UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

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

For the fiscal year ended December 31, 2005

OR

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

For the transition period from                      to                     

Commission file number: 1-13025

AirNet Systems, Inc.

(Exact name of Registrant as specified in its charter)

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

Title of each class		Name of each exchange on which registered
Common Shares, $0.01 par value		American Stock Exchange

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

o Yes þ No

Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

o Yes þ No

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.

þ Yes o No

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

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o		Accelerated filer o		Non-accelerated filer þ

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

o Yes þ No

State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the Registrant’s most recently completed second fiscal quarter: As of June 30, 2005, the aggregate market value of the Registrant’s common shares (the only common equity of the Registrant) held by non-affiliates of the Registrant was $42,354,506 based on the closing sale price as reported on the New York Stock Exchange.

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

Class		Outstanding at March 21, 2006
Common Shares, $0.01 par value		10,153,599 common shares

 

 

INDEX

PART I
		Item 1: Business	3
		Item 1A: Risk Factors	9
		Item 1B: Unresolved Staff Comments	12
		Item 2: Properties	12
		Item 3: Legal Proceedings	14
		Item 4: Submission of Matters to a Vote of Security Holders	14
PART II
		Item 5: Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	15
		Item 6: Selected Financial Data	16
		Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operation	17
		Item 7A: Quantitative and Qualitative Disclosures About Market Risk	34
		Item 8: Financial Statements and Supplementary Data	35
		Item 9: Changes in and Disagreements With Accountants on Accounting and Financial Disclosure	52
		Item 9A: Controls and Procedures	52
		Item 9B: Other Information	53
PART III
		Item 10: Directors and Executive Officers of the Registrant	55
		Item 11: Executive Compensation	61
		Item 12: Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	70
		Item 13: Certain Relationships and Related Transactions	74
		Item 14: Principal Accountant Fees and Services	75
PART IV
		Item 15: Exhibits and Financial Statement Schedules	75
		Signatures	86
		Exhibit Index	87
EX-4.21
EX-4.22
EX-4.48
EX-10.21
EX-10.24
EX-10.25
EX-10.29
EX-21
EX-23
EX-24
EX-31.1
EX-31.2
EX-32

PART I

which is often highly regulated by various governmental authorities. Targeted markets within the medical industry include producers and recipients of radioactive pharmaceuticals, diagnostic specimens, blood, umbilical cord blood, human tissue and organs.

For those customers requiring time-critical delivery options not available on AirNet’s regularly scheduled routes, cargo charter services are available. Cargo charter services may be regularly scheduled or scheduled on an on-demand, as-needed basis, 24 hours per day, seven days a week.

Passenger Charter Services

Jetride’s Passenger Charter Services generated approximately 15%, 11% and 5% of AirNet’s total net revenues for the fiscal years ended December 31, 2005, 2004 and 2003, respectively. Jetride provides private passenger charter services that offer customers a safe, fast, and convenient way to travel. Jetride’s private passenger charter service is available 24 hours a day, 7 days a week primarily within the continental United States and neighboring countries. Jetride provides charter services to fractional charter companies, third-party charter brokers and, to a lesser extent, to retail customers. As of December 31, 2005, Jetride operated 14 Learjets from nine locations across the country. Jetride also operated 2 Challenger aircraft under management agreements for a portion of 2005. As of December 31, 2005, Jetride’s fleet consisted of nine owned aircraft and five aircraft that are managed for other owners. Jetride’s fleet of Learjets are configured to comfortably carry seven to eight passengers. All passenger charter pilots are Airline Transport Pilot rated – the highest Federal Aviation Administration (“FAA”) rating possible. Jetride is certified by the Wyvern Network of Charter Operators and holds an Aviation Research Group/US Platinum rating, the highest rating in the industry.

Aviation Services

AirNet operates a fixed base operation from AirNet’s Columbus, Ohio facility, offering retail aviation fuel sales and related ground support services.

Business Strategy

As a result of the continuing evolution of electronic alternatives to the physical movement of cancelled checks, AirNet believes that its Bank Services net revenue will decline in future periods. AirNet believes that the transition in the banking industry to the electronic clearing of cancelled checks will continue to accelerate in the future. AirNet continues to evaluate and adjust its aircraft mix and fleet size in response to these changing business conditions as well as review its ground operations for efficiencies and cost reductions. AirNet continues to focus on the implementation of operational changes to increase the efficiency of its national airline network and delivery services to maximize cash flow for the purpose of reducing its debt. During Fiscal Year 2005, AirNet reduced its outstanding debt by approximately $6 million.

AirNet continues to focus on Express Services customers in time-critical and time-definite delivery markets, such as life sciences, radioactive pharmaceutical and on-demand cargo charters, to partially offset anticipated declines in its Bank Services revenues. The anticipated declines in AirNet’s Bank Services revenues will likely require significant changes in AirNet’s air transportation network over time, including a reduction in AirNet’s current route schedule and the number of aircraft it operates. In February 2006, AirNet decided to market for sale all nine of the Cessna 310 piston aircraft it operates as a result of the reduction in its required airline capacity. AirNet’s ability to expand or maintain its Express Services may be limited by continuing reductions in AirNet’s route schedule.

Future growth in Passenger Charter Services revenues in Fiscal Year 2006 will be dependent upon securing additional aircraft under aircraft management agreements and operational improvements. AirNet does not intend to purchase any additional Passenger Charter aircraft during Fiscal Year 2006.

On January 5, 2005, upon the approval of the Board of Directors (the “Board”) of AirNet, AirNet engaged Brown Gibbons Lang & Company (“BGL”) to serve as AirNet’s exclusive financial advisor and investment banker to review, develop and evaluate various strategic alternatives to enhance shareholder value, including the possible sale of AirNet. AirNet’s Board also established a Special Committee, consisting solely of independent directors, to oversee the marketing process, which resulted in a number of indications of interest with respect to the sale of AirNet and culminated in the execution of a letter of intent for the sale of AirNet on October 26, 2005. On December 16, 2005, AirNet announced that it had been unable to reach a definitive merger agreement with the private equity investment firm that entered into the letter of intent and that the exclusivity period under such letter of intent had been allowed to expire.

Following the termination of the letter of intent, in December of 2005, the Board dissolved the Special Committee and appointed a Strategy Committee to work with management on the ongoing business strategy and alternatives for the company to enhance shareholder value. The Strategy Committee, together with the full Board, determined that AirNet’s business strategy would include operating its businesses with emphasis on cash flows from operations while seeking other de-leveraging opportunities. The Board has elected to continue its engagement of BGL as its financial advisor on a month-to-month basis in connection with the development and evaluation of various strategies and opportunities to enhance shareholder value and de-leverage the business.

Operations

Air operations

AirNet’s air operations are headquartered in Columbus, Ohio. In June 2005, AirNet relocated its operational headquarters from Port Columbus International Airport (“Port Columbus”) to Rickenbacker International Airport (“Rickenbacker”).

