##### 









UNITED STATES SECURITIES AND EXCHANGE
COMMISSION

Washington, D.C. 20549


Form 10-K

|           |  |                                                                                             
|---------- |  | --------------------------------------------------------------------------------------------
|(Mark One) |  |                                                                                             
|þ          |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR
    15(d) OF THE SECURITIES EXCHANGE ACT OF 1934    
|          
|           |  | For the fiscal year ended: December 31,
    2003                                            
|          
|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 0-26582

World Airways, Inc.

(Exact name of registrant as specified in its
charter)


|                                                                                                  |  |                                            
|------------------------------------------------------------------------------------------------- |  | -------------------------------------------
|Delaware                                                                                          |  | 94-1358276                                 
|(State or other jurisdiction of incorporation
    or organization)                                |  | (I.R.S. Employer Identification
    Number)
|                                                                                                 
|HLH Building, 101 World Drive,
    Peachtree City, GA(Address of principal executive
    offices) |  | 30269(Zip Code)                            

Registrants telephone number, including
area code:

(770) 632-8000


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


|                    |  |                                          
|------------------- |  | -----------------------------------------
|Title of Each Class |  | Name of Each Exchange on Which Registered
|                    |  |                                          
|NONE                |  |                                          

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

|                               |  |                                          
|------------------------------ |  | -----------------------------------------
|Title of Each Class            |  | Name of Each Exchange on Which Registered
|                               |  |                                          
|Common Stock ($.001 par value) |  | The Nasdaq Stock Market, Inc.            

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

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

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

Aggregate market value of Common Stock held by
non-affiliates as of June 30, 2003 was approximately
$20,204,000.

As of the close of business on March 3,
2004, 11,446,598 shares of Common Stock were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

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



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WORLD AIRWAYS, INC.

2003 ANNUAL REPORT ON FORM 10-K


TABLE OF CONTENTS

|                                                   |  |                                                                                                                      |  |  |    | 
|-------------------------------------------------- |  | -------------------------------------------------------------------------------------------------------------------- |  |  | -- | 
|PART I                                            
|Item 1.                                            |  | Business                                                                                                             |  |  | 2  | 
|Item 2.                                            |  | Properties                                                                                                           |  |  | 17 | 
|Item 3.                                            |  | Legal Proceedings                                                                                                    |  |  | 18 | 
|Item 4.                                            |  | Submission of Matters to a
    Vote of Security Holders                                                              |  |  | 19 | 
|PART II                                           
|Item 5.                                            |  | Market for Registrants
    Common Equity, Related Stockholder Matters and Issuer Purchases
    of Equity Securities |  |  | 20 | 
|Item 6.                                            |  | Selected Financial Data                                                                                              |  |  | 22 | 
|Item 7.                                            |  | Managements Discussion
    and Analysis of Financial Condition and Results of Operations                            |  |  | 23 | 
|Item 7a.                                           |  | Quantitative and Qualitative
    Disclosures About Market Risk                                                       |  |  | 34 | 
|Item 8.                                            |  | Financial Statements and
    Supplementary Data                                                                      |  |  | 36 | 
|Item 9.                                            |  | Changes in and Disagreements
    with Accountants on Accounting and Financial Disclosure                             |  |  | 63 | 
|Item 9a.                                           |  | Controls and Procedures                                                                                              |  |  | 63 | 
|PART III                                          
|Item 10.                                           |  | Directors and Executive
    Officers of the Registrant                                                               |  |  | 63 | 
|Item 11.                                           |  | Executive Compensation                                                                                               |  |  | 65 | 
|Item 12.                                           |  | Security Ownership of
    Certain Beneficial Owners and Management and Related Stockholder
    Matters               |  |  | 65 | 
|Item 13.                                           |  | Certain Relationships and
    Related Transactions                                                                   |  |  | 65 | 
|Item 14.                                           |  | Principal Accountant Fees
    and Services                                                                           |  |  | 65 | 
|PART IV                                           
|Item 15.                                           |  | Exhibits, Financial
    Statement Schedules, and Reports on Form 8-K                                                 |  |  | 65 | 
|EX-10.3 INTELLECTUAL PROPERTY SECURITY AGREEMENT  
|EX-10.4 PAYOFF LETTER DATED DECEMBER 30, 2003     
|EX-10.11 AMENDMENT TWO TO EMPLOYMENT AGREEMENT    
|EX-10.29 AMENDMENT THREE TO EMPLOYMENT AGREEMENT  
|EX-10.30 EMPLOYMENT AGREEMENT-JEFFREY L. MACKINNEY
|EX-12.1 STATEMENT REGARDING COMPUTATION OF EARNING
|EX-21.1 SUBSIDIARIES OF THE REGISTRANT            
|EX-23.1 CONSENT OF KPMG LLP                       
|EX-31.1 SECTION 302 CERTIFICATION OF THE CEO      
|EX-31.2 SECTION 302 CERTIFICATION OF THE CFO      
|EX-32.1 SECTION 906 CERTIFICATION OF THE CEO      
|EX-32.2 SECTION 906 CERTIFICATION OF THE CFO      



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PART I






|        |         
|------- | --------
|Item 1. | Business

World Airways, Inc. (World
Airways or the Company) was organized in March
1948 and is a U.S. certificated air carrier. Airline
operations account for 100% of the Companys operating
revenue. World Airways provides long-range passenger and cargo
charter and wet lease air transportation, serving the
U.S. Government, international passenger and cargo air
carriers, tour operators, international freight forwarders and
cruise ship companies. As of December 31, 2003, the Company
operated eleven MD-11 and seven DC-10-30 aircraft. The principal
executive offices of World Airways are located in The HLH
Building, 101 World Drive, Peachtree City, Georgia 30269 and the
Companys telephone number is (770) 632-8000.

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

Available Information

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

Recent Developments

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

In February 2004, the Company announced that its
Chairman and Chief Executive Officer (CEO), Hollis
L. Harris gave notice to the board of directors of his plan to
retire from the Company. Effective April 1, 2004,
Mr. Harris will give up the title of CEO and he will retire
from the board of directors at the Companys May 6,
2004 annual meeting of stockholders. General Ronald R. Fogleman
will be named non-executive Chairman of the board effective at
the May 6, 2004 annual meeting of stockholders. The Company
intends to retain Mr. Harris as a consultant for a period
of up to two years. Randy J. Martinez, President and Chief
Operating Officer, will become President and Chief Executive
Officer and Jeffrey L. MacKinney, Senior Vice President of
Planning and Corporate Development, will become Chief Operating
Officer, both effective April 1, 2004. Mr. Martinez
will also become a member of the board of directors to fill the
unexpired term of Dato Wan Malek Ibrahim on April 1,
2004.

2



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In the first quarter of 2004, the Company
returned to its lessor one of its DC-10-30 freighter aircraft.
The term of the lease agreement for another DC-10 freighter
aircraft has expired. The Company is currently negotiating with
the lessor regarding various issues relating to the return of
this aircraft and expects to resolve them during the second
quarter of 2004. Under the terms of the lease, the Company has
continued to pay rent on a month-to-month basis on this aircraft
until its return is accepted by the lessor.

In a February 6, 2004 press release, the
Company announced its intention to introduce two Boeing
767-300ER passenger aircraft to its fleet in the fourth quarter
of 2004. These new aircraft are intended to replace two DC-10-30
passenger aircraft that will be returned to their lessor at
scheduled lease termination dates in the second half of 2004.
Following an extensive review of the Boeing 767 market, the
Company has identified several B767-300ER aircraft that meet its
technical and financial requirements. However, because these
particular aircraft are not available until the first half of
2005, the Company has elected to defer this introduction until
the first part of 2005. The Company anticipates executing
commitment letters for these aircraft during the second quarter
of 2004.

On December 30, 2003, the Company completed
a major financial restructuring under which it (a) closed a
$30.0 million term loan facility (the ATSB
Loan) backed by a $27.0 million guarantee issued by
the Air Transportation Stabilization Board (ATSB);
(b) issued $25.5 million principal amount of
8.0% Convertible Senior Subordinated Debentures due 2009
(the New Debentures) in exchange for
$22.5 million principal amount of the Companys then
existing 8.0% Convertible Senior Subordinated Debentures
due 2004 (the Old Debentures) and $3.0 million
cash; (c) called for redemption the remaining balance of
$18.0 million of the Old Debentures; and
(d) terminated the Wells Fargo Foothill, Inc. Loan and
Security Agreement (the Foothill Facility). As
additional compensation for the federal loan guarantee, the
Company issued to the ATSB warrants to purchase an aggregate of
2,378,233 shares of Common Stock. As a condition of the
ATSB Loan, the Company was required to exit the Foothill
Facility prior to the contractual term. As a result, the Company
was required to pay an early termination fee to Wells Fargo
Foothill, Inc., including expenses, of $1.3 million.
The ATSB Loan agreement contains a number of financial and
negative covenants that the Company must observe throughout the
term of the ATSB Loan. The $18.0 million principal amount
of the remaining Old Debentures was redeemed on January 28,
2004. See Note 7 in the Notes to Consolidated
Financial Statements in Item 8 for additional
information.

Ownership

At December 31, 2003, Naluri Berhad, a
Malaysian aviation company, owned 10.7% of the outstanding
Common Stock of World Airways and the balance was widely held.

Overview & Operating
Environment

World Airways focuses its marketing efforts on
the United States Air Force (USAF) Air Mobility
Command (AMC), freight operators, freight
forwarders, cruise ship companies, tour operators and
international airlines. The Company increases its potential
customer base by being able to serve both passenger and cargo
customers with its passenger and cargo aircraft. The Company can
respond to rapidly changing market conditions and requirements
because its fleet of passenger aircraft can be deployed in a
variety of configurations.

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

Historically most of the Companys contracts
have required the Company to supply aircraft, crew, maintenance,
and insurance (ACMI or wet lease) and
the Companys customers were responsible for other
operating costs, including fuel. In recent years the Company has
increased its operations under full service
contracts whereby, in addition to ACMI costs, the Company is
responsible for most other costs associated with flight
operations including landing fees, ground handling and fuel. The
Company attempts to maximize profitability by entering into both
ACMI contracts and full service agreements that meet the

3



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


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

Similar to other air transportation companies,
the Companys business is seasonal. During the early part
of the first quarter, the Company typically experiences lower
levels of utilization and revenue per block hour
(yield) due to lower demand relative to other times
of the year. The Company experiences higher levels of
utilization and yield mid-year associated with leisure travel
demand during the peak summer vacation season. During the fall,
the cargo market typically increases as the Christmas season
approaches.

The market for ACMI and full service charter
business is highly competitive. Certain air carriers that the
Company competes with have substantially greater financial
resources and more extensive facilities and equipment than the
Company. The Company believes that the most important bases for
competition in the charter business include the range as well as
passenger and payload capacities of the aircraft, in addition to
the price, flexibility, quality and reliability of the air
transportation service provided. Competitors in the passenger
charter market include North American Airlines, Omni Air
International, Miami Air and American Trans Air and in the cargo
charter market include cargo carriers Atlas Air (including Polar
Air Cargo), Gemini Air Cargo, Evergreen, Centurion Air Cargo, as
well as scheduled and non-scheduled passenger carriers that have
substantial belly capacity. The ability of the Company to
compete depends, in part, upon its success in convincing
customers that outsourcing a portion of their business is
cost-effective.

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

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

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

Factors that affect the Companys ability to
achieve high utilization of its aircraft include the
compatibility of the Companys aircraft with customer needs
and the Companys ability to react on short notice to
customer requirements (which can be unpredictable due to changes
in traffic rights, aircraft delivery schedules and aircraft
maintenance requirements). Other factors that affect the Company
include domestic

4



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and foreign regulatory requirements, as well as a
trend toward aviation deregulation that is increasing alliances
and code share arrangements.


The Company has unsold capacity in the second
quarter of 2004 and beyond; however, historically it has been
successful in obtaining additional business to utilize some or
all of its available capacity. Although there can be no
assurance that it will be able to secure additional business to
utilize unsold capacity, the Company is actively seeking
additional business for 2004 and beyond.

