – proforma		0.76			0.79
Diluted earnings per share - as reported		0.77			0.78
Diluted earnings per share – proforma		0.76			0.78

Financial Instruments– The carrying amounts reported in the consolidated balance sheets for cash and cash equivalents, accounts receivable, notes receivable, cash surrender value of life insurance, accrued expenses, and long-term debt approximate their fair value at March 31, 2007 and 2006.

Warranty Reserves– The Company warranties its ground equipment products for up to a three-year period from date of sale. Product warranty reserves are recorded at time of sale based on the historical average warranty cost and are adjusted as actual warranty cost becomes known.

Product warranty reserve activity during fiscal 2007 and fiscal 2006 is as follows:

Balance at March 31, 2005	$	198,000
Additions to reserve		251,000
Use of reserve		(164,000	)