AirNet and Jetride utilize an extensive screening process to evaluate potential pilots prior to hiring. New pilots must meet stringent company qualifications, as well as mandated FAA requirements. New pilots must satisfactorily complete a five-week training program conducted by AirNet’s flight training staff prior to assignment of pilot duties. This training program includes flight simulator training prior to any actual flight time in an AirNet or Jetride aircraft, as well as intensive ground instruction. Additionally, new pilots gain operating experience in a structured setting prior to assignment in order to gain a familiarity with AirNet’s route system and the unique demands of the flight environment. In addition to FAA requirements, pilots providing Passenger Charter Services for Jetride must also meet additional in-flight experience requirements specifically related to the types of aircraft operated by Jetride.

AirNet’s central dispatch system coordinates all components of the air cargo operation. Departure and arrival times are continuously updated, and weather conditions throughout the nation are monitored. AirNet dispatchers remain in contact with pilots, out-based hub managers, fuelers, maintenance technicians and ground delivery personnel to identify and minimize any potential delays in the delivery process.

Capacity management is an important factor in maintaining profitability of AirNet’s package delivery services. AirNet’s air transportation network is positioned around a flexible national route structure designed to facilitate late pick-up and early delivery times, minimize delays and simplify flight scheduling. AirNet’s flexible route structure allows it to respond to the changing volume needs of its customers. AirNet’s primary hub in Columbus, Ohio, and several mini-hubs across the nation, are located primarily in less congested regional airports. These locations, in conjunction with AirNet’s off-peak departure and arrival times, provide easy take-off and landings, convenient loading and unloading and fast refueling and maintenance. AirNet also uses commercial airlines, primarily to transport shipments during the daytime and weekend hours when its aircraft are operating under a limited flight schedule.

AirNet employs approximately 80 aircraft and avionics technicians in seven separate locations across the United States who perform maintenance on AirNet’s fleet of aircraft. AirNet has an in-house engine shop at its Columbus facility where some of the piston engines are overhauled on-site, thereby reducing aircraft downtime and controlling costs. AirNet also performs avionics troubleshooting and repair at its Columbus facility to provide for maximum efficiency and minimum aircraft downtime for the fleet. AirNet’s aircraft maintenance center at its Columbus hub has received ISO 9001:2000 certification and holds a repair station certificate granted by the FAA.

Shipment processing

Bank shipments are pre-sorted by bank customer personnel and packaged in AirNet-supplied bags with three letter city identifier tags to show final destination. Express shipments are packaged in either AirNet-provided packaging or the customers’ packaging. Shipments transported on AirNet’s air transportation network are typically picked up by a courier and transported to the local airport where an airbill is either scanned using bar code technology or entered manually. Information on each airbill pertaining to the shipper, receiver, airbill number and applicable deadline is captured and downloaded into AirNet’s computer system, where it is available to AirNet’s customer service representatives (“CSRs”). Upon arrival at AirNet’s Columbus hub or one of its mini-hubs, the shipment is off-loaded, sorted by destination and reloaded onto an aircraft. At the final destination city, the shipment is off-loaded and delivered by courier to the receiver. When delivered, information from the airbill is once again captured and downloaded into AirNet’s computer system. Delivery information for all shipments is then available on-line to customers and AirNet’s CSRs.

For banking customers meeting daytime banking deadlines and Express customers requiring next-flight-out timing, shipments are typically picked up by a courier and transported via commercial airlines or other integrators to destination cities where couriers recover the packages and deliver them to their final destinations.

Ground support

AirNet manages its ground delivery services through the combined use of employees and a network of independent contractors and vendor couriers. Independent contractors and vendor couriers perform the majority of ground delivery services, allowing AirNet to better match its ground costs with its volume requirements. In limited situations, employees are used for ground delivery services on scheduled routes where volume requirements economically justify employing full-time couriers. Dispatching functions related to ground delivery services occur at AirNet’s Columbus, Ohio hub and on a regional basis in some of the major cities served.

Fast Forward Solutions

Fast Forward Solutions, LLC (“Fast Forward Solutions”), a wholly-owned subsidiary of AirNet, was formed to explore growth opportunities associated with existing and emerging image replacement platforms and technologies. Fast Forward Solutions is no longer pursuing opportunities in the image replacement market and AirNet expects to dissolve Fast Forward Solutions during fiscal year 2006, without any financial impact in Fiscal Year 2006.

Regulation

AirNet holds an air carrier operating certificate granted by the FAA pursuant to Part 135 of the Federal Aviation Regulations. AirNet also holds a repair station certificate granted by the FAA pursuant to Part 145 of the Federal Aviation Regulations. In addition, Jetride holds its own air carrier operating certificate granted by the FAA pursuant to Part 135. These certificates are of unlimited duration and remain in effect so long as AirNet and Jetride maintain the required standards of safety and meet the operational requirements of the Federal Aviation Regulations. The FAA’s regulatory authority relates primarily to operational aspects of air transportation, including aircraft standards and maintenance, personnel, and ground facilities.

The U. S. Department of Transportation (“DOT”) and Transportation Security Administration (“TSA”) have regulatory authority concerning operational and security concerns in transportation, including safety, insurance and hazardous materials. AirNet holds various operational certificates issued by these agencies, including party status to DOT E-7060, which permits AirNet to transport higher volumes of time-critical radioactive pharmaceuticals than is allowed by the DOT for most carriers. Party status to DOT E-7060 is renewed every two years, with AirNet’s next renewal due August 2006. AirNet is also subject to Food and Drug Administration regulation of AirNet’s transportation of pharmaceuticals and live animals.

In addition to federal regulations, AirNet’s operations are subject to various state and local regulations, and in many instances, require permits and licenses from state authorities.

AirNet believes that both AirNet and Jetride have all permits, approvals and licenses required to conduct their respective operations and that they are in compliance with applicable regulatory requirements relating to their operations including all applicable noise level regulations. Because current noise level regulations would have required AirNet to modify its three cargo configured Model 25 Learjets, and because such Learjets are less efficient to operate, AirNet retired and sold its three Model 25 Learjets prior to the end of fiscal year 2005. AirNet cooperates with various local governments to minimize noise issues; however, future noise pollution regulations could require the modification or replacement of other AirNet aircraft.

AirNet conducts a portion of its operations through the transportation of packages via commercial airlines. TSA regulations provide that only indirect air carriers that maintain a TSA approved Indirect Air Carrier Standard Security Program (“IACSSP”) may tender packages to commercial airlines. In February, 2005, the TSA informed AirNet that the TSA would no longer approve the IACSSP maintained by AirNet based upon the definition of an “indirect air carrier” provided under 49 CFR §1540.5. At the same time, the TSA requested that AirNet submit an application for a new IACSSP under the name of an affiliated company.