Customers

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

|                                                                      |  |      |      |      |  |      |      |   |  |  |      |  
|--------------------------------------------------------------------- |  | ---- | ---- | ---- |  | ---- | ---- | - |  |  | ---- | -
|                                                                      |  | 2003 |      | 2002 |  | 2001
|                                                                      |  |      |      |      |  |     
|USAF                                                                  |  |      | 74.7 | %    |  |      | 72.2 | % |  |  | 64.1 | %
|Menlo Worldwide (Menlo, formerly
    Emery Air Freight Corporation) |  |      | 5.8  | %    |  |      | 8.0  | % |  |  | 9.4  | %
|Sonair Serviceo Aereo (Sonair)                                      |  |      | 5.8  | %    |  |      | 5.8  | % |  |  | 8.3  | %
|P.T. Garuda Indonesia (Garuda)                                      |  |      |     |      |  |      |     |   |  |  | 5.5  | %

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

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

|                                                        |  |      |       |      |  |      |       |  |  |   |       | 
|------------------------------------------------------- |  | ---- | ----- | ---- |  | ---- | ----- |  |  | - | ----- | 
|                                                        |  | 2003 |       | 2002 |  | 2001
|                                                        |  |      |       |      |  |     
|Original contract award (year ended
    September 30th) |  | $    | 120.0 |      |  | $    | 175.0 |  |  | $ | 127.0 | 
|                                                        |  |      |       |      |  |      |       |  |  |   |       | 
|Fixed passenger revenue earned                          |  | $    | 73.6  |      |  | $    | 125.3 |  |  | $ | 121.5 | 
|Expansion passenger revenue earned                      |  |      | 207.1 |      |  |      | 141.5 |  |  |   | 79.8  | 
|Cargo fixed and expansion revenue earned                |  |      | 74.0  |      |  |      | 10.8  |  |  |   | 2.5   | 
|                                                        |  |      |       |      |  |      |       |  |  |   |       | 
|Total revenue earned (year ended
    December 31st)     |  | $    | 354.7 |      |  | $    | 277.6 |  |  | $ | 203.8 | 
|                                                        |  |      |       |      |  |      |       |  |  |   |       | 

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

The original contract award for the year
beginning October 1, 2003 and ending September 30,
2004 is $125.8 million for fixed flying. The USAF did not
incorporate long-term expansion flying into the contract for
fiscal year 2004. The Company also will receive additional
expansion business during the fiscal year 2004 contract period
for less predictable flying and other short notice requirements.

In February 2003, the Secretary of Defense gave
authority to the commander, U.S. Transportation Command
(USTRANSCOM), to activate Stage I of the CRAF to provide
the Department of Defense

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additional airlift capability to move
U.S. troops and military cargo. This measure was necessary
due to increased operations associated with the build-up of
U.S. forces in the Persian Gulf region. CRAF aircraft are
U.S. commercial passenger and cargo aircraft that are
contractually pledged to move passengers and cargo when the
Department of Defenses airlift requirements exceed the
capability of U.S. military aircraft and volunteer
commercial aircraft.


The authority to activate CRAF Stage I
involved 22 U.S. airline companies and their 78 commercial
aircraft  47 passenger aircraft and 31 wide-body
cargo aircraft. While the authority was for all 78 commercial
aircraft in the CRAF Stage I program, the USTRANSCOM
commander only activated 47 passenger aircraft.
U.S. military airlift aircraft and CRAF volunteered
commercial cargo aircraft were sufficient to meet the cargo
airlift requirements.

The Company had three MD-11 passenger aircraft
activated under CRAF Stage I. The Company also had one
MD-11 cargo aircraft under Stage I, but it was not
activated. The activation became effective February 9, 2003
and lasted through and including June 17, 2003 for a total
of 129 days.

Revenue generated from the USAF under the CRAF
activation during 2003 was $41.0 million. Revenue from the
USAF will continue to be a significant portion of total revenues
for the Company in 2004, however, the Company cannot determine
how future military spending budgets, airlift requirements,
national security considerations and balanced CRAF and teaming
arrangements will combine to affect future business with the
USAF.

Menlo.The Company
has provided an MD-11F freighter aircraft to Menlo Worldwide
(formerly Emery Air Freight Corporation) since October 1998. The
program for the aircraft, which has been extended through
December 2004, primarily operates five days per week flying
round trip between Dayton, Ohio, and Brussels, Belgium. The
Company provided additional ad hoc cargo service with its
DC-10-30 freighter aircraft for Menlo during fiscal 2003.

Sonair.In November
2000, the Company began operating regular private charter air
service for Sonair, a subsidiary of Angolas National Oil
Company, SONANGOL, in support of Angolas developing
petroleum industry. Initial service was provided between
Houston, Texas, and Luanda, Angola, twice a week. In January
2003, the Company began flying a third weekly flight for Sonair
between Houston, Texas, and Malabo, Equatorial Guinea. In July
2003, the Company announced an extension of the Sonair agreement
to June 2004 that resulted in total 2003 revenues in excess of
$27.0 million. The new contract extension also includes two
one-year renewal options that could further extend the
relationship to June 2006 and provide a total of
$85 million in revenue over the three-year term.

Garuda.The Company
has flown for Garuda periodically since 1973. The Company
operated three aircraft for Garuda during the 2001 Hadj
pilgrimage. The Company did not provide Hadj airlift services in
2003 or 2002 because of weakened demand and various security
considerations due to the September 11, 2001 events. The
Company does not have plans to provide this service in the
foreseeable future.

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

|                             |  |                         |       |      |  |      |       |  |  |   |       | 
|---------------------------- |  | ----------------------- | ----- | ---- |  | ---- | ----- |  |  | - | ----- | 
|                             |  |                        
|                             |  | Year Ended December 31,
|                             |  |                        
|                             |  | 2003                    |       | 2002 |  | 2001
|                             |  |                         |       |      |  |     
|Passenger Charter Operations |  | $                       | 343.3 |      |  | $    | 306.5 |  |  | $ | 279.2 | 
|Cargo Charter Operations     |  |                         | 128.5 |      |  |      | 76.0  |  |  |   | 37.3  | 

Backlog

The Company had contract backlog of
$158.4 million and $154.5 million at December 31,
2003 and 2002, respectively. Approximately 75% of the backlog at
December 31, 2003 relates to the Companys contract
with the USAF, and the entire $158.4 million of backlog
relates to air transportation services for 2004. See
Note 12 of the Companys Notes to Consolidated
Financial Statements in Item 8 for additional
information regarding major customers and foreign source revenue.

6



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Maintenance

Airframe and engine maintenance costs, which
account for most of the Companys maintenance expenses,
typically increase as the aircraft fleet ages. The Company
outsources major airframe maintenance and engine work to several
suppliers. The Company has agreements expiring in 2005 with
Delta Air Lines for off-wing maintenance on the Pratt &
Whitney 4462 engines that power its MD-11 aircraft, and repair
of MD-11 aircraft and its components. The Company also has
maintenance agreements with Triumph Air Repair
(Triumph) for the repair of auxiliary power units on
the MD-11 and DC-10-30 aircraft. The agreements with Triumph
will expire in 2004 and 2005, respectively. The Company has a
maintenance agreement with Honeywell for wheel and brake repairs
on both aircraft types that will expire in 2006. In addition,
the Company has a landing gear overhaul/exchange program with
McDonnell Douglas/ Boeing that expires after all landing gear
listed in the contract will have been overhauled, which should
be in the first quarter of 2004.

Aviation Fuel

The Company incurs fuel expenses for full-service
flights provided to customers. Certain full service contracts
contain terms that limit the Companys exposure to
increases in fuel prices. However, the terms of such contracts
are renewed annually and take estimated market prices for fuel
for the period under contract into consideration. Both the cost
and availability of aviation fuel are subject to many economic
and political factors and events occurring throughout the world
and remain subject to various unpredictable economic and market
factors that affect the supply of all petroleum products.
Fluctuations in the price of fuel have not had a significant
impact on the Companys operations because, in general, the
Companys contracts with its customers that cover 96% of
fuel purchased limit the Companys exposure to increases in
fuel prices. Substantial increases in the price or the
unavailability of aviation fuel could have a material adverse
effect on the Company.

The Companys primary sources of aviation
fuel are major oil companies at commercial airports and from
United States military organizations at military bases. The
Companys current fuel purchasing policy consists of the
purchase of fuel within seven days in advance of all flights
based on current prices set by individual suppliers. The Company
annually solicits quotes for prices of aviation fuel from a
group of suppliers at each location. The Company does not
purchase fuel under long-term contracts nor does the Company
enter into futures or fuel swap contracts.

Regulatory Matters

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

The Company is subject to the jurisdiction of the
Federal Aviation Administration (FAA) with respect
to aircraft maintenance, flight operations, equipment, aircraft
noise, ground facilities, dispatch, communications, training,
weather observation, flight time, crew qualifications, aircraft
registration and other matters affecting air safety. The FAA
requires air carriers to obtain an operating certificate and
operations specifications authorizing the carriers to operate to
particular airports on approved international routes using
specified equipment. These certificates and specifications are
subject to amendment, suspension, revocation, or termination by
the FAA. In addition, all of the Companys aircraft must
have and maintain certificates of airworthiness issued or
approved by the FAA. The Company currently holds an FAA air
carrier operating certificate and operations specifications
under Part 121 of the Federal Aviation Regulations. The FAA
has the

7



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##### 



authority to suspend temporarily or revoke
permanently the authority of the Company or its licensed
personnel for failure to comply with regulations promulgated by
the FAA and to assess civil penalties for such failures.


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

In 2000, the FAA issued an Airworthiness
Directive (AD) that will require the replacement of
insulation blankets on the Companys MD-11 aircraft by June
2005. The Company has begun replacement of the affected
insulation blankets on MD-11 aircraft. This is being
accomplished in phases, during scheduled maintenance work, to
minimize the impact on operational availability. The Company
presently estimates the cost of replacement, including labor and
material, will total approximately $0.5 million per
aircraft and approximately 31% of this work was complete as of
December 31, 2003.

In March 2001, the FAA issued a rule that
requires the Company to install enhanced ground proximity
warning systems in its aircraft by March 2005. The Company
currently estimates that the cost of such installation will be
approximately $77,000 per MD-11 aircraft and
$129,000 per DC-10-30 aircraft. In October 2001, the FAA
also issued an AD that requires the Company to modify the engine
thrust reversers on its DC-10-30 aircraft by October 1,
2006 and will cost approximately $0.5 million per aircraft.
In response to the events of September 11th, the FAA issued
Special Federal Aviation Regulation (SFAR) 92 in
October 2001 regarding general aircraft and cockpit security.
The Company has complied with SFAR 92 by installing new cockpit
doors on all its passenger aircraft. Three cargo aircraft are
operating under SFAR 92 guidelines with the required restraint
bars and new cockpit doors are to be installed in the first
quarter of 2004. There may be other aircraft modifications that
may be required in the future under the SFAR.

In the fall of 2003, the FAA issued an AD that
requires the replacement of the ring case located in the
compressor area of the Companys MD-11 engines. The Company
presently estimates that it will incur approximately
$0.3 million per engine, subject to further negotiations
with the engine manufacturer related to cost-sharing for this
AD. This work must be accomplished by June 30, 2009.

Due to increased airport security needs as a
result of the September 11th events and the potential for
future terrorist attacks, Congress enacted in November 2001 the
Aviation and Transportation Security Act (the Security
Act) which established the Transportation Security
Administration (the TSA) within the DOT. Consistent
with the Security Act, the TSA imposed a security service fee,
effective February 1, 2002, in the amount of $2.50 per
enplanement on passengers of domestic and foreign air carriers
in air transportation, foreign air transportation, and
intrastate air transportation originating at airports in the
United States. The passengers are not charged for more than two
enplanements per one-way trip or four enplanements per round
trip. Beginning in 2002, the Company also has to remit an
additional $330,000 annually through 2004 to cover TSAs
aviation security infrastructure fees. This additional fee was
imposed on air carriers because current passenger fees were
insufficient to cover TSAs costs of providing civil
aviation security services. The air carriers must remit these
imposed fees monthly to the TSA by the last calendar day of the
following month. From June 2003 through September 2003, the TSA
suspended all airlines requirement to remit both the per
passenger fee and the monthly infrastructure fee.

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

8



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##### 



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

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

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

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

Employees

As of December 31, 2003, the Company had
1,241 full time equivalent employees classified as follows:

|                              |                 |           |     |       |  |  |      |       | 
|----------------------------- | --------------- | --------- | --- | ----- |  |  | ---- | ----- | 
|Classification                |                 | Employees |     | %    
|                              |                 |           |     |      
|Officers                      |                 |           | 13  |       |  |  | 1.0  |      
|Administrative and Operations |                 |           | 383 |       |  |  | 30.9 |      
|Cockpit Crew                  |                 |           | 344 |       |  |  | 27.7 |      
|Flight Attendants             |                 |           | 501 |       |  |  | 40.4 |      
|                              |                 |           |     |       |  |  |      |      
|                              | Total Employees |           |     | 1,241 |  |  |      | 100.0 | 
|                              |                 |           |     |       |  |  |      |      

The Companys cockpit crewmembers are
represented by the Teamsters and are subject to a collective
bargaining agreement that became amendable June 30, 2003.
In December 2003, the Company announced that it would begin
negotiations with the cockpit crewmembers in January 2004. It
was also announced that the Teamsters had requested mediation
services from the NMB. Following three days of negotiations in
January 2004, the Company and representatives of the Teamsters
reached a tentative agreement for a contract extension. However,
on February 27, 2004, the Company received notification
that the tentative agreement

9



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##### 



was not ratified by a majority of the Teamsters
membership. The Company will reconvene negotiations with the
Teamsters at a later date.


On September 2, 2003, the Companys
flight attendants, who are also represented by the Teamsters,
ratified a new three-year collective bargaining agreement that
has a new amendable date of August 31, 2006. The agreement
includes pay increases and other benefit changes requested by
the flight attendants, while providing the Company work-rule
changes in support of its financial goals.

The Companys aircraft dispatchers, who are
represented by the Transport Workers Union (TWU),
are subject to a collective bargaining agreement that became
amendable December 31, 2003. Fewer than 15 Company
employees are covered by this collective bargaining agreement.
The Company and the TWU commenced formal negotiations in
January 2004.