In accordance with the TSA’s request, during 2005 AirNet submitted an application for a new IACSSP under the name of AirNet Management, Inc., a wholly-owned subsidiary of AirNet (“AirNet Management”). On June 21, 2005, the TSA approved the IACSSP submitted by AirNet Management. Upon receipt of such approval, AirNet began implementing operational changes necessary to transition the tender of packages to commercial airlines under the new IACSSP maintained by AirNet Management. This transition process was completed by August 28, 2005, the date on which the IACSSP authority maintained by AirNet expired. In connection with the transition to the new IACSSP maintained by AirNet Management, AirNet entered into a service agreement with AirNet Management under which AirNet retained the services of AirNet Management to process packages with commercial airlines. Under the service agreement, AirNet also performs certain functions related to the new IACSSP on behalf of AirNet Management, such as site visits to qualify potential customers as “known shippers”.

The TSA conducts periodic audits of all indirect air carriers to ensure compliance with the rules and regulations governing indirect carriers. From time to time, the TSA has notified AirNet Management of possible violations of the IACSSP it maintains. Such alleged violations generally involve the failure of ground vendors to comply with certain provisions of AirNet Management’s IACSSP. Upon receipt of any such TSA notification, AirNet Management conducts an internal investigation of the alleged failure and notifies the TSA of any corrective actions it has implemented to address such failure. While the TSA can impose penalties for violations of the rules and regulations governing an IACSSP, including fines and revocation of IACSSP authority, no fines or other penalties have been proposed by the TSA with respect to the IACSSP maintained by AirNet Management.

The U. S. DOT implemented new regulations regarding the transportation of hazardous materials that became effective on April 1, 2005. These new regulations require that certain information concerning hazardous material shipments be maintained by the pilot-in-command of an aircraft and be readily accessible at the airport of departure and the intended airport of arrival for the duration of each flight leg. AirNet has implemented new operating procedures to comply with the regulations; however, a significant portion of AirNet’s operations are conducted at night at airports where it maintains no ground operations. In order to comply with the regulatory requirement that information concerning hazardous material shipments be readily accessible at each airport of departure, AirNet has made arrangements to deposit such information with ground vendors, fixed based operators, or in drop boxes located at departing airports. The location of the deposited information is maintained at AirNet’s dispatch center in Columbus, Ohio. AirNet’s dispatch personnel can direct any regulatory authorities or emergency response team to the location of the hazardous material information in the event of an emergency. While AirNet continues to evaluate its procedures for complying with the new DOT regulations, there can be no assurances that the TSA, DOT or FAA would agree that AirNet’s operating procedures comply with all of the requirements of the new regulations.

Failure to comply with the new hazardous material regulations could reduce or otherwise restrict AirNet’s ability to transport hazardous materials, including its ability to transport radioactive pharmaceuticals under its DOT E-7060 permit described above.

Seasonality

See “Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operation” under the heading “Seasonality and Variability in Quarterly Results” of this Annual Report on Form 10-K for a discussion of the seasonal aspects of AirNet’s business, which discussion is incorporated herein by reference.

Competition

The air and ground courier industry is highly competitive. AirNet’s primary competitor in the transportation of cancelled checks is the Federal Reserve’s Check Relay Network. The actions of the Federal Reserve are regulated by the Monetary Control Act, which requires the Federal Reserve to price its services at actual cost plus a set percentage private sector adjustment factor. AirNet believes that the purpose of the Monetary Control Act is to curtail the possibility of predatory pricing by the Federal Reserve when it competes with the private sector. No assurance beyond the remedies of law can be given that the Federal Reserve will comply with the Monetary Control Act.

In the private sector, there are a large number of smaller, regional carriers that transport cancelled checks, none of which AirNet believes has a significant interstate market share. The two largest private sector air couriers, FedEx and United Parcel Service (“UPS”), both carry cancelled checks where the required deadlines fit into their existing system. AirNet does not believe that FedEx or UPS represent significant competitors in the time-critical cancelled check market to date. AirNet provides customized service for its customer base, often with later pick-ups and earlier deliveries than the large, national couriers provide.

AirNet competes with commercial airlines and numerous other carriers in its Express Services delivery business and estimates its market share in this industry at less than 1%. AirNet believes that its national air transportation network system, proprietary information technology and historically high on-time performance level allow it to compete in this market. Aggressive competition for customers with express delivery needs resulted in reduced Express Services shipments in fiscal year 2005. In addition, in fiscal year 2005, AirNet became aware that a competitor received a DOT E-7060 permit which may increase competition for radioactive pharmaceuticals customers.

In the Passenger Charter business, AirNet competes with other owner/operators and charter brokers of small business jets. AirNet believes its maintenance and related support facilities provide added flexibility in deploying and servicing the Passenger Charter fleet to meet customer demands.

Environmental matters

In 2004, AirNet commenced construction of a new corporate and operational facility (the “Rickenbacker Facility”) on land leased from the Columbus Regional Airport Authority (the “Authority”). Construction of the Rickenbacker Facility was completed in May of 2005 and AirNet completed the relocation of its flight and administrative operations to the Rickenbacker Facility in June of 2005. Portions of the leased land on which the Rickenbacker Facility was constructed, as well as portions of the aircraft ramp used by AirNet at the Rickenbacker Facility, contain known pollution conditions. The appropriate amended post closure plan and no further action letters addressing the Rickenbacker Facility and the aircraft ramp were obtained by AirNet from the Authority prior to beginning construction. No additional pollution conditions on the leased land were noted during construction of the Rickenbacker Facility or the aircraft ramp and none have been noted through the date of this Annual Report on Form 10-K.

In June 2005, AirNet relocated its corporate and operational headquarters from 3939 International Gateway in Columbus, Ohio (the “Port Columbus Facility”) to the new Rickenbacker Facility. AirNet’s lease of its Port Columbus Facility expired on August 31, 2005. In connection with vacating its Port Columbus Facility, AirNet was required to conduct an environmental assessment of the Port Columbus Facility. The results of the environmental assessment demonstrated concentrations of petroleum hydrocarbons and vinyl chloride above the regulatory limits in samples associated with one of three oil-water separators located in the hanger portion of the Port Columbus Facility. Except for the area associated with the one oil-water separator, it was the opinion of the environmental testing firm engaged to conduct the assessment that no obviously recognized environmental conditions existed at AirNet’s Port Columbus Facility in the areas assessed, including the fuel farm which AirNet maintains at the Port Columbus Facility.

Following completion of the environmental assessment, AirNet, with the assistance of the Authority, determined what actions were necessary to remediate the identified pollution conditions. In March of 2006, AirNet completed remedial work to remove the pollution conditions, which consisted primarily of the removal and replacement of a portion of the concrete floor in the hangar area of the Port Columbus Facility, the removal and replacement of the contaminated soil, and the installation of a new oil-water separator. Environmental testing conducted at the completion of the remedial work demonstrated no presence of petroleum hydrocarbons or vinyl chloride above the regulatory limits in the area associated with the remedial work. As of December 31, 2005, AirNet had an accrual of approximately $0.2 million for such remedial environmental work and work that may be required to return the fuel farm to its original condition, as discussed below in “Item 2 – Properties”.