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

Risk Factors

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



| |                                                                                                                                                                                                                                                                                     
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Companys substantial debt and
    operating lease obligations limit its ability to fund general
    corporate requirements, limit its flexibility in responding to
    competitive developments and increase its vulnerability to
    adverse economic and industry conditions.

At December 31, 2003, the Company had
$57.2 million of long-term debt outstanding, including
$30.0 million outstanding under the ATSB Loan and
$25.5 million aggregate principal amount of the New
Debentures. In addition, the Company has significant long-term
obligations relating to operating leases in connection with its
aircraft and spare engines and its leased real property. At
December 31, 2003, these obligations totaled
$286.3 million through 2008 and $248.7 million
thereafter.

As a result of the Companys high financial
leverage:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The Company does not have the ability to obtain
    additional financing. The Companys indebtedness
    outstanding under the ATSB Loan is secured by substantially all
    of its assets. In addition, the ATSB Loan contains restrictive
    provisions which require prepayments in the event that the
    Company sells any significant assets, receives proceeds from
    future borrowings from other sources and issuances of certain
    securities, or receives net proceeds from insurance and
    condemnation.                  
|
| |  | The Companys ability to fund general
    corporate requirements, including capital expenditures, may be
    impaired. The Company has substantial obligations to pay
    principal and interest on its debt and other recurring fixed
    costs. Further, the Company may be required to prepay portions
    of the ATSB Loan under various circumstances. Accordingly, the
    Company may have to use its working capital to fund such
    payments and other recurring fixed costs instead of funding
    general corporate requirements.
|
| |  | The Companys ability to respond to
    competitive developments and adverse economic conditions may be
    limited. Without the ability to obtain additional financing and
    with substantial fixed costs, the Company may not be able to
    fund the capital expenditures required to keep it competitive or
    to withstand prolonged adverse economic conditions.                                                                                                                                                                    

10



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| |                                                                                                                                                                                                            
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The covenants contained in the loan
    agreement governing the ATSB Loan and the covenants included in
    the Companys operating leases may limit the Companys
    financial and operating flexibility.

The ATSB Loan and the operating leases relating
to some of the Companys aircraft contain restrictive
covenants that impose significant operating and financial
restrictions on the Company. Under the loan agreement governing
the ATSB Loan, the Company is subject to certain covenants
pursuant to which the Company must satisfy various financial
covenants requiring it to maintain a certain amount of
unrestricted cash or cash equivalents and to comply with certain
financial ratios.

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



| |   |                                                                                                                                                             
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | granting additional liens on the Companys
    property or making significant investments;                                                                  
|
| |  | paying dividends, redeeming capital stock,
    repricing outstanding stock options or repaying indebtedness
    other than the ATSB Loan;                   
|
| |  | liquidating, winding up, dissolving or engaging
    in certain acquisitions or certain sale-leaseback transactions;                                         
|
| |  | engaging in certain transactions with affiliates
    or certain asset sales;                                                                                
|
| |  | engaging in any business unrelated to the
    Companys existing business;                                                                                  
|
| |  | consolidating, merging with or into another
    entity or selling substantially all of the Companys assets
    unless certain conditions are satisfied; and
|
| |  | amending the terms of agreements relating to the
    Companys other indebtedness for borrowed money or granting
    any additional negative pledges.       

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



| |                                                                                                                       
| | ----------------------------------------------------------------------------------------------------------------------
| | Fluctuations in interest rates could
    adversely affect the Companys liquidity, operating
    expenses and results.

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



| |                                                                                                                       
| | ----------------------------------------------------------------------------------------------------------------------
| | If the Company loses the U.S. Air
    Force as a customer, its business would be significantly
    adversely affected.

The Company is highly dependent on revenues from
the U.S. Air Force. Revenues from USAF represented 74.7%
and 72.2% of the Companys total revenues for the years
ended December 31, 2003 and 2002, respectively. The Company
provides transportation services to the USAF under annual
contracts. If the Company loses these contracts with the USAF,
or if the USAF reduces substantially the amount of business it

11



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##### 



awards to the Company in a given year, the
Company may not be able to replace the lost business and its
financial condition and results of operations could be
materially adversely affected. The Company believes that the
USAF will continue to contribute a significant portion of the
Companys total revenues in 2004, but the lessening of
military activities in connection with the conflict in Iraq may
reduce the USAFs demand for transportation services, which
could negatively affect the Companys results of operations
in 2004.




| |                                                                                                        
| | -------------------------------------------------------------------------------------------------------
| | The Companys non-military customers
    may cancel or default on their contracts with the
    Company.

Non-military customers who have contracted with
the Company may cancel or default on their contracts, and the
Company may not be able to obtain other business to cover the
resulting loss in revenues. For the year ended December 31,
2003, the Companys five largest non-military customers
accounted for approximately 20.2% of its total operating
revenues. If these customers cancel or default on their
obligations and the Company is not able to obtain other
business, its financial position could be materially adversely
affected.



| |                                                                                                                          
| | -------------------------------------------------------------------------------------------------------------------------
| | If the Company is unable to maintain high
    utilization rates for its aircraft, the Companys business
    will suffer.

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



| |                                                                                                                                      
| | -------------------------------------------------------------------------------------------------------------------------------------
| | In the event of an aircraft accident, the
    Company may incur substantial losses that may not be entirely
    covered by insurance.

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

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

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



| |                                                                                                         
| | --------------------------------------------------------------------------------------------------------
| | The Company aircraft could become more
    expensive to maintain which may affect its
    profitability.

The Company is subject to the jurisdiction of the
FAA, with respect to aircraft maintenance and other matters
affecting air safety. Manufacturer Service Bulletins and FAA
Airworthiness Directives could cause aircraft operators to be
subject to extensive aircraft examinations and could require
aircraft to undergo structural inspections and modifications. It
is possible that Manufacturer Service Bulletins or Airworthiness
Directives applicable to the types of aircraft or engines
included in the Companys fleet could be issued in the
future. The Company cannot currently estimate the cost of
compliance with new Manufacturer Service

12



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##### 



Bulletins and Airworthiness Directives, but they
could be substantial and could have a material adverse effect on
the Companys financial condition and results of operations.




| |                                                                                                        
| | -------------------------------------------------------------------------------------------------------
| | The failure of the Companys
    contractors to provide essential services could harm its
    business.

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



| |                                                                                                                                                                            
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Many of the Companys employees are
    represented by unions, and a prolonged dispute with the
    Companys employees could have an adverse impact on its
    operations.

The Companys flight attendants are
represented by the Teamsters. On September 3, 2003, the
Companys flight attendants ratified a collective
bargaining agreement proposed in July 2003 to extend the flight
attendants collective bargaining agreement until August 31,
2006 and to allow for pay increases and other benefit changes
requested by the flight attendants. On January 16, 2004,
the Company reached a three-year tentative agreement with the
Teamsters covering the Companys cockpit crewmembers. The
updated agreement called for work rule changes and wage
increases. On February 27, 2004, the Company received a
notification that the tentative agreement was not ratified by a
majority of the Teamsters members. The Company will
reconvene negotiations with the Teamsters at a later date. The
Company is unable to predict whether any of its employees not
currently represented by a labor union, such as its maintenance
personnel, will elect to be represented by a labor union or
collective bargaining unit. The election of such employees for
union representation could result in employee compensation and
working condition demands that could have a material adverse
effect on the Companys financial condition and results of
operations. The Company is also unable to predict whether its
flight attendants will choose to renew their collective
bargaining agreement in 2006.



| |                                                                                                                                                                                                  
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Company is subject to significant and
    increasing government regulation and oversight which can
    materially affect its ability to maintain or increase the level
    of air operations.

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

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



| |                                                                                                                                                                                                
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Companys operating costs could
    increase as a result of past, current or new regulations that
    impose additional requirements and restrictions on air
    transportation operations.

The air transportation industry is heavily
regulated. Both federal and state governments from time to time
propose laws and regulations that impose additional requirements
and restrictions on air transportation

13



---



##### 



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




| |                                                                                                                                                                                                                                               
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The air transportation industry and the
    markets the Company serves are highly competitive and the
    Company may be unable to compete effectively against carriers
    with substantially greater resources or lower cost
    structures.

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



| |                                                                                                                                                                    
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Company depends on the expertise of its
    management team. If key individuals leave unexpectedly, the
    Companys business and operations could
    suffer.

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



| |                                                                                                                                                                                                                                   
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Companys business is sensitive to
    general economic conditions, unforeseen events and seasonal
    fluctuations. As a result, the Companys prior performance
    is not necessarily indicative of its future
    results.

The air travel business historically fluctuates
on a seasonal basis and in response to general economic
conditions. Due to the greater demand for air and leisure travel
during the summer months, revenues in the airline industry in
the second and third quarters of the year tend to be greater
than revenues in the first and fourth quarters of the year. In
addition, the airline industry is highly susceptible to
unforeseen events that

14



---



##### 



result in declines in revenues or increased
costs, such as political instability, regional hostilities,
terrorist attacks, recession, fuel price escalation, inflation,
adverse weather conditions, consumer preferences, labor
instability or regulatory oversight. Also, the Companys
results of operations for interim periods are not necessarily
indicative of those for an entire year and the Companys
prior results are not necessarily indicative of its future
results.




| |                                                                                                                                                                        
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The terrorist attacks of September 11,
    2001 and government responses to them continue to have a
    material adverse impact on the air transportation
    industry.

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



| |   |                                                                                                                                                                                                             
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | a reduction in the demand for travel;                                                                                                                                                                       
|
| |  | an increase in costs due to enhanced security
    measures and government directives in response to the terrorist
    attacks;                                                                              
|
| |  | an increase in the cost of aviation insurance in
    general, and the cost and availability of coverage for acts of
    war, terrorism, hijacking, sabotage and similar acts of peril in
    particular; and
|
| |  | the other risks discussed in this Annual Report.                                                                                                                                                            



| |                                                                                                                                                              
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Increased insurance costs due to the
    terrorist attacks of September 11, 2001 may adversely
    impact the Companys operations and financial
    results.

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

Moreover, since September 11, 2001, the
Company and others in the airline industry have been unable to
obtain third party war risk, terrorism, hull and liability
insurance at reasonable rates from the commercial insurance
market and have been obtaining this insurance through a special
program administered by the FAA. The Emergency Wartime
Supplemental Appropriations Act extended this insurance
protection until August 2004. Should the federal insurance
program terminate, the Company would likely face a material
increase in the cost of such insurance. Because of competitive
pressures in the Companys industry, the Companys
ability to pass these additional costs to customers would be
limited and the increased costs could be material to its
financial condition.



| |                                                                                                                                                                                  
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Sales in the public market of shares issued
    upon the exercise of the Companys outstanding warrants or
    the New Debentures could affect the market value of its
    stock.

At December 31, 2003, there were outstanding
warrants to purchase an aggregate of 4,378,223 shares of
the Companys common stock. In addition, the Company has
outstanding $25.5 million aggregate principal amount of the
New Debentures. All of the shares subject to the Companys
outstanding warrants and the New Debentures have been or will be
registered for resale under the Securities Act, and, therefore,
may be sold in the public market. Any sales in the public market
of common stock issued upon the exercise of warrants or upon the
conversion of the New Debentures could adversely affect
prevailing market prices of the Companys common stock. In
addition, the existence of the warrants and the New Debentures
may encourage short selling by market participants because
exercise of the warrants or conversion of the New Debentures
could depress the price of the Companys Common Stock.

15



---



##### 





| |                                                                                                                                          
| | -----------------------------------------------------------------------------------------------------------------------------------------
| | If the Companys Common Stock is
    delisted from Nasdaq, liquidity of the Companys Common
    Stock will likely be adversely affected.

The Companys Common Stock is listed for
trading on the Nasdaq SmallCap Market (Nasdaq),
under the symbol WLDA. In order to continue to be
listed on Nasdaq, however, the Company must meet certain
criteria, including one of the following:



| |   |                                                               
| | - | --------------------------------------------------------------
| |  | maintaining $2,500,000 in stockholders
    equity;           
|
| |  | having a market capitalization of at least
    $35,000,000; or
|
| |  | generating annual net income of $500,000.                     

In addition, the minimum bid price of the
Companys Common Stock must be at least $1.00 per
share. The potential dilution resulting from the exercise of
warrants issued to the ATSB in connection with the ATSB Loan, as
well as other events beyond the Companys control, could
cause the per share market price of the Companys Common
Stock to drop below the minimum bid price of $1.00 per
share. As of December 31, 2003, the Company did not satisfy
the requirement for stockholders equity. The failure to meet
Nasdaqs maintenance criteria may result in the delisting
of the Companys Common Stock from Nasdaq. As a result of
such delisting, the Companys stockholders could find it
more difficult to dispose of, or to obtain accurate quotations
as to the market value of, the Companys Common Stock.



| |                                                                 
| | ----------------------------------------------------------------
| | The market price for the Companys
    Common Stock is volatile.

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



| |                                                                                                                                                                                                 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Delaware law, as well as the Companys
    Certificate of Incorporation and Bylaws, contain anti-takeover
    provisions that may indirectly affect the value of the
    Companys Common Stock.