AirNet believes that compliance with applicable laws and regulations governing environmental matters has not had, and is not expected to have, a material effect on AirNet’s capital expenditures, operations or competitive position.

Employees

As of December 31, 2005, AirNet employed approximately 790 persons, which included approximately 235 pilots. AirNet’s employees are not represented by any union or covered by any collective bargaining agreement. AirNet has experienced no work stoppages and believes that its relationship with employees is good.

ITEM 1A — RISK FACTORS

Competition from other providers of express air and ground delivery services may adversely affect AirNet’s results of operations and financial condition.

AirNet’s Bank Services compete primarily against the Federal Reserve’s Check Relay Network, which has significantly greater financial and other resources than AirNet. The Federal Reserve is regulated by the Monetary Control Act of 1980, which in general requires that the Federal Reserve price its services on an actual cost basis plus a set percentage private sector market adjustment factor. Failure by the Federal Reserve to comply with the Monetary Control Act by pricing its services below the required rates could have an adverse competitive impact on AirNet. In addition, the Monetary Control Act may be amended, modified or repealed, or new legislation affecting AirNet’s business may be enacted. Also, the market for Express Delivery Services is highly competitive. Aggressive competition for customers with express delivery needs could have a material adverse affect on revenue and contribution margins in Delivery Services.

The Check 21 Act or similar legislation and electronic methods of clearing cancelled checks will have a significant adverse effect on AirNet’s revenues derived from check delivery services.

The Check 21 Act, which became effective in October 2004, creates a new negotiable instrument called a substitute check (also known as an image replacement document or “IRD”) that becomes the legal equivalent of the original item. The Check 21 Act effectively removes the requirement of returning an original paper check to the account holder’s institution and requires that all financial institutions accept an IRD in lieu of a cancelled check. The Check 21 Act and the transition in the banking industry to electronic methods of clearing cancelled checks will eventually replace the need for expedited air transportation services of original cancelled checks by most of AirNet’s banking customers. The Check 21 Act and electronic methods of clearing cancelled checks will have a significant adverse affect on AirNet’s revenues derived from check delivery services. However, it is unclear how quickly IRD’s and electronic methods of clearing cancelled checks will be implemented on a widespread basis by banking customers and how such implementation would affect their expedited check transportation needs.

Other technological changes in the check clearance and national payment systems may adversely affect the demand for AirNet’s Bank Services from the financial services industry.

Some analysts have predicted that the increased use of electronic funds transfers will lead to a “checkless society,” which could also adversely affect the demand for AirNet’s Bank Services to the financial services industry. In addition, some financial services industry analysts have predicted the development of various forms of imaging technology that could reduce or eliminate the need for prompt delivery of cancelled checks. Similarly, technological advances in the nature of “electronic mail” and “telefax” have affected the demand for on-call delivery services by customers needing express delivery services. While none of these technological advances has had a significant adverse impact on AirNet’s business to date, these or similar technologies, or other regulatory or technological changes in the check clearance and national payment systems, could have an adverse affect on AirNet’s business in the future.

Reductions in AirNet’s route schedule and the number of aircraft it operates may adversely impact AirNet’s Express Services business.

AirNet’s air and ground network that provides later pick-up and earlier delivery times than those offered by other national carriers is one of the primary differentiating characteristics of AirNet’s time-critical delivery network. A significant portion of AirNet’s Express shipments are transported on AirNet’s airline. The anticipated decline in AirNet’s transportation of cancelled checks will require significant changes in AirNet’s air transportation network, including a reduction in its current route schedule and the number of aircraft it operates. Reductions in AirNet’s route schedule and the number of aircraft it operates will require AirNet to transport a greater portion of its Express shipments on commercial airlines and may adversely impact AirNet’s ability to expand or maintain its Express Services business.

Government regulation significantly affects AirNet.

AirNet’s delivery operations are subject to various federal, state and local regulations that in many instances require permits and licenses. Failure by AirNet to maintain required permits or licenses, or to comply with the applicable regulations, could result in substantial fines or possible revocation of AirNet’s authority to conduct certain of its operations.

AirNet’s flight operations are regulated by the FAA under Part 135 of the Federal Aviation Regulations. Among other things, these regulations govern permissible flight and duty time for aviation flight crews. The FAA has contemplated, from time to

time, certain changes in flight and duty time guidelines which, if adopted, could increase AirNet’s operating costs. These changes, if adopted, could also require AirNet and other operators regulated by the FAA to hire additional flight crew personnel. In addition, Congress, from time to time, has considered various means, including excise taxes, to raise revenues directly from the airline industry to pay for air traffic control facilities and personnel. There can be no assurances that Congress will not change the current federal excise tax rate or enact new excise taxes, which could adversely affect AirNet’s business.

Loss of AirNet Management’s Indirect Air Carrier Standard Security Program approval could adversely affect AirNet’s business.

A significant portion of AirNet’s shipments are transported via commercial airlines. TSA regulations provide that only indirect air carriers that maintain a TSA approved Indirect Air Carrier Standard Security Program (“IACSSP”) may tender packages to commercial airlines. In accordance with the TSA’s request, during Fiscal Year 2005 AirNet secured TSA approval for a new IACSSP under the name of AirNet Management, Inc., a wholly-owned subsidiary of AirNet. AirNet’s ability to transport packages on commercial airlines is dependent upon AirNet Management, Inc.’s continuing compliance with the rules and regulations governing Indirect Air Carrier Standard Security Programs and the TSA’s continuing approval of the AirNet Management, Inc. IACSSP. The loss of AirNet Management, Inc.’s IACSSP approval would have a significant and immediate adverse effect on AirNet’s business.

Changes in government regulations regarding the transportation of hazardous materials may increase AirNet’s costs of transporting such shipments or reduce AirNet’s ability to transport such shipments.

The DOT implemented new regulations regarding the transportation of hazardous materials that went into effect on April 1, 2005. The new regulations required that AirNet institute new operating procedures and make arrangements with ground vendors and/or fixed based operators to assist AirNet in complying with the new regulations. Failure to comply with the new or existing regulations governing the transportation of hazardous materials would reduce or otherwise restrict AirNet’s ability to transport hazardous materials, including its ability to transport radioactive pharmaceuticals under AirNet’s DOT E-7060 permit. Future changes in government regulations regarding the transportation of hazardous materials may also increase AirNet’s costs of transporting such shipments or reduce AirNet’s ability to transport such shipments.

Reclassification of ground couriers as employees rather than independent contractors could impact AirNet’s operating costs and subject it to back taxes and other liabilities.

AirNet uses the services of independent contractors as couriers to pick up and deliver its packages. From time to time, federal and state authorities have sought to assert that independent contractors in the transportation industry, including independent contractors providing services similar to those utilized by AirNet, are employees rather than independent contractors. AirNet currently classifies its couriers providing services under an independent contractor agreement as independent contractors rather than as employees. However, there can be no assurance that federal or state authorities will not challenge this position, or that other laws or regulations, including tax laws or interpretations thereof, will not change. If, as a result of any of the foregoing, AirNet were required to pay withholding taxes and pay for and administer added employee benefits to these couriers, AirNet’s operating costs would increase. Additionally, in the event of any such reclassification, AirNet could be required to pay back-up withholding with respect to amounts previously paid to such individuals and be required to pay penalties or be subject to other liabilities as a result of the incorrect classification of such individuals, such as payment of past due workers compensation and unemployment insurance premiums.