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



| |                                                                                                                                                
| | -----------------------------------------------------------------------------------------------------------------------------------------------
| | FAA regulations restrict ownership of the
    Companys Common Stock by non-U.S. citizens, which may
    lessen demand for the Companys stock.

Because the Company is a U.S. certificated
flag carrier, under applicable regulatory restrictions, no more
than 25% of the Companys voting stock may be owned or
controlled, directly or indirectly, by persons who are

16



---



##### 



not U.S. citizens. The Companys
Certificate of Incorporation and Bylaws provide that no shares
of capital stock may be voted by or at the direction of persons
who are not U.S. citizens unless such shares are registered
on a separate foreign stock record. No shares of Common Stock
owned by persons who are not U.S. citizens will be
registered on the Companys foreign stock record to the
extent that the aggregate ownership by persons who are not
U.S. citizens reflected in the foreign stock record would
exceed 25% of the Companys outstanding shares of Common
Stock.







|        |           
|------- | ----------
|Item 2. | Properties

Flight Equipment

As of December 31, 2003, the Companys
operating fleet consisted of eleven MD-11 and seven DC-10-30
aircraft, all of which are operated under operating leases. The
MD-11 fleet includes eight passenger aircraft (four of which are
long-range versions) and three freighter aircraft. The DC-10-30
fleet includes four freighter aircraft and three passenger
aircraft. One DC-10-30 freighter aircraft was returned to its
lessor in the first quarter of 2004, and a second DC-10
freighter is expected to be returned to its lessor in the second
quarter of 2004.

At December 31, 2003, the Companys
operating fleet consisted of the following:

|                            |       |            |     |        |  |       |     |  |  |  |   |    | 
|--------------------------- | ----- | ---------- | --- | ------ |  | ----- | --- |  |  |  | - | -- | 
|                            |       |           
|                            |       | Capacity  
|                            |       |           
|                            |       | Passenger  |     | Cargo  |  |      
|Aircraft(a)                 |       | (Seats)(b) |     | (Tons) |  | Total
|                            |       |            |     |        |  |      
|McDonnell Douglas MD-11     |       |            | 409 |        |  |       |    |  |  |  | 4 |   
|McDonnell Douglas MD-11F    |       |            |    |        |  |       | 102 |  |  |  | 3 |   
|McDonnell Douglas MD-11ER   |       |            | 409 |        |  |       |    |  |  |  | 4 |   
|McDonnell Douglas DC-10-30  |       |            | 356 |        |  |       |    |  |  |  | 3 |   
|McDonnell Douglas DC-10-30F |       |            |    |        |  |       | 80  |  |  |  | 4 |   
|                            |       |            |     |        |  |       |     |  |  |  |   |   
|                            | Total |            |     |        |  |       |     |  |  |  |   | 18 | 



---

Notes



|    |  |                                                                                           
|--- |  | ------------------------------------------------------------------------------------------
|(a) |  | F aircraft are freighters;
    ER aircraft have extended-range capabilities.          
|   
|(b) |  | Based on maximum operating configurations. Other
    configurations are occasionally used.

As indicated above, one DC-10 aircraft was
returned to its lessor in the first quarter of 2004 and the
other DC-10 is expected to be returned to its lessor in the
second quarter of 2004. In addition, the lease term for three
DC-10 aircraft expire in the second half of 2004, and the
remaining two expire in 2008.

The lease terms for five of the MD-11 aircraft
expire throughout 2005 and 2006, and three expire in 2008. The
three leases that expire in 2008 previously had lease terms that
would have expired in 2005, but were extended in conjunction
with the closing of the ATSB Loan which occurred on
December 30, 2003. The three remaining MD-11 aircraft
leases were amended in the first quarter of 2004, and include
changes to the lease expiration dates of the aircraft. The term
for one aircraft will expire in January 2006, and may be
automatically extended for a one-year period depending on the
market price of the Companys Common Stock during a
specified time period. If the lease is extended, there is a
further provision that would allow for a second automatic
one-year extension through January 2008, which is also dependent
on the market price of the Companys Common Stock during a
specified period of time. If at any time during the term of the
lease, the Companys Common Stock is no longer traded
publicly, the lease term for this aircraft is automatically
extended to expire in January 2008. The remaining two MD-11
leases, which were also restructured in the first quarter of
2004, will now expire in either 2011 or 2012, depending on the
Companys ability to meet certain financial conditions.

17



---



##### 



Ground Facilities

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

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






|        |                  
|------- | -----------------
|Item 3. | Legal Proceedings

A claim has been filed in the 19th Civil Court
District Court, Frankfurt, Germany, against the Company by a
tour operator seeking approximately $4.2 million in
compensation related to the cancellation of a summer program in
1996. The Company believes it has substantial defenses to this
action, although no assurance can be given of the eventual
outcome of this litigation. Because of the uncertain outcome of
this action, no amounts have been accrued in the consolidated
financial statements.

Miami-Dade County is currently investigating and
remediating various environmental conditions at the Miami
International Airport (MIA). During the second quarter of 2001,
the County filed a lawsuit against 17 defendants, which does not
currently include World Airways, in an attempt to recover its
past and future clean-up costs. This claim has been filed in the
Florida Circuit Court for the 11th Judicial District in Dade
County Florida. In addition to the 17 named in the lawsuit, 243
other agencies and companies that were prior tenants at MIA
(potentially responsible parties or PRPs),
including World Airways, were issued letters advising of the
lawsuit and indicating that any PRPs could be named as
additional defendants in the future depending upon a
determination as to the levels of contamination and the extent
to which any PRP may have contributed to any alleged
contamination. At this point certain PRPs, including World
Airways, have joined a joint defense group to respond to the
Countys inquiries and investigation of the PRPs.
This group is conducting preliminary investigations of the site
in question to determine each PRPs potential exposure.
This process is ongoing and the potential exposure of World
Airways has yet to be determined.

In January and February 2004, seven purported
class action complaints (four in the United States District
Court for the Eastern District of New York, one in the
United States District Court for the Southern District of New
York, one in the Superior Court of DeKalb County, Georgia, and
one in the United States District Court for the Northern
District of Illinois) and four individual complaints (one in the
United States District Court for the Southern District of New
York, one small claims action in New York, one small claims
action in New Jersey, and one small claims action in California)
were filed against the Company arising out of the discontinuance
of charter flights upon the expiration of the Companys
obligation to provide services under an air services agreement.
The Company had operated the charter flights between cities in
the United States and Lagos, Nigeria for Ritetime Aviation and
Travel Services, Inc. (Ritetime). The
Companys obligation to perform air services for Ritetime
ended with the last chartered flight on December 30, 2003.
From the allegations made by the various plaintiffs, it appears
that Ritetime continued to sell tickets for flights purportedly
scheduled to depart after the expiration of the Companys
contractual obligations for air services. The plaintiffs purport
to act for themselves and on behalf of other persons who held
tickets issued by Ritetime for the non-contracted flights.
Ritetime is also named as a defendant in each of these lawsuits.
The plaintiffs seek compensatory, punitive and/or treble damages
and costs and expenses, including attorneys fees, based on
various legal theories including breach of contract, fraud,
negligent misrepresentation, unjust enrichment, illegal/excess
tax and violations of U.S. federal laws and regulations
governing air transportation and of the Federal Racketeer
Influenced and Corrupt Organization Statute. The Company is
cooperating with the DOT in its inquiry concerning this matter.
During March 2004, Ritetime filed a Demand to Arbitrate in
Peachtree City, Georgia, and subsequently the Company responded
and filed a counterclaim. The Company believes that the
allegations against it are without merit and intends to
vigorously defend itself in these lawsuits, although it

18



---



##### 



cannot give any assurance that these lawsuits
will not have a material adverse effect on the Companys
financial condition or results of operations.


On January 9, 2004, Whitebox Convertible
Arbitrage Partners, L.P. and Pandora Select Partners, L.P. filed
a complaint in the United States District Court for the District
of Minnesota alleging breach of contract by the Company in
connection with its purchase in December 2003 of $22,545,000
aggregate amount of 8% Convertible Senior Subordinated
Debentures due 2004 (the Old Debentures) in exchange
for a like amount of newly-issued 8% Convertible Senior
Subordinated Debentures due 2009 (the New
Debentures). The plaintiffs in this lawsuit allege that
they have held at all relevant times $2,530,000 and $780,000
principal amount, respectively, of Old Debentures and that the
Company breached the terms of the indenture governing the Old
Debentures by purchasing Old Debentures from a selected group of
holders rather than from holders determined by lot or from all
holders on a pro rata basis. The plaintiffs are seeking damages
in an amount equal to the difference in value between the New
Debentures and the Old Debentures held by the plaintiffs and
interest lost by the plaintiffs on the Old Debentures through
maturity on August 26, 2004 as well as costs and reasonable
attorney fees. The Company believes that this claim is without
merit and intends to defend itself vigorously in this lawsuit,
although it cannot give any assurance that this litigation will
not have a material adverse effect on the Companys
financial condition or results of operation.

In February 2004, the Company made a
self-disclosure to the Federal Aviation Administration
(FAA) concerning aircraft record irregularities
discovered upon preparing for the return of two DC-10-30
aircraft. The Company subsequently received a letter from the
FAA opening an investigation into a possible violation of the
Code of Federal Regulations. The Company has complied with all
requests of the FAA and is waiting to receive notification of
the FAAs findings. At the present time, the Company cannot
determine what impact, if any, the FAAs findings will have
on the Company operationally or financially.

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






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

On December 15, 2003, the Company held a
special meeting of stockholders to consider and vote upon the
following proposals:



| |                                                                                                                                                                                                                                                                                                                                                                                 
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (a) to approve the issuance of
    $25.5 million aggregate principal amount of
    8.0% Convertible Senior Subordinated Debentures due 2009
    (the New Debentures) in exchange for
    $22.5 million principal amount of the Companys
    outstanding 8.0% Convertible Senior Subordinated Debentures
    due 2004 (the Old Debentures) and $3.0 million
    in cash; and
|
| | (b) to approve the issuance of warrants to
    the Air Transportation Stabilization Board (the
    ATSB) to purchase shares of the Companys
    Common Stock in connection with a federal guarantee of
    $27.0 million to support a $30.0 million term loan
    facility.                                                                                                  

The following table reflects the votes with
respect to each matter voted upon at the special meeting:

|                                                                                                                                                                                                                             |  |     |           |         |  |         |         |           |  |  |        |  |  |  |   | 
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | --- | --------- | ------- |  | ------- | ------- | --------- |  |  | ------ |  |  |  | - | 
|                                                                                                                                                                                                                             |  |     |           |         |  |         |         | Broker   
|Proposal                                                                                                                                                                                                                     |  | For |           | Against |  | Abstain |         | Non-Votes
|                                                                                                                                                                                                                             |  |     |           |         |  |         |         |          
|The issuance of $25.5 million aggregate
    principal amount of the New Debentures in exchange for
    $22.5 million aggregate principal amount of the
    Companys outstanding Old Debentures and $3.0 million
    in cash |  |     | 5,433,800 |         |  |         | 523,272 |           |  |  | 41,024 |  |  |  | 0 | 
|The issuance of warrants to the ATSB to purchase
    shares of the Companys Common Stock in connection with a
    federal guarantee of $27.0 million to support a
    $30.0 million term loan facility                      |  |     | 5,431,959 |         |  |         | 525,437 |           |  |  | 40,700 |  |  |  | 0 | 

19



---



##### 






PART II






|        |                                                                                                                     
|------- | --------------------------------------------------------------------------------------------------------------------
|Item 5. | Market for Registrants Common Equity,
    Related Stockholder Matters and Issuer Purchases of Equity
    Securities

The Companys Common Stock currently trades
on the Nasdaq SmallCap Market of The Nasdaq-Amex Market
GroupSM under the symbol: WLDA. The high
and low bid prices of the Companys Common Stock, as
reported by Nasdaq, for each quarter in the last two fiscal
years are as follows:

|               |  |              |      |     |  |   |      | 
|-------------- |  | ------------ | ---- | --- |  | - | ---- | 
|               |  |             
|               |  | Common Stock
|               |  |             
|               |  | High         |      | Low
|               |  |              |      |    
|2003           |  |              |      |     |  |   |      | 
|Fourth Quarter |  | $            | 4.90 |     |  | $ | 2.91 | 
|Third Quarter  |  |              | 5.10 |     |  |   | 1.75 | 
|Second Quarter |  |              | 2.89 |     |  |   | .69  | 
|First Quarter  |  |              | 1.00 |     |  |   | .50  | 
|2002           |  |              |      |     |  |   |      | 
|Fourth Quarter |  |              | 1.09 |     |  |   | .63  | 
|Third Quarter  |  |              | 1.22 |     |  |   | .60  | 
|Second Quarter |  |              | 1.52 |     |  |   | .57  | 
|First Quarter  |  |              | .89  |     |  |   | .41  | 

The Company has not declared or paid any cash
dividends or distributions on its Common Stock since 1992. The
Company currently intends to retain future earnings to fund the
development and growth of its business and, therefore, does not
anticipate paying any cash dividends in the foreseeable future.
Any future decision concerning the payment of dividends on its
Common Stock will depend upon the results of operations,
financial condition, capital expenditure plans of the Company,
provisions of certain financing instruments as well as such
other factors as the Board of Directors, in its sole discretion,
may consider relevant. In December 2003, the Company entered
into a $30 million term loan agreement that restricts the
Companys ability to pay dividends or purchase treasury
stock. In addition, the indentures governing the New Debentures
provide that the Company may not pay any cash dividend or make
any other cash payment or distribution to the holders of Common
Stock until the date when all the New Debentures have been
converted into Common Stock. (See Note 7 of the
Companys Notes to Consolidated Financial
Statements in Item 8).