Changes to current transportation security requirements or procedures could adversely impact AirNet’s ability to efficiently conduct AirNet’s air and ground operations to meet AirNet’s current delivery parameters or significantly increase costs to transact those operations.

Considerable focus has been placed on package security requirements and procedures at domestic and international airports since the September 11, 2001 tragedy and related incidents. The TSA, commercial airlines, fixed based operations (where AirNet transacts a significant portion of its aircraft loading and unloading operations) and airport authorities are still in the process of reviewing and improving all aspects of their security requirements. While many proposed changes are voluntary, many are being mandated by the TSA, the DOT and the FAA.

During 2002, the TSA implemented screening procedures for over-the-counter cargo tendered to commercial airlines. These screening procedures have resulted in additional tender time for packages transported on the commercial airlines in certain locations and during certain times. In addition, the TSA continues to review and consider additional package screening requirements and changes to the vendor screening procedures, which AirNet may need to perform on packages from its customers. Many commercial airlines are also adding security surcharges to shipments.

Changes at fixed base operators and by local airport authorities could potentially limit AirNet’s ramp access to its aircraft, thereby increasing tender time from customers. Changes in chain of custody requirements could also potentially cause AirNet to incur additional costs to staff additional hours at certain locations. In response to the new security-related procedures being implemented, AirNet added a security surcharge in 2002 for its Bank and Express Services customers.

Although the surcharge is expected to help offset the increasing costs associated with security issues, AirNet’s current surcharge program may not be sufficient to cover all new costs it may incur as additional transportation safety procedures are developed and/or required.

As a company actively engaged in providing aviation services, AirNet is subject to current and future regulations with which it must comply in order to maintain its ability to provide such services. Various governmental agencies are implementing and expanding policies, procedures, and compliance measures to enhance the safety and security of both domestic and international air transportation. This increasing regulatory environment may require AirNet to change its operational processes, modify its flight schedules, and incur additional costs of compliance. The costs associated with regulatory compliance could impact AirNet’s financial results. AirNet’s inability to comply with current or future governmental regulations could limit or restrict AirNet’s ability to provide specific services, including but not limited to, the transportation of hazardous materials.

Catastrophic accidents involving AirNet’s Passenger Charter aircraft could result in a significant reduction in AirNet’s business and damage to the Jetride brand.

A catastrophic accident could substantially reduce the demand for Jetride’s Passenger Charter Services and, therefore, significantly reduce its revenue. In such event, Jetride may not be able to secure liability insurance for its business or secure such insurance at a reasonable cost.

Environmental concerns may arise in connection with AirNet’s operation at its new facility on leased land with known pollution conditions.

In 2005, AirNet completed construction of its new Rickenbacker Facility on land leased from the Authority. Portions of the leased land, as well as portions of the aircraft ramp, on which AirNet conducts a significant portion of its operations at the Rickenbacker Facility, contain known pollution conditions. The appropriate amended post closure plan and no further action letters addressing these areas were supplied to AirNet by the Authority prior to beginning construction. Identification of additional pollution conditions on the leased land or attached ramp could increase AirNet’s costs and have an adverse affect on its ability to operate at the Rickenbacker Facility.

Failure to renew party status to Department of Transportation E-7060 would result in significant loss of Express Services revenue.

AirNet maintains party status to DOT E-7060, which permits AirNet to transport higher volumes of radioactive pharmaceuticals than allowed by most air carriers. AirNet is required to renew its party status every two years. Although AirNet anticipates it will obtain its DOT E-7060 renewal at its next scheduled renewal date in August 2006, there can be no assurances that the party status will be extended. Further, there can be no assurance that AirNet can continue to comply with all current DOT E-7060 requirements, or that such requirements will not change in the future which would negatively affect AirNet’s ability to maintain such status.

Anti-takeover provisions may delay or prevent an acquisition or change in control of AirNet by a third party.

Provisions of AirNet’s amended articles and code of regulations and of the Ohio Revised Code, together or separately, could discourage potential acquisition proposals, delay or prevent a change in control of AirNet and limit the price that certain investors might be willing to pay in the future for the common shares. Among other things, these provisions require certain supermajority votes, establish advance notice procedures for shareholder nomination of candidates for election as directors and for shareholder proposals to be considered at shareholders’ meetings, eliminate cumulative voting in the election of directors and provide that directors may only be removed from office for cause.

AirNet’s amended articles authorize the board of directors to issue up to 10,000,000 preferred shares without further shareholder approval, subject to any limitations prescribed by law and the rules and regulations of the American Stock Exchange. The preferred shares could have dividend, liquidation, conversion and other rights and privileges that are superior or senior to the common shares. Issuance of preferred shares could result in the dilution of the voting power of the common shares, adversely affect holders of the common shares in the event of liquidation of AirNet or delay, defer or prevent a change in control of AirNet.

In addition, Section 1701.831 of the Ohio Revised Code contains provisions that require shareholder approval of any proposed “control share acquisition” of any Ohio corporation at any of three voting power thresholds: one-fifth, one-third and a majority. Further, Chapter 1704 of the Ohio Revised Code contains provisions that restrict specified business combinations and other transactions between an Ohio corporation and interested shareholders.

AirNet’s substantial indebtedness could adversely affect AirNet’s financial condition and prevent AirNet from fulfilling its obligations.

AirNet has a significant amount of debt. AirNet’s substantial indebtedness could: (1) require AirNet to dedicate a substantial portion of cash flows from operating activities to payments on AirNet’s indebtedness, which would reduce the cash flows available to fund working capital, capital expenditures and other general corporate requirements; (2) limit AirNet’s flexibility in planning for, or reacting to, changes in AirNet’s business and the industry in which AirNet operates; and (3) limit AirNet’s ability to borrow additional funds. AirNet’s liquidity and its ability to meet its current and long-term financial obligations as they become due will be dependent upon AirNet’s financial performance, its ability to meet financial covenants in financing agreements and its ability to replace or extend the revolving credit facility. AirNet’s failure to meet these financial covenants would have a material adverse effect on AirNet’s financial position and ability to continue operations. A substantial portion of AirNet’s revolving credit facility was used to fund the Rickenbacker Facility.

AirNet may encounter issues in documenting and testing its internal control over financial reporting for purposes of complying with Section 404 of the Sarbanes-Oxley Act of 2002.