The approximate number of shareholders of record
at December 31, 2003 was 554, which does not include those
shareholders who hold shares in street name accounts.

Recent Sales of Unregistered
Securities

During the quarter ended December 31, 2003,
the Company issued the securities described below in
transactions that were not registered under the Securities Act
of 1933, as amended (the Securities Act).

On December 30, 2003, the Company issued
$25.5 million aggregate principal amount of the New
Debentures in exchange for $22.5 million aggregate
principal amount of the Companys then outstanding Old
Debentures and $3.0 million in cash. The New Debentures
accrue interest at the rate of 8.0% per annum, are
convertible into the Companys Common Stock at
$3.20 per share, and mature on December 30, 2009.

On December 30, 2003, in connection with the
closing of the ATSB Loan and as additional compensation for the
loan guarantee, the Company issued to the ATSB a series of
warrants (collectively, the ATSB Warrants) to
purchase in the aggregate 2,378,223 shares of the
Companys Common Stock. The ATSB Warrants consist of the
following: (a) warrants to purchase 1,269,022 shares
of Common Stock, exercisable at $0.78 per share through
December 30, 2008; (b) warrants to purchase
886,979 shares of Common Stock, exercisable at
$3.20 per share through December 30, 2009;
(c) warrants to purchase 111,111 shares of

20



---



##### 



Common Stock, exercisable at $2.50 per share
through August 23, 2004; and (d) warrants to purchase
111,111 shares of Common Stock, exercisable at
$2.50 per share through March 29, 2005.


The New Debentures were issued without
registration in reliance on the exemption from registration
provided in Section 4(2) of the Securities Act and
Rule 506 of Regulation D promulgated thereunder. The
ATSB Warrants were issued in reliance on the exemption from
registration provided by Section 4(2) of the Securities
Act. The New Debentures and the ATSB Warrants were issued in
transactions not involving any public offering. The acquirers of
the New Debentures and the ATSB Warrants were provided access to
all material information about the Company which they requested
and all information necessary to verify such information, and
were afforded access to management of the Company in connection
with these transactions. Each acquirer of New Debentures and
ATSB Warrants represented to the Company that it acquired such
securities for investment and not with a view towards
distribution. All certificates or agreements representing the
New Debentures or the ATSB Warrants bear restrictive legends to
the effect that the securities represented by such certificates
or agreements have not been registered under the Securities Act
and may not be transferred or otherwise disposed of in the
absence of an effective registration statement under the
Securities Act or applicable state securities law, unless an
exemption from registration is available.

21



---



##### 








|        |                        
|------- | -----------------------
|Item 6. | Selected Financial Data

The following selected financial data are derived
from the audited consolidated financial statements of the
Company. The data should be read in conjunction with
Managements Discussion and Analysis of Financial
Condition and Results of Operations and the Consolidated
Financial Statements and notes thereto.

|                                                                                              |                                                                            |                                           |         |        |        |      |         |        |       |      |         |        |         |   |         |       |        |   |         |       |        |  
|--------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------- | ----------------------------------------- | ------- | ------ | ------ | ---- | ------- | ------ | ----- | ---- | ------- | ------ | ------- | - | ------- | ----- | ------ | - | ------- | ----- | ------ | -
|                                                                                              |                                                                            |                                          
|                                                                                              |                                                                            | Year Ended December 31,                  
|                                                                                              |                                                                            |                                          
|                                                                                              |                                                                            | 2003                                      |         | 2002   |        | 2001 |         | 2000   |       | 1999
|                                                                                              |                                                                            |                                           |         |        |        |      |         |        |       |     
|                                                                                              |                                                                            |                                          
|                                                                                              |                                                                            | (In thousands except per share data)     
|Results of Operations:                                                                        |                                                                            |                                           |         |        |        |      |         |        |       |      |         |        |         |   |         |       |        |   |         |      
|Operating revenues                                                                            |                                                                            | $                                         | 474,850 |        |        | $    | 384,489 |        |       | $    | 317,866 |        |         | $ | 264,033 |       |        | $ | 263,998 |      
|Operating expenses                                                                            |                                                                            |                                           | 446,422 |        |        |      | 377,367 |        |       |      | 338,595 |        |         |   | 262,926 |       |        |   | 274,247 |      
|Operating income (loss)                                                                       |                                                                            |                                           | 28,428  |        |        |      | 7,122   |        |       |      | (20,729 | )      |         |   | 1,107   |       |        |   | (10,249 | )    
|Earnings (loss) before income taxes,
    extraordinary item and accounting change             |                                                                            |                                           | 19,123  |        |        |      | 2,041   |        |       |      | (26,037 | )      |         |   | (3,159  | )     |        |   | (13,653 | )    
|Extraordinary item                                                                            |                                                                            |                                           |        |        |        |      |        |        |       |      |        |        |         |   |        |       |        |   | 6,030   |      
|Accounting change                                                                             |                                                                            |                                           |        |        |        |      |        |        |       |      |        |        |         |   | 22,744  |       |        |   |        |      
|Income tax expense                                                                            |                                                                            |                                           | 3,802   |        |        |      |        |        |       |      |        |        |         |   |        |       |        |   |        |      
|Net earnings (loss)                                                                           |                                                                            |                                           | 15,321  |        |        |      | 2,041   |        |       |      | (26,037 | )      |         |   | 19,585  |       |        |   | (7,623  | )    
|Basic earnings (loss) per common share:                                                       |                                                                            |                                           |         |        |        |      |         |        |       |      |         |        |         |   |         |       |        |   |         |      
|                                                                                              | Before extraordinary item and accounting change                            |                                           |         | 1.37   |        |      |         | 0.18   |       |      |         | (2.42  | )       |   |         | (0.33 | )      |   |         | (2.04 | )     
|                                                                                              | Extraordinary item                                                         |                                           |         |       |        |      |         |       |       |      |         |       |         |   |         |      |        |   |         | 0.90  |       
|                                                                                              | Accounting change                                                          |                                           |         |       |        |      |         |       |       |      |         |       |         |   |         | 2.36  |        |   |         |      |       
|                                                                                              | Net earnings (loss)                                                        |                                           |         | 1.37   |        |      |         | 0.18   |       |      |         | (2.42  | )       |   |         | 2.03  |        |   |         | (1.14 | )     
|                                                                                              | Weighted average Common Stock outstanding                                  |                                           |         | 11,224 |        |      |         | 11,073 |       |      |         | 10,755 |         |   |         | 9,641 |        |   |         | 6,692 |       
|Diluted earnings (loss) per common share:                                                     |                                                                            |                                           |         |        |        |      |         |        |       |      |         |        |         |   |         |       |        |   |         |      
|                                                                                              | Before extraordinary item and accounting change                            |                                           |         | 0.98   |        |      |         | 0.18   |       |      |         | (2.42  | )       |   |         | (0.33 | )      |   |         | (2.04 | )     
|                                                                                              | Extraordinary item                                                         |                                           |         |       |        |      |         |       |       |      |         |       |         |   |         |      |        |   |         | 0.90  |       
|                                                                                              | Accounting change                                                          |                                           |         |       |        |      |         |       |       |      |         |       |         |   |         | 2.36  |        |   |         |      |       
|                                                                                              | Net earnings (loss)                                                        |                                           |         | 0.98   |        |      |         | 0.18   |       |      |         | (2.42  | )       |   |         | 2.03  |        |   |         | (1.14 | )     
|                                                                                              | Weighted average Common Stock and common
    equivalent shares outstanding |                                           |         | 17,783 |        |      |         | 11,073 |       |      |         | 10,775 |         |   |         | 9,641 |        |   |         | 6,692 |       
|Pro forma amounts assuming new method of
    accounting is applied retroactively (unaudited): |                                                                            |                                           |         |        |        |      |         |        |       |      |         |        |         |   |         |       |        |   |         |      
|                                                                                              |                                                                            | Earnings (loss) before extraordinary item |         | $      | 15,321 |      |         | $      | 2,041 |      |         | $      | (26,037 | ) |         | $     | (3,159 | ) |         | $     | (7,810 | )
|                                                                                              |                                                                            | Net earnings (loss)                       |         |        | 15,321 |      |         |        | 2,041 |      |         |        | (26,037 | ) |         |       | (3,159 | ) |         |       | (1,780 | )
|                                                                                              | Basic earnings (loss) per share:                                           |                                           |         |        |        |      |         |        |       |      |         |        |         |   |         |       |        |   |         |       |       
|                                                                                              |                                                                            | Before extraordinary item                 |         |        | 1.37   |      |         |        | 0.18  |      |         |        | (2.42   | ) |         |       | (0.33  | ) |         |       | (1.17  | )
|                                                                                              |                                                                            | Net earnings (loss)                       |         |        | 1.37   |      |         |        | 0.18  |      |         |        | (2.42   | ) |         |       | (0.33  | ) |         |       | (0.27  | )
|                                                                                              | Diluted earnings (loss) per share:                                         |                                           |         |        |        |      |         |        |       |      |         |        |         |   |         |       |        |   |         |       |       
|                                                                                              |                                                                            | Before extraordinary item                 |         |        | 0.98   |      |         |        | 0.18  |      |         |        | (2.42   | ) |         |       | (0.33  | ) |         |       | (1.17  | )
|                                                                                              |                                                                            | Net earnings (loss)                       |         |        | 0.98   |      |         |        | 0.18  |      |         |        | (2.42   | ) |         |       | (0.33  | ) |         |       | (0.27  | )
|Financial Position:                                                                           |                                                                            |                                           |         |        |        |      |         |        |       |      |         |        |         |   |         |       |        |   |         |      
|Cash and cash equivalents                                                                     |                                                                            | $                                         | 53,825  |        |        | $    | 21,504  |        |       | $    | 19,540  |        |         | $ | 15,682  |       |        | $ | 12,406  |      
|Total assets                                                                                  |                                                                            |                                           | 157,301 |        |        |      | 117,262 |        |       |      | 112,229 |        |         |   | 113,890 |       |        |   | 109,736 |      
|Notes payable and long-term debt including
    current maturities                             |                                                                            |                                           | 75,177  |        |        |      | 57,641  |        |       |      | 62,396  |        |         |   | 64,024  |       |        |   | 63,287  |      
|Stockholders deficiency                                                                      |                                                                            |                                           | (6,673  | )      |        |      | (28,867 | )      |       |      | (31,104 | )      |         |   | (7,280  | )     |        |   | (29,838 | )    

At December 31, 2003, the Company had
$53.8 million of cash and cash equivalents, of which
$23.3 million was restricted. This was due to
$18.8 million required to pay the principal and interest on
the convertible debentures called for redemption on
December 30, 2003 (which was paid on January 28, 2004),

22



---



##### 



$3.4 million for letters of credit that are
secured by collateral, and $1.1 million of prepayments from
customers for flights that are scheduled to be flown within
30 days of the balance sheet date.


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






|        |                                                                                          
|------- | -----------------------------------------------------------------------------------------
|Item 7. | Managements Discussion and Analysis
    of Financial Condition and Results of Operations

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

Critical Accounting Policies

The preparation of the financial statements
requires the Company to make estimates and judgments that affect
the reported amount of assets, liabilities, revenue and
expenses, and related disclosure of contingent assets and
liabilities at the date of the financial statements. Actual
results may differ from these estimates under different
assumptions or conditions.

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

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



| |                                              
| | ---------------------------------------------
| | Accounting for Aircraft Maintenance
    Costs

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

The Companys aircraft are maintained by
outside maintenance providers. In certain cases, aircraft
maintenance costs are covered by maintenance reserve
payments made to the lessors of the Companys aircraft. In
these cases, the Company is required to set aside funds to cover
future maintenance work. This is done by remitting these
non-refundable amounts to the lessors each month. After
qualifying maintenance is performed and paid for, the Company is
reimbursed for amounts paid from the funds held by the lessors.
The result of this arrangement is that the Company recognizes
maintenance costs each month based on the amount of the
maintenance reserves required to be paid to its lessors (usually
based on a rate per hour flown). In other cases, maintenance
work does not qualify for reimbursement from lessor reserves.
This may be due to the type of maintenance performed or whether
the aircraft component being maintained is covered by a lease
agreement.

For maintenance that is not covered by lessor
reserves, the Company recognizes the costs when maintenance
services are performed. Therefore, these maintenance costs will
fluctuate from period to period as scheduled maintenance work
comes due or in the event unscheduled maintenance work must be
performed.