AirNet is in the process of documenting and testing its internal control over financial reporting in order to satisfy the requirements of Section 404 of the Sarbanes-Oxley Act, which will require management to annually assess the effectiveness of AirNet’s internal control over financial reporting beginning with the fiscal year ending December 31, 2007 and a report by AirNet’s independent registered public accounting firm addressing management’s assessment and the effectiveness of the internal control over financial reporting beginning with the fiscal year ending December 31, 2007. During the course of AirNet’s testing, AirNet may identify deficiencies and weaknesses, which AirNet may not be able to remediate in time to meet the deadline imposed by the Sarbanes-Oxley Act for compliance with the requirements for Section 404. If management is unable to conclude that AirNet’s internal control over financial reporting is effective at year-end 2007 or AirNet’s independent registered public accounting firm is unable to give a favorable report on management’s assessment, this could have a material adverse effect on AirNet’s reputation, financial condition and on the market price of AirNet’s common shares.

ITEM 1B — UNRESOLVED STAFF COMMENTS

None.

AirNet had an accrual of $0.2 million for such remedial environmental work and the work necessary to return the fuel farm premise to its original condition if the Authority does not take title to the fuel farm assets, as discussed above.

AirNet also operates at approximately 40 additional locations throughout the country. These locations, which are leased from unrelated third parties, generally include office space and/or a section of the lessor’s hangar or ramp.

Fleet

Cargo aircraft

The following table shows information about AirNet’s cargo aircraft fleet used in its Delivery Services reportable segment as of December 31, 2005. AirNet’s cargo aircraft have been modified for cargo use and contain no passenger seats and interiors to provide maximum payload.

The Learjet 35 is among the fastest and most reliable small jet aircraft available in the world and meets all Stage Three noise requirements currently being implemented across the United States.

The Cessna Caravan Super Cargomaster aircraft is a turbo-prop aircraft.

The Piper Navajo, Beech Baron and Cessna 310 are twin-engine piston aircraft. In February 2006, AirNet decided to market for sale all nine of the Cessna 310 aircraft it owns.

Passenger Charter aircraft

The following table shows information about Jetride’s Passenger Charter aircraft fleet as of December 31, 2005:

The Learjet is a midsize business jet with transcontinental range and meets all Stage Three noise requirements.

Vehicles

AirNet operated a fleet of approximately 50 ground transportation vehicles as of December 31, 2005. Vehicles range in size from passenger cars to full sized vans. AirNet also rents lightweight trucks for certain weekend ground routes. In 2001, AirNet entered into a leasing agreement with a third party provider and began replacing owned vehicles with leased vehicles

as replacement became necessary. AirNet leased approximately 20 of the 50 vehicles it operated as of December 31, 2005. In addition to the ground transportation vehicles it operates, AirNet operates approximately 25 vehicles not licensed for road use, including fuel trucks and tugs.

(c) Matters voted upon at the 2005 Annual Meeting

(i) See Item 4(b) for voting results for the election of directors.

(d) Not applicable.

ITEM 6 — SELECTED FINANCIAL DATA

Note 1		The year 2001 includes a $1.0 million non-recurring charge related to the retirement agreement of Gerald G. Mercer (see Note 7 — Related Party Transactions of the Notes to Consolidated Financial Statements included in “Item 8 — Financial Statements and Supplementary Data” of this Annual Report on Form 10-K.)
Note 2		Represents 2005 charge related to the impairment of AirNet’s cargo assets (See Note 2 — Impairment of Property and Equipment and Goodwill of the Notes to Consolidated Financial Statements included in “Item 8 — Financial Statements and Supplementary Data” of this Annual Report on Form 10-K.)
Note 3		Represents 2004 charge related to the impairment of AirNet’s cargo assets and related goodwill (See Note 2 — Impairment of Property and Equipment and Goodwill of the Notes to Consolidated Financial Statements included in “Item 8 — Financial Statements and Supplementary Data” of this Annual Report on Form 10-K.)
Note 4		Represents 2001 non-recurring charge related to the impairment of Float Control, Inc.’s investment in The Check Exchange System Co. partnership.
Note 5		In August 2003, AirNet sold the assets of its Mercury Business Services unit, resulting in discontinued operations.
Note 6		Represents the effect of adopting Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets”.

ITEM 7 — MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION

General

As a result of the continuing evolution of electronic alternatives to the physical movement of cancelled checks and other market factors, AirNet’s Bank Services net revenues are expected to decline. This expected decline in Bank Services revenues requires that AirNet restructure its existing transportation network which was originally established to service its bank customers. AirNet continues to evaluate and adjust its aircraft mix and fleet size in response to these changing business conditions as well as review its ground operations for efficiencies and cost reductions. In February 2006, AirNet decided to market for sale all nine of the Cessna 310 piston cargo aircraft it operates as a result of the reduction in its required airline capacity.

The following management’s discussion and analysis describes the principal factors affecting the results of operations, liquidity and capital resources, as well as the critical accounting policies of AirNet. This discussion should be read in conjunction with the accompanying audited consolidated financial statements, which include additional information about AirNet’s significant accounting policies, practices and the transactions that underlie its financial results, and the risk factors described in “Item 1A – Risk Factors”.

Financial Overview

This financial overview contains certain non-GAAP financial data to show results of operations excluding charges for impairment of assets and goodwill. The company believes this information is useful and informative to the readers in providing a complete view of AirNet’s operating results.

Selected Non-GAAP Financial Data

Excluding the non-cash impairment charges recognized in 2005 and 2004, income before taxes was $13.8 million for 2005 compared to $6.4 million for 2004. Loss before income tax benefit was $6.3 million for the 2005, including $16.1 million for impairment of assets, compared to a loss before income tax benefit of $43.1 million, including $47.0 million for impairment of assets and goodwill, for the same period last year.

Excluding the non-cash impairment charges in each period, net income was $5.7 million ($0.56 per common share) for 2005 compared to a net loss of $3.1 million ($0.31 per common share) for 2004. For 2005, the net loss was $ 4.2 million, ($0.42 per common share), including the $10.0 million after-tax ($0.98 per common share) charge for the impairment, versus a net loss of $34.1 million, ($3.39 per common share), including $31.0 million after-tax ($3.08 per common share) charge for the impairment of assets and goodwill, for 2004.

In 2005, Delivery Services experienced net revenue growth primarily due to the significant increase in fuel surcharge revenues. The impact of increased fuel surcharge revenues accounted for $10.3 million, or 95%, of the total increase in Delivery Services revenues in 2005.

In 2005, Passenger Charter Services experienced net revenue growth as a result of the increase in flight hours after AirNet invested in additional aircraft in 2004 to support passenger charter demand. Jetride’s contribution margin decreased from $2.8 million in the first six months of 2005 to a contribution margin shortfall of ($0.1) million in the last six months of 2005, primarily due to major aircraft maintenance performed on the Jetride aircraft fleet, increased pilot travel and training expense, and increased fuel costs. Jetride charges its customers a fuel surcharge per hour based upon current fuel prices which changes according to prevailing market rates. In the third and fourth quarters of 2005, Jetride did not recover a substantial portion of the increased fuel costs because increases in fuel surcharges did not keep pace with increased fuel costs.