It is also important to note that aggregate
maintenance reserves paid to each of the Companys lessors
may not be sufficient to cover actual maintenance costs
incurred. In these cases, the Company incurs the cost of any
shortfall when the maintenance services are performed and the
costs are determinable.

23



---



##### 





| |                                           
| | ------------------------------------------
| | Losses on Contractual Lease
    Agreements

The Company is obligated under an operating lease
for office space at its former headquarters in Herndon, Virginia
through April 2006. The Companys total obligation at
December 31, 2003 under the lease was $3.7 million.
The Company received rental income, sufficient to offset its
lease expense through March 2002, after which time no rental
income was received except $0.4 million in 2003. The
Company is currently seeking a new sub-lessee for this office
space.

The Company recognized a $1.7 million
liability at December 31, 2002 for costs that will continue
to be incurred, without economic benefit to the Company, over
the remaining term of its lease of this office space. During
2003, the Company used $1.4 million of the accrual,
reviewed its estimates and assumptions on a quarterly basis, and
determined that an additional $1.7 million should be added
to the accrual, resulting in a $2.0 million balance at
December 31, 2003. The liability at December 31, 2003
was determined based on the remaining lease rentals, reduced by
estimated sublease rentals that can be reasonably obtained for
the property. The liability is included in other accrued
liabilities on the accompanying consolidated balance sheet and
the cost is included in sales, general and administrative on the
accompanying consolidated statement of operations.

Management was required to make significant
estimates and assumptions in determining this liability. These
included an estimated eight-month period, starting
January 1, 2004, in which the Company will not obtain any
sublease rentals while seeking a sub-lessee and an estimated
54 percent discount that will be provided to a suitable
sub-lessee from the Companys current monthly lease
rentals. These assumptions were determined based on current
market conditions for commercial office space in Herndon,
Virginia and the metropolitan Washington, D.C. area.

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

In November 2003, the Company agreed to convert
the total amount due from the previous sub-lessee into equity,
and received 5.1 million shares of common stock of the
sub-lessee. This investment is not currently reflected on the
Consolidated Balance Sheets.



| |                                    
| | -----------------------------------
| | Impairment of Long-Lived
    Assets

The Company reviews its long-lived assets for
impairment whenever events or circumstances indicate that the
carrying amount of an asset may not be recoverable. To the
extent that the future undiscounted net cash flows expected to
be generated from an asset are less than the carrying amount of
the asset, an impairment loss will be recognized based on the
difference between the assets carrying amount and its
estimated fair market value.

Overview and Results of Operations



| |         
| | --------
| | Overview

The Companys net earnings were
$15.3 million for the year ended December 31, 2003, as
compared to $2.0 million for the year ended
December 31, 2002 and a net loss of $26.0 million for
the year ended December 31, 2001.

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



| |     
| | ----
| | 2003



| |   |                                                                                                                                                                                                                                                                                                                           
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Recording a loss on debt extinguishment of
    $3.0 million due to the issuance, on December 30,
    2003, of $25.5 million principal amount of the
    Companys Convertible Senior Subordinated Debentures due
    2009 (the New Debentures) in exchange for
    $22.5 million principal amount of then outstanding 8%

24



---



##### 



| |   |                                                                                                                                                                                                                                                                                                              
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | existing Convertible Senior Subordinated
    Debentures due 2004 (the Old Debentures) and
    $3.0 million in cash. This represents the difference
    between the fair value of the New Debentures and the carrying
    amount of the Old Debentures extinguished.                                        
|
| |  | Recording $1.9 million of bad debt expense
    associated with air services provided to Ritetime Aviation
    Services.                                                                                                                                                                                      
|
| |  | Recording a $1.7 million liability for
    estimated losses based on contractual lease costs (reduced by
    estimated sub-lease rentals) that will continue to be incurred
    for the remaining term of the Companys lease agreement for
    office space at its former headquarters in Herndon, Virginia.
|
| |  | Fees and expenses of $1.3 million paid due
    to termination of the Wells Fargo Foothill, Inc. loan
    facility (Foothill loan facility).                                                                                                                                                                
|
| |  | A $0.5 million write-off of deferred
    issuance fees related to the Foothill loan facility.                                                                                                                                                                                                                



| |     
| | ----
| | 2002



| |   |                                                                                                                                                                                                                                                                                                              
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Recording a $2.0 million liability to the
    federal government for the return in 2003 of a portion of the
    grant funds received under the Air Transportation Safety and
    System Stabilization Act (the Stabilization Act).                                                                         
|
| |  | Recording a $1.7 million liability for
    estimated losses based on contractual lease costs (reduced by
    estimated sub-lease rentals) that will continue to be incurred
    for the remaining term of the Companys lease agreement for
    office space at its former headquarters in Herndon, Virginia.
|
| |  | Recording an $0.8 million receivable due
    from a lessor related to unused maintenance reserves.                                                                                                                                                                                                           



| |     
| | ----
| | 2001



| |   |                                                                                                                        
| | - | -----------------------------------------------------------------------------------------------------------------------
| |  | Recording the benefit of a $5.1 million
    grant received from the federal government under the
    Stabilization Act.

The Companys net earnings for 2003
increased significantly from 2002, due to the increase in
operating revenue year over year, offset primarily by increases
in flight expenses, fuel, maintenance costs, sales, general and
administrative expenses and income taxes.

The following table provides statistical data,
used by management in evaluating the operating performance of
the Company, for the years ended December 31, 2003, 2002,
and 2001:

|                                                                       |                        |                         |  |        |  |      |  |     |   |  |  |        |  |  |  |     |   |  |  |        |  |  |  |     |  
|---------------------------------------------------------------------- | ---------------------- | ----------------------- |  | ------ |  | ---- |  | --- | - |  |  | ------ |  |  |  | --- | - |  |  | ------ |  |  |  | --- | -
|                                                                       |                        |                        
|                                                                       |                        | Year Ended December 31,
|                                                                       |                        |                        
|                                                                       |                        |                         |  |        |  |     
|                                                                       |                        | 2003                    |  | 2002   |  | 2001
|                                                                       |                        |                         |  |        |  |     
|                                                                       |                        |                         |  |        |  |      |  |     |   |  |  |       
|Block hours:                                                           |                        |                         |  |        |  |      |  |     |   |  |  |        |  |  |  |     |   |  |  |        |  |  |  |    
|                                                                       | Full service passenger |                         |  | 23,046 |  |      |  | 52  | % |  |  | 21,226 |  |  |  | 56  | % |  |  | 18,108 |  |  |  | 54  | %
|                                                                       | ACMI passenger         |                         |  | 4,412  |  |      |  | 10  | % |  |  | 3,053  |  |  |  | 8   | % |  |  | 7,397  |  |  |  | 22  | %
|                                                                       | Full service cargo     |                         |  | 9,182  |  |      |  | 21  | % |  |  | 4,966  |  |  |  | 13  | % |  |  | 337    |  |  |  | 1   | %
|                                                                       | ACMI cargo             |                         |  | 6,514  |  |      |  | 15  | % |  |  | 8,049  |  |  |  | 21  | % |  |  | 7,053  |  |  |  | 22  | %
|                                                                       | Miscellaneous          |                         |  | 918    |  |      |  | 2   | % |  |  | 755    |  |  |  | 2   | % |  |  | 483    |  |  |  | 1   | %
|                                                                       |                        |                         |  |        |  |      |  |     |   |  |  |        |  |  |  |     |   |  |  |        |  |  |  |    
|                                                                       | Total                  |                         |  | 44,072 |  |      |  | 100 | % |  |  | 38,049 |  |  |  | 100 | % |  |  | 33,378 |  |  |  | 100 | %
|                                                                       |                        |                         |  |        |  |      |  |     |   |  |  |        |  |  |  |     |   |  |  |        |  |  |  |    
|Operating aircraft at year-end                                         |                        | 18                      |  | 16     |  | 15  
|Average available aircraft per day                                     |                        | 16.9                    |  | 15.8   |  | 12.9
|Average daily utilization (block hours flown per
    day per aircraft) |                        | 7.1                     |  | 6.6    |  | 7.1 

25



---



##### 



In 2003, the Company achieved profitability for
the second consecutive year, and built a strong foundation for
2004 and the years ahead. The Company accomplished the following
in 2003:



| |   |                                                                                                                                                                                                                                                                
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Increased block hours by 15.8%.                                                                                                                                                                                                                                
|
| |  | Increased revenue per block hour by 6.6%, with
    operating expense rising 2.1%.                                                                                                                                                                              
|
| |  | Further diversified revenue mix by adding new
    passenger customers and building the cargo business.                                                                                                                                                         
|
| |  | Initiated steps to reduce aircraft costs through
    use of power-by-the-hour arrangements and restructuring of
    existing leases.                                                                                                                           
|
| |  | Finalized a new union contract with its flight
    attendants.                                                                                                                                                                                                 
|
| |  | Completed a major restructuring of its debt.
    These transactions improved the Companys balance sheet and
    now provide a foundation for the Companys future working
    capital needs and growth plans. The following occurred on
    December 30, 2003:



| |   |                                                                                                                                                                                                                                                  
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | A $30.0 million term loan facility (the
    ATSB Loan) with a final maturity in 2008 was closed,
    of which $27.0 million is guaranteed by the Air
    Transportation Stabilization Board (the ATSB) and
    $3.0 million by a third party.
|
| |  | $25.5 million of New Debentures were issued
    in exchange for $22.5 million of the Companys then
    outstanding Old Debentures and $3.0 million cash.                                                                                        
|
| |  | The remaining balance of $18.0 million
    principal amount of the Old Debentures was called for redemption
    and redeemed on January 28, 2004.                                                                                                
|
| |  | The Foothill loan facility was terminated.                                                                                                                                                                                                       

For 2004, the Company expects to achieve the
following:



| |   |                                                                                                                                                                                            
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Profitability for a third consecutive year.                                                                                                                                                
|
| |  | Further diversification of revenue mix by adding
    more commercial customers, while continuing to provide excellent
    service to the Companys largest customer, the
    U.S. military.
|
| |  | On a per block hour basis, hold flat or reduce
    major cost categories (flight, maintenance, fuel and aircraft
    costs).                                                               
|
| |  | Work on concluding a new collective bargaining
    agreement with its pilots.                                                                                                              
|
| |  | Continue to seek aircraft lease cost reductions,
    with two of the Companys most expensive DC-10 freighters
    having been returned in the first half of 2004.                         
|
| |  | Initiate plans to introduce Boeing 767 aircraft
    to the fleet in 2005 to replace two older DC-10-30 passenger
    aircraft that are more costly to operate.                             
|
| |  | Complete the executive succession plan announced
    in February 2004.                                                                                                                     

Results of Operations



| |                                                                          
| | -------------------------------------------------------------------------
| | Year Ended December 31, 2003 Compared
    to Year Ended December 31, 2002

Operating Revenues.Operating revenues increased $90.4 million, or 23.5%, to
$474.9 million in 2003 from $384.5 million in 2002.
The higher operating revenue was primarily attributable to a
$77.1 million increase in flying under the contract with
the USAF, as well as an increase of $21.7 million in
commercial passenger flying. These increases were offset by
lower commercial cargo revenue of $11.5 million. Two key
variables that impact the amount of operating revenues are
listed below:

|                     |  |      |        |      |  |            |        |          |  |   |       |  |  |  |       | 
|-------------------- |  | ---- | ------ | ---- |  | ---------- | ------ | -------- |  | - | ----- |  |  |  | ----- | 
|                     |  | 2003 |        | 2002 |  | Difference |        | % Change
|                     |  |      |        |      |  |            |        |         
|Total block hours    |  |      | 44,072 |      |  |            | 38,049 |          |  |   | 6,023 |  |  |  | 15.8% | 
|Yield per block hour |  | $    | 10,774 |      |  | $          | 10,105 |          |  | $ | 669   |  |  |  | 6.6%  | 

26



---



##### 



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

Operating Expenses.Total operating expenses increased to $446.4 million in
2003 from $377.4 million in 2002. Below is information on
the Companys operating expense per block hour:

|                                 |  |      |        |      |  |            |       |          |  |   |     |  |  |  |      | 
|-------------------------------- |  | ---- | ------ | ---- |  | ---------- | ----- | -------- |  | - | --- |  |  |  | ---- | 
|                                 |  | 2003 |        | 2002 |  | Difference |       | % Change
|                                 |  |      |        |      |  |            |       |         
|Operating expense per block hour |  | $    | 10,129 |      |  | $          | 9,918 |          |  | $ | 211 |  |  |  | 2.1% | 

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



| |   |                                                    
| | - | ---------------------------------------------------
| |  | $9.8 million in cockpit crew costs;                
|
| |  | $7.3 million in flight attendant costs;            
|
| |  | $6.1 million in flight communication
    costs; and
|
| |  | $2.2 million in landing/security/handling
    fees.

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

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



| |   |                                                                                        
| | - | ---------------------------------------------------------------------------------------
| |  | $3.7 million in maintenance reserves paid to
    the lessors of the Companys aircraft;
|
| |  | $3.1 million in component repairs;                                                     
|
| |  | $2.9 million in airframe checks and landing
    gear repairs; and                      
|
| |  | $2.7 million in materials expense.                                                     

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

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

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

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



| |   |                                                                                                                
| | - | ---------------------------------------------------------------------------------------------------------------
| |  | $2.4 million higher accrual for profit
    sharing payments to administrative employees;                       
|
| |  | $1.9 million of bad debt expense related to
    air services provided to Ritetime Aviation and Travel Services;
|
| |  | $1.8 million (net) of higher wages, fringe
    benefits, and payroll taxes; and                                
|
| |  | $0.8 million of higher outside service and
    professional fees.                                              

27



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##### 



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



| |   |                                                                                                                                                                                                                                                                                                      
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Recording a loss on debt extinguishment of
    $3.0 million due to the restructuring of the Companys
    convertible senior subordinated debentures. This represents the
    difference between the fair value of the New Debentures and the
    carrying amount of the Old Debentures extinguished.
|
| |  | Fees and expenses of $1.3 million paid due
    to termination of the Foothill loan facility.                                                                                                                                                                                                         
|
| |  | Write-off of $0.5 million of deferred
    issuance fees related to the Foothill loan facility.                                                                                                                                                                                                       



| |                                                                          
| | -------------------------------------------------------------------------
| | Year Ended December 31, 2002 Compared
    to Year Ended December 31, 2001

Operating Revenues.Operating revenues increased $66.6 million, or 21.0%, to
$384.5 million in 2002 from $317.9 million in 2001.
The higher operating revenue was primarily attributable to a
$73.8 million increase in flying under the contract with
the USAF, as well as an increase of $30.3 million in
commercial cargo flying. These increases were offset by lower
commercial passenger revenue of $37.2 million. Total block
hours increased 14% in 2002 and the yield per block hour
increased on average due to a greater percentage of full service
flights.

Operating Expenses.Total operating expenses increased to $377.4 million in
2002 from $338.6 million in 2001. Total operating expenses
for 2002 included non-routine transactions that had an impact on
the financial results as follows:



| |   |                                                                                                                                                                                                                                                                                                                
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Recording a $2.0 million liability to the
    federal government for the return in 2003 of a portion of the
    grant funds received under the Stabilization Act.                                                                                                                                              
|
| |  | Recording a $1.7 million liability for
    estimated losses based upon contractual lease costs (reduced by
    estimated sub-lease rentals) that will continue to be incurred
    for the remaining term of the Companys lease agreement for
    office space at its former headquarters in Herndon, Virginia.
|
| |  | Recording a $0.8 million receivable due from
    a lessor related to unused maintenance reserves.                                                                                                                                                                                                              

Operating expenses in 2001 were reduced by a
$5.1 million grant received under the Stabilization Act, to
help offset losses resulting from the terrorist attacks on the
United States.

Flight expenses include all expenses related
directly to the operation of the aircraft other than
maintenance, aircraft rent, insurance and fuel. Also included
are expenses related to flight dispatch and flight operations
administration. Flight expenses increased $10.0 million, or
9.4%, in 2002 to $116.0 million from $106.0 million in
2001. This increase resulted primarily from an increase of
$2.9 million in landing/ security/handling fees,
$2.3 million in flight communication costs,
$1.7 million in catering costs and $1.7 million in
passenger expenses. These higher costs are directly attributable
to increased flying for the USAF as well as more full-service
flights in 2002 compared to 2001. In addition, flight expenses
in 2002 also include $0.6 million for a crew profit sharing
bonus as stipulated in the union contracts.

Maintenance expenses decreased $4.0 million,
or 6.2%, in 2002 to $59.6 million from $63.6 million
in 2001. The Company benefited from expense reductions in the
following areas:



| |   |                                                           
| | - | ----------------------------------------------------------
| |  | $1.5 million in thrust reverser
    repairs/overhauls;    
|
| |  | $1.0 million in landing gear repair expense;              
|
| |  | $1.3 million in component repairs; and                    
|
| |  | $1.0 million in maintenance travel/personnel
    expenses.

These decreases were offset by a
$0.8 million increase in auxiliary power unit repairs for
both MD-11 and DC-10-30 aircraft.

Aircraft costs increased $9.2 million, or
11.9%, to $86.8 million in 2002 from $77.6 million in
2001. This was primarily due to the increase in the number of
average aircraft to 15.8 in 2002 from 12.9 in 2001, as well

28



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##### 



as higher hull and war risk insurance costs in
2002. See Liquidity and Capital Resources for
information on deferrals of aircraft rent payments that affect
the financial position of the Company at December 31, 2002.


Fuel expenses increased $16.9 million, or
41.3%, in 2002 to $57.9 million from $41.0 million in
2001. This increase was due to more full-service block hours
being flown, together with higher per-gallon costs. The Company
is generally able to pass fuel cost increases through to its
customers.

Commissions increased by $1.3 million to
$15.8 million in 2002 from $14.5 million in 2001. This
was principally a result of the increase in AMC business in 2002
offset by a decrease in the commission rate on this AMC business.

Depreciation and amortization decreased by
$1.4 million to $4.5 million in 2002 from
$5.9 million in 2001, primarily due to the sale-leaseback
of four owned engines in June 2001. These engines were no longer
depreciated in 2002.

Subcontract flying costs increased
$1.2 million to $2.1 million in 2002 from
$0.9 million in 2001. The higher costs in 2002 resulted
from outsourcing flights due to aircraft being out of service
for maintenance.

Sales, general and administrative expenses
decreased $1.5 million, or 4.4%, to $32.6 million in
2002 from $34.1 million in 2001. The decrease in 2002 was
primarily attributable to higher wages, travel/personnel
expenses and outside services in 2001 associated with the
Companys relocation of its headquarters from Virginia to
Georgia as well as additional expense related to the allowance
for doubtful accounts receivable. The benefit of these decreases
in 2002 was offset by a $1.7 million accrual for estimated
losses associated with the Companys sub-lease of office
space in Herndon, Virginia.

Other Expense/ Net.Total other expense, net decreased by $0.2 million in 2002
compared with 2001. This decrease was primarily due to
prepayment penalties incurred due to the early repayment of debt
in connection with a sale-leaseback of two owned engines in June
2001. This was offset by higher capital gain/loss expense
related to fixed assets in 2002.

Liquidity and Capital Resources

At December 31, 2003, the Company had
$53.8 million of cash and cash equivalents, compared to
$21.5 million at December 31, 2002. The
December 31, 2003 cash balance included $23.3 million
of restricted cash, which consisted of $18.8 million
required to pay the principal and interest on the convertible
debentures called for redemption on December 30, 2003,
$3.4 million as collateral for letters of credit, and
$1.1 million of prepayments from customers for flights that
are scheduled to be flown within 30 days of the balance
sheet date.

World Airways is highly leveraged. At
December 31, 2003, World Airways current assets were
$93.0 million, which included the $18.8 million of
restricted cash set aside to redeem the Old Debentures called
for redemption in December 2003. The Companys current
liabilities were $84.4 million, which included current
maturities of long-term debt of $18.0 million representing
the principal amount of Old Debentures that were redeemed on
January 28, 2004. As of December 31, 2003, the Company
had a $30.0 million term loan, payable in three annual
principal payments of $6.0 million commencing December 2005
and a final payment of $12.0 million due in December 2008.
The Company also had outstanding long-term debt of
$27.2 million, consisting of the New Debentures, which has
a principal amount of $25.5 million and is due December
2009. In addition, the Company has significant long-term
obligations relating to operating leases for aircraft and spare
engines.

29



---



##### 



The following table presents aggregated
information about the Companys contractual obligations at
December 31, 2003:

|                                     |  |                        |         |           |  |       |         |       |  |           |         |  |  |   |        |  |  |   |         | 
|------------------------------------ |  | ---------------------- | ------- | --------- |  | ----- | ------- | ----- |  | --------- | ------- |  |  | - | ------ |  |  | - | ------- | 
|                                     |  |                       
|                                     |  | Payments Due by Period
|                                     |  |                       
|                                     |  |                        |         | Less than |  | 1-3   |         | 3-5   |  | More than
|Contractual Obligations              |  | Total                  |         | 1 Year    |  | Years |         | Years |  | 5 Years  
|                                     |  |                        |         |           |  |       |         |       |  |          
|                                     |  |                       
|                                     |  | (In thousands)        
|Convertible Senior Subordinated Debt |  | $                      | 43,545  |           |  | $     | 18,000  |       |  | $         |        |  |  | $ |       |  |  | $ | 25,545  | 
|Operating leases                     |  |                        | 534,998 |           |  |       | 85,064  |       |  |           | 126,354 |  |  |   | 74,868 |  |  |   | 248,712 | 
|Term Loan                            |  |                        | 30,000  |           |  |       |        |       |  |           | 12,000  |  |  |   | 18,000 |  |  |   |        | 
|Accrued Post-Retirement Benefits     |  |                        | 3,583   |           |  |       |        |       |  |           |        |  |  |   |       |  |  |   | 3,583   | 
|                                     |  |                        |         |           |  |       |         |       |  |           |         |  |  |   |        |  |  |   |         | 
|Total                                |  | $                      | 612,126 |           |  | $     | 103,064 |       |  | $         | 138,354 |  |  | $ | 92,868 |  |  | $ | 277,840 | 
|                                     |  |                        |         |           |  |       |         |       |  |           |         |  |  |   |        |  |  |   |         | 

Two MD-11 leases, which at December 31, 2003
had expiration dates in 2021, were restructured in the first
quarter of 2004 and have new lease terms that will expire in
either 2011 or 2012, depending on the Companys ability to
meet certain financial conditions. The reduction in the lease
terms for these two aircraft will lower the Companys
operating lease contractual obligations by approximately
$180 million, which is not reflected in the table above.

In prior years, the Company paid amounts less
than its contractual aircraft rent obligations in order to
conserve cash. The Company continued to recognize expense for
the full amount of its contractual rent payments due. The
accrual for unpaid contractual rent obligations was
$8.9 million and $17.0 million at December 31,
2003 and 2002, respectively. This accrual is included as accrued
rent in the current liabilities section of the Consolidated
Balance Sheet. The Companys aircraft lessors agreed to
amended terms of the aircraft lease agreements to provide for
the repayment of the unpaid contractual rent obligations. The
amended lease terms on leases for which the Company is still
obligated to repay rent as of December 31, 2003, provide
for repayment of contractual rent obligations based on a
percentage of profits in future years. In 2004, the Company will
be repaying $7.2 million of this liability based on
2003 net earnings.

Due to its high financial leverage, the Company
has the following restrictions:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The Company is greatly limited in its ability to
    obtain additional financing. Its indebtedness outstanding under
    the ATSB Loan is secured by substantially all of the
    Companys assets. In addition, the ATSB Loan contains
    restrictive provisions which require prepayments in the event
    the Company sells any significant assets, receives proceeds from
    future borrowings from other sources or issuances of certain
    securities, or receives net proceeds from insurance or
    condemnation.                 
|
| |  | The Companys ability to fund general
    corporate requirements, including capital expenditures, may be
    impaired. The Company has substantial obligations to pay
    principal and interest on its debt and other recurring fixed
    costs. Further, the Company may be required to prepay portions
    of the ATSB Loan under various circumstances. Accordingly, the
    Company may have to use its working capital to fund such
    payments and other recurring fixed costs instead of funding
    general corporate requirements.
|
| |  | The Companys ability to respond to
    competitive developments and adverse conditions may be limited.
    With a restricted ability to obtain additional financing and
    with substantial fixed costs, the Company may not be able to
    fund the capital expenditures required to keep it competitive or
    to withstand prolonged adverse economic conditions.                                                                                                                                                                       

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



| |   |                                                                                 
| | - | --------------------------------------------------------------------------------
| |  | Granting additional liens on its property or
    making significant investments;

30



---



##### 





| |   |                                                                                                                                                   
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Paying dividends, redeeming capital stock,
    repricing outstanding stock options or repaying indebtedness
    other than the ATSB Loan;         
|
| |  | Liquidating, winding up, dissolving or engaging
    in certain acquisitions or certain sale-leaseback transactions;                               
|
| |  | Engaging in certain transactions with affiliates
    or certain asset sales;                                                                      
|
| |  | Engaging in any business unrelated to the
    Companys existing business;                                                                        
|
| |  | Consolidating, merging with or into another
    entity or selling substantially all of its assets unless certain
    conditions are satisfied; and
|
| |  | Amending the terms of agreements relating to its
    indebtedness for borrowed money or granting any additional
    negative pledges.             

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

Other items that will impact cash requirements of
the Company in 2004 are:



| |   |                                                                                                                                                            
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The Companys earnings will be fully subject
    to income taxes, with the exception of an annual net operating
    loss carry-forward benefit of $343,000.
|
| |  | The Company will be paying the 2003 profit
    sharing bonus of approximately $6.6 million to its
    employees in the first half of 2004.                 