This financial overview contains certain non-GAAP financial data to show results of operations excluding charges for impairment of assets and goodwill. The company believes this information is useful and informative to the readers in providing a complete view of AirNet’s operating results.

Total net revenues have increased each of the last three years primarily due to additional fuel surcharge revenues and growth in Passenger Charter Services revenues.

AirNet generally assesses its Bank Services customers a fuel surcharge, which is based on the Oil Price Index Summary – Columbus, Ohio (OPIS-CMH index). As index rates increase above a set threshold, surcharge rates increase. The 2005 average annual price on the OPIS index increased approximately 43% from the 2004 average annual price. The 2004 average annual price on the OPIS index increased approximately 17% from the 2003 annual price. AirNet assesses most of its Express Services customers a fuel surcharge which is based on the OPIS index, and is adjusted monthly. In addition, Jetride charges its customers a fuel surcharge per hour based upon current fuel prices which changes according to prevailing market rates.

Although there were 2 fewer flying days in 2005 compared to 2004, Bank Services revenues increased during 2005 primarily due to fuel surcharge revenues resulting from the approximate 43% increase in 2005 in the average annual price on the OPIS index. While pounds shipped per flying day decreased by approximately 1% from 2004 to 2005, revenues per pound shipped increased approximately 2% from 2004 to 2005 as a result of rate increases on Bank Services.

As banks transition to other alternatives to the physical movement of checks, certain banks cancelled selected AirNet services as reflected by the following events: in the second quarter of 2005, certain Bank Services customers terminated agreements to transport cancelled checks from the Western U.S. to various points in the East; in the fourth quarter of 2005, AirNet received notice from a major bank customer that the customer intended to terminate a certain portion of the air transportation services provided by AirNet effective March 3, 2006; on January 9, 2006, AirNet received notice from a bank customer that the customer intended to terminate a substantial portion of the air transportation services provided by AirNet, effective March 3, 2006; and, during 2005, other small Bank Services customers terminated or reduced air transportation services provided by AirNet.

In response to the loss in revenue from its Western U.S. routes, AirNet negotiated price increases with several of its Bank Services customers, primarily those requiring transportation services from the Eastern portions of the U.S. to the West, which generally took effect in June 2005. These price increases substantially replaced the contribution margin which was lost due to the termination of the Bank Services in the second quarter of 2005 discussed above. AirNet continues to evaluate its operational structure and associated costs to more closely align them with the expected volume and revenue changes. However, given the high fixed cost nature of AirNet’s national airline network, it will become increasingly difficult to reduce costs in proportion to decreases in Bank Services revenues.

AirNet continues to modify its pricing for bank customers and the contracts under which bank services are provided. AirNet’s bank contracts historically did not provide any revenue or volume guarantees, limited AirNet’s ability to institute price increases during the contract term, and often authorized a bank to terminate its contract for convenience. Commencing in fiscal year 2004, AirNet began introducing bank pricing that contained both fixed fee and per pound pricing components that would be impacted to a lesser degree by decreasing volume. In anticipation of additional requests from banks to reduce services, in 2005 AirNet began implementing bank contracts that contain primarily fixed fee pricing and require a bank to provide AirNet with 90 days advance notice prior to cancelling services. AirNet’s more recent bank contracts also provide AirNet with the right to propose price increases upon 90 days notice during the contract term and contain more mutual termination rights. Advance notification of service cancellations will provide AirNet with the opportunity to analyze the impact of such service losses and discuss route and pricing changes with its remaining bank customers.

AirNet continues to focus on additional services for banks, such as proof of deposit and interoffice mail delivery services, which provide additional revenue but at lower yields than AirNet’s traditional cancelled check business.

Revenue yields per pound are similar for Bank and Express shipments; however, because the density of cancelled check shipments is much greater than the typical Express shipment, contribution margins on Bank shipments are substantially higher than Express shipments after considering the cubic dimension of shipments. Furthermore, due to the unscheduled nature of Express shipments, pick-up and delivery costs per shipment are higher for Express shipments than Bank shipments. AirNet believes that lower check delivery volume as a result of the declining use of checks and electronic alternatives to the physical movement of cancelled checks will contribute to a significant reduction in Bank Services revenues and the contribution margin from Delivery Services in future periods. As Bank Services revenues decline, it will be necessary to reduce AirNet’s airline capacity because Express Services contribution margins are insufficient to support the operation of AirNet’s airline as presently configured.

There were 2 more flying days in 2004 compared to 2003. Bank Services revenues increased during 2004 as compared to 2003 primarily due to fuel surcharge revenues resulting from the approximate 17% increase in the average annual price on the OPIS index in 2004. From 2003 to 2004, revenues per pound shipped increased approximately 6%.

Express Revenues – Non Charter represent revenues AirNet derives from shipments on AirNet’s airline, commercial airlines and point-to-point surface (ground only) shipments. The total number of Non Charter Express shipments decreased approximately 8% from 2004 to 2005 as a result of the loss of certain Express Services customers and reduced shipment volume by other Express Services customers. The number of Non Charter Express shipments transported on AirNet’s airline decreased approximately 12% in 2005 compared to 2004 while these shipments increased approximately 2% in 2004

compared to 2003. Revenues per shipment increased approximately 5% from 2004 to 2005 primarily as a result of the increase in fuel surcharge revenues.

Express Revenues – Charters represent revenues AirNet derives from cargo charters transported on AirNet’s airline and on aircraft operated by other third parties. Charter revenues have increased due to a significant increase in the number of charters, primarily for radioactive pharmaceutical customers. AirNet expects Express charter revenues to decrease in 2006 as compared to 2005 primarily as a result of the loss of certain entertainment industry charters due to changes in the distribution methods in that industry.

Higher fuel prices during 2005 and changes to the fuel surcharge program instituted in October 2004 resulted in significantly higher fuel surcharge revenues for 2005.

The increase in revenues from 2003 to 2004 was primarily due to a significant increase in the number of charters, primarily for life sciences customers. The total number of Non Charter Express shipments increased approximately 9% from 2003 to 2004. Revenues from point-to-point surface shipments increased approximately $3.1 million for the fiscal year 2004 compared to the fiscal year 2003. Revenues per shipment increased approximately 14% from 2003 to 2004.

Passenger Charter Services derives its revenues primarily from passenger charter brokers and other companies that provide fractional aircraft ownership programs and card membership programs. Passenger Charter Services revenues grew as a percentage of total revenues during 2005, after AirNet invested in additional aircraft in 2004 to support passenger charter demand. Passenger Charter Services revenues increased from 11% of total revenues in 2004 to 15% of total revenues in 2005. Flight hours for Passenger Charter Services increased approximately 45% from 2004 to 2005 and increased approximately 113% from 2003 to 2004. AirNet’s Passenger Charter Services revenues include revenue from both owned and managed aircraft. Management fee revenues generally include a monthly fee and a specific percentage of revenues earned under each managed aircraft agreement.

At December 31, 2005, AirNet’s Passenger Charter fleet consisted of fourteen passenger Learjets, nine owned aircraft and five aircraft that were managed for other owners, compared to fifteen aircraft at December 31, 2004 and nine aircraft at December 31, 2003. Jetride also operated 2 passenger Challenger aircraft for approximately seven months in 2005 as compared to approximately 3 months in 2004.

Aviation Services and Other Revenues

Aviation services revenues primarily relate to AirNet’s fixed base operation services provided in Columbus, Ohio.

Approximately $0.4 million of other revenues in 2004 relate to royalty revenue earned from the installation by a third party of Reduced Vertical Separation Minimum (“RVSM”). No significant royalty revenue is expected in future years.

Total costs and expenses for Passenger Charter Services increased from $15.6 million in 2004 to $26.7 million in 2005 as operating activities for Passenger Charter Services increased. Excluding the impact of the impairment charges as described below, the increase in the total costs and expenses of Passenger Charter Services from 2004 to 2005 accounted for approximately $11.1 million, or 79%, of the overall increase in operating costs and expenses. Flight hours increased approximately 45% for Passenger Charter Services from 2004 to 2005. In addition, costs and expenses increased due to additional aircraft fuel, aircraft maintenance, and contracted air costs to support AirNet’s Delivery and Passenger Charter Services.

The increase in the use of Passenger Charter Services from 2003 to 2004 accounted for approximately $9.4 million, or 37%, of the overall increase in operating costs and expenses before impairment charges. Flight hours for Passenger Charter Services increased 113% from 2003 to 2004. In addition, costs and expenses increased due to increased hours flown, service and support costs associated with the increase in the use of Express Services and additional aircraft fuel, aircraft maintenance and contracted air costs to support AirNet’s Bank customers.

The increase in wages and benefits from 2003 to 2004 was substantially due to the increase in the number of Passenger Charter pilots and support staff.

Aircraft fuel expense increased $7.6 million, or 28%, from 2004 to 2005, as a result of significantly higher fuel prices. The 2005 average annual price on the OPIS index increased approximately 43% from the 2004 average annual price. Offsetting a portion of the $4.3 million increase in Delivery Services fuel expense was the approximate 6% decrease in hours flown. Approximately $3.3 million, or 43%, of the increase related to the passenger charter fleet with a 45% increase in passenger charter hours flown over 2004. Fuel expense for owned passenger charter aircraft increased $1.2 million from 2004 to 2005. Aircraft fuel expense for managed passenger charter aircraft, which is reimbursed by the aircraft’s owner, increased $2.1 million from 2004 to 2005. Amounts collected for fuel surcharges are classified as revenues.

Fuel surcharges related to AirNet and Jetride operated aircraft increased approximately $9.3 million, or 105%, from 2004 to 2005 as a result of the significant increase in fuel prices in 2005. Of the increase, approximately $8.1 million was for Delivery Services, while $1.2 million was for Passenger Charter Services, of which $.7 million corresponded to managed aircraft. In the third and fourth quarters of 2005, Jetride did not recover a substantial portion of the increased fuel costs because increases in fuel surcharges did not keep pace with increased fuel costs. The increases in 2004 compared to 2003 are primarily due to the increase in fuel prices and the additional passenger charter hours flown. The 2004 average annual price on the OPIS index increased approximately 17% from the 2003 average annual price. AirNet expects fuel prices, and corresponding fuel surcharges to remain at 2005 levels in 2006.

Total aircraft maintenance expense increased approximately $7.4 million, or 49%, from 2004 to 2005. Approximately $3.5 million, or 47%, of such increase related to the passenger charter fleet and primarily coincided with the increase in flight hours. Aircraft maintenance expense for owned passenger charter aircraft increased $1.4 million from 2004 to 2005. Aircraft maintenance expense for managed passenger charter aircraft, which is reimbursed by the aircraft’s owner, increased $2.1 million from 2004 to 2005. Aircraft maintenance is primarily based on pre-determined inspection intervals determined by usage, hours flown, cycles and the number of aircraft take-offs and landings. Consequently, high use, older aircraft such as those in AirNet’s cargo fleet requires greater maintenance than lower use, newer aircraft.

The increase in cargo fleet maintenance expense primarily reflects the age of AirNet’s cargo fleet, including Learjets, which averaged approximately 24 years in service at the end of 2005. Given the age of the Delivery Services aircraft and the recent impairment charge taken on September 30, 2005, management determined that none of the major maintenance expenditures incurred during the fourth quarter of 2005, with the exception of engine maintenance, extended the useful life of the Delivery Services aircraft. Consequently, such expenditures were charged to aircraft maintenance expense. AirNet does not expect to make any capital additions to the Delivery Services aircraft fleet, with the exception of certain engine repairs and improvements and payments under manufacturer engine maintenance plans, in 2006.

Maintenance expense increased $2.8 million, or 23%, from 2003 to 2004 primarily due to the expansion of the Passenger Charter fleet, including managed aircraft, and an increase in flight hours for the Passenger Charter fleet and cargo fleet Learjets.

Contracted Air Costs

Contracted air costs include expenses associated with shipments transported on commercial airlines and costs to third- party air operators for subcontracted air routes and back-up charter services. Back-up and subcontracted charter expenses

increased approximately 19% from 2004 to 2005 as AirNet increased the outsourcing of routes to third-party providers. Commercial airline costs decreased approximately 9% from 2004 to 2005 primarily due to the approximate 12% decrease in Express Services shipments transported on commercial airlines. Commercial airline costs increased 21% from 2003 to 2004 primarily due to the increase in Express shipments transported on commercial airlines.

Ground courier costs increased in 2005 as a result of higher costs per shipment, partially as a result of increased fuel costs that are passed through to AirNet from its contracted ground couriers. Ground courier costs also increased in 2005 in part as a result of an increase in shipments transported via point-to-point surface, which typically involve higher shipment weights and delivery distances. AirNet’s Express customers are more costly to serve than the traditional Bank customer due to more unscheduled pick-up and delivery services and more geographically dispersed locations.

Aircraft depreciation decreased in 2005 due to a reduction in aircraft values as a result of the impairment charge recorded on September 30, 2004 as discussed below. This decline was partially offset by approximately $0.7 million of additional depreciation for 2005 related to the increase in the number of operating hours flown by the passenger charter fleet. AirNet continually reviews the remaining useful life and expected salvage value of its aircraft in connection with its depreciation calculation. Aircraft engines are depreciated based on the number of hours flown. Non-aircraft related depreciation increased in 2005 primarily due to AirNet’s move to its new Rickenbacker Facility in June 2005.

Insurance, Rent and Landing Fees

Insurance, rent and landing fees decreased in 2005 primarily as a result of the decrease in workers’ compensation insurance expense generally attributable to a reduction in the number of AirNet ground couriers.

AirNet incurred increased insurance costs in 2004 compared to 2003 primarily as a result of the increase in its Passenger Charter fleet size. Rent expense increased in 2004 and 2003 mainly due AirNet leasing additional aircraft for both its Delivery Services and Passenger Charter services businesses.