Although there can be no assurances, World
Airways believes that the combination of its existing contracts
and additional business which it expects to obtain, along with
its existing cash, and financing arrangements, will be
sufficient to allow the Company to meet its cash requirements
related to operating and capital requirements for 2004.



| |                                         
| | ----------------------------------------
| | Cash Flows from Operating
    Activities

Operating activities provided $29.5 million
in cash for the year ended December 31, 2003 compared to
$4.4 million in 2002. The cash provided in 2003 principally
reflects the $15.3 million of earnings, net non-cash income
statement charges of $6.6 million, a $3.0 million
increase in trade accounts receivable, and a net increase in
cash of $10.6 million due to other changes in operating
assets and liabilities.



| |                                         
| | ----------------------------------------
| | Cash Flows from Investing
    Activities

Investing activities used $2.8 million in
cash for the year ended December 31, 2003, compared to
using $5.0 million in 2002. In 2003, cash was used to
purchase new rotable spare parts, computer equipment, leasehold
improvements and other fixed assets. In 2002, cash was used to
purchase an existing leased aircraft for spare parts, in
addition to rotable parts and other fixed assets.



| |                                         
| | ----------------------------------------
| | Cash Flows from Financing
    Activities

Financing activities generated $5.5 million
in cash for the year ended December 31, 2003 compared to
generating $2.5 million in 2002. Significant items in 2003
were that the Company received $30.0 million from the ATSB
guaranteed loan, and used $17.1 of cash to terminate the
Foothill credit facility and $8.4 million to repay its
deferred aircraft rent obligations. In 2002, the Company
deferred aircraft rent obligations of

31



---



##### 



$7.3 million, which was partially offset by
scheduled debt payments of $2.1 million and a
$2.7 million decrease in notes payable.




| |                                                
| | -----------------------------------------------
| | Capital Commitments/ Financing
    Developments

On December 30, 2003, the Company closed on
$30.0 million term loan of which $27.0 million
(Tranche A Loan) is guaranteed by the ATSB and
$3.0 million (Tranche B Loan) is
guaranteed by another third party. The Companys
obligations under the loan agreement are secured by
substantially all of the assets of the Company and its
subsidiary. The Tranche A Loan bears an interest rate equal
to the lenders weighted average cost of issuing commercial
paper plus 0.5% per annum. The Tranche B Loan bears
interest at a rate equal to LIBOR plus 1.0% per annum.
Interest on the term loan is payable semi-annually on June 12th
and December 12th of each year. At December 31, 2003,
the blended rate on both Tranches approximated 2%. The Company
is required to pay semi-annual guarantee fees commencing on the
date of the closing of the term loan (a) to the ATSB at an
annual rate of 4.5% of the principal amount of the
Tranche A Loan scheduled to be outstanding for the interest
periods ending on June 12 and December 12, 2004,
increasing by 0.5% each year for subsequent semi-annual interest
periods through December 12, 2008; and (b) to the
guarantor of the Tranche B Loan at an annual rate of 3.0%
of the principal amount of the Tranche B Loan scheduled to
be outstanding for the interest periods ending on June 12th and
December 12th through December 12, 2008. The principal
amount of the term loan will be repaid in three annual
installments of $6.0 million each, commencing on
December 12, 2005, and a final fourth installment of
$12.0 million due on December 12, 2008.

In addition, on December 30, 2003, the
Company issued $25.5 million aggregate principal amount of
the New Debentures in exchange for $22.5 million aggregate
principal amount of its outstanding Old Debentures and
$3.0 million in cash. The Company called the remainder, or
$18.0 million aggregate principal amount, of its Old
Debentures, and redeemed such Old Debentures on January 28,
2004. Interest on the New Debentures is payable semi-annually on
June 30th and December 30th of each year. The New
Debentures are convertible, at any time, into the Companys
Common Stock at a conversion price of $3.20 per share, and
are not callable for one year. The New Debentures may be called
by the Company at 100% of the principal amount after
one year if the Companys Common Stock closes at a
price equal to or greater than 200% of the conversion price for
20 of 30 consecutive trading days and after two years
if the Common Stock closes for a similar period at a price equal
to or greater than 150% of the conversion price. After three
years, the Company may call the New Debentures, at any time, at
100% of the principal amount regardless of the stock price.

On December 30, 2003, in connection with
closing the $30.0 million term loan supported by the
$27.0 million federal guarantee, the Company terminated its
loan facility with Foothill. The Company repaid all borrowings
outstanding with Foothill, incurred $1.3 million of fees
and expenses connected with the early termination of the loan
facility and wrote off $0.5 million of deferred issuance
fees. The Company had no current notes payable outstanding at
December 31, 2003, but did have $3.3 million of
letters of credit outstanding, which were collateralized by
$3.4 million of restricted cash. Letters of credit are
subject to a fee of 2.75% of the face amounts of the letters of
credit issued and outstanding. Subsequent to December 31,
2003, the Company moved its current outstanding letters of
credit to Wachovia Bank, N.A. (Wachovia). Letters of
credit with Wachovia are subject to a fee of 0.75% of the face
amounts of the letters of credit issued and outstanding, are
collateralized by $3.2 million of restricted cash and their
terms are one year or less.

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



| |   |                                                                                                                                                                                                                                           
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the replacement of insulation blankets on the
    Companys MD-11 aircraft by June 2005 that is expected to
    cost approximately $0.5 million per aircraft (approximately
    31% of this work has been completed at December 31, 2003);
|
| |  | the installation of enhanced ground proximity
    warning systems in its aircraft by March 2005 that is expected
    to cost approximately $77,000 per MD-11 and
    $129,000 per DC-10-30 aircraft;                                      

32



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##### 





| |   |                                                                                                                                                                                        
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the modification of thrust reversers on the
    Companys DC-10-30 aircraft by October 2006 that is
    estimated to cost approximately $0.5 million per
    aircraft; and             
|
| |  | the replacement of the ring case located in the
    compressor area of the Companys MD-11 engines by June 2009
    that is expected to cost approximately $0.3 million per
    engine.

The Company expects to finance the cost of
compliance with ADs through internally generated funds. The
estimated total cost of these modifications based on the
Companys current fleet is $9.0 million as of
December 31, 2003.

World Airways capital expenditures for
2004, other than the cost of ADs, are currently expected to be
approximately $3.0 million, principally for the purchase of
aircraft related assets, which it expects to finance from
working capital.

In 1996, in conjunction with leasing two MD-11ER
aircraft the Company agreed to assume leases of one or two
MD-11F freighter aircraft for the remainder of their 24-year
leases (that commenced in November and December 1995), in the
event that the existing lessee terminates its leases with the
lessor. As of the date hereof, the Company does not know if the
existing lessee intends to terminate the existing leases or not.
As part of the agreement for the aircraft, the lessor provided
spare parts financing of which approximately $1.1 million
is still available.

Recently Issued Accounting Standards

The Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting
Standards (SFAS) No. 132 (revised in
2003), Employers Disclosures about Pensions and Other
Postretirement Benefits, an Amendment of FASB Statements
No. 87, 88 and 106 (SFAS 132R) in
December 2003. SFAS 132R revised employers
disclosures about pension plans and other postretirement benefit
plans by requiring additional disclosures about assets,
obligations, cash flows and net periodic benefit costs.
SFAS 132R is effective for financial statements issued
after December 15, 2003 and for interim periods thereafter.
See Note 10 for the Companys disclosures required
under SFAS 132R.

In December 2003, the FASB issued a revised FASB
Interpretation No. 46 (FIN 46R),
Consolidation of Variable Interest Entities, which
addresses how a business enterprise should evaluate whether it
has a controlling financial interest in an entity through means
other than voting rights and accordingly should consolidate the
entity. FIN 46R replaces FASB Interpretation No. 46,
Consolidation of Variable Interest Entities
(VIE), which was issued in January 2003. The
application of this interpretation (or Interpretation 46)
is required in financial statements of public entities that have
interests in variable interest entities or potential variable
interest entities commonly referred to as special interest
entities for periods ending after December 15, 2003.
Application by public entities (other than small business
issuers) for all other types of entities is required in
financial statements for periods ending after March 15,
2004. For any VIEs that must be consolidated under FIN 46R
that were created before January 1, 2004, the assets,
liabilities and non-controlling interests of the VIE initially
would be measured at their carrying amounts with any difference
between the net amount added to the balance sheet and any
previously recognized interest being recognized as the
cumulative effect of an accounting change. If determining the
carrying amounts is not practicable, fair value at the date
FIN 46R first applies may be used to measure the assets,
liabilities and non-controlling interest of the VIE. The Company
currently does not have any interests in variable interest
entities or special interest entities.

FASB Statement No. 150, Accounting for
Certain Financial Instruments with Characteristics of both
Liabilities and Equity, was issued in May 2003. This
Statement establishes standards for the classification and
measurement of certain financial instruments with
characteristics of both liabilities and equity. The Statement
also includes required disclosures for financial instruments
within its scope. For the Company, the Statement was effective
for instruments entered into or modified after May 31, 2003
and otherwise was effective as of July 1, 2003. The Company
currently does not have any financial instruments that are
within the scope of this Statement.

33



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##### 



Other Matters



| |          
| | ---------
| | Inflation

The Company believes that neither inflation nor
changing prices have had a material effect on the Companys
revenues during the past three years.



| |                       
| | ----------------------
| | Corporate Headquarters

In 2001, the Company relocated its corporate
headquarters to Peachtree City, Georgia. Hollis L. Harris, World
Airways current Chairman and CEO, is a principal in the
company that owns the building for which the Company signed a
lease for a 15-year term beginning May 1, 2001. The
Companys Board of Directors verified with a nationally
recognized tenant brokerage firm that the new lease rate was
equivalent to what could be obtained in arms length
negotiations with an independent party. In addition, the lease
rate in Georgia was less than what was being paid in Virginia.
Obligations for rent under the lease aggregating
$16.1 million at December 31, 2003 are included with
future annual minimum lease payments for operating leases in
Note 8 to the Consolidated Financial Statements.

In June 2003, the Georgia Department of Revenue
approved the Companys application for the Georgia
Headquarters Job Tax Credit (the HQC). The HQC is
available for corporate taxpayers (a) establishing or
relocating their headquarters to Georgia, (b) investing a
minimum of $1 million in certain property, and
(c) employing a minimum number of new full-time employees
in the State of Georgia that pay at or above a required wage
level. This credit may be used for either corporate state income
tax or payroll withholding tax. The Company has qualified for
$510,000 and $590,000 of tax credits related to 2001 and 2002,
respectively. The application for tax credits related to 2003 is
in process at this time. If the Company continues to meet the
statutory requirements for each year that it is eligible, its
total potential net estimated benefit could be in excess of
$2.0 million on a pre-tax basis.

Subsequent to December 31, 2003, the company
that owns the building containing World Airways corporate
headquarters, of which World Airways current Chairman and
CEO is a principal, sold the building to a real estate
investment trust. In conjunction with this transaction, the
Company executed a new 15-year lease that provides for reduced
rental rates and increased flexibility for expansion. Before
approving the terms of the new lease, the Companys Board
of Directors retained both an independent outside law firm to
provide a comparative analysis as well as a national, commercial
real estate firm to independently verify that the new lease
terms did not have a material incremental financial impact on
the Company.






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

World Airways does not have any material exposure
to market risks.

With respect to interest rate risks at
December 31, 2003, interest rates on the Companys
$25.5 million long-term convertible debt obligations due in
December 2009 are fixed. Interest rates on the
$18.0 million of previously existing convertible debt due
in August 2004, which were called for redemption on
December 30, 2003, were also fixed. On December 30,
2003, the Company closed on a $30.0 million term loan of
which $27.0 million (the Tranche A Loan)
is guaranteed by the Air Transportation Stabilization Board and
$3.0 million (the Tranche B Loan) is
guaranteed by a third party. The Tranche A Loan bears an
interest rate equal to the lenders weighted average cost
of issuing commercial paper plus 0.5% per annum. The
Tranche B Loan bears an interest rate equal to LIBOR plus
1.0% per annum. Based on the balance outstanding at
December 31, 2003, each 1% change in the interest rate
would have increased or decreased the Companys annual
interest cost by approximately $300,000. On December 30,
2003, the Company also terminated its loan facility with Wells
Fargo Foothill, Inc. (Foothill). The Company
had no current notes payable outstanding at December 31,
2003 with Foothill, but did have $3.3 million of letters of
credit outstanding, which were collateralized by
$3.4 million of restricted cash. Letters of credit are
subject to a fee of 2.75% of the face amount of the letters of
credit. See Notes 6 and 7 of Notes to the
Consolidated Financial Statements in Item 8. The
Company has not entered into any obligations for trading
purposes.

34



---



##### 



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

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

35



---



##### 








|        |                                                
|------- | -----------------------------------------------
|Item 8. | Financial Statements and Supplementary
    Data

WORLD AIRWAYS, INC.

CONSOLIDATED BALANCE SHEETS

|                                                                                                                             |                                                                                                                                                                                                     |                                 |                            |         |        |        |         |         |         |        | 
|---------------------------------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------- | -------------------------- | ------- | ------ | ------ | ------- | ------- | ------- | ------ | 
|                                                                                                                             |                                                                                                                                                                                                     |                                
|                                                                                                                             |                                                                                                                                                                                                     | December 31,                   
|                                                                                                                             |                                                                                                                                                                                                     |                                
|                                                                                                                             |                                                                                                                                                                                                     | 2003                            |                            | 2002   
|                                                                                                                             |                                                                                                                                                                                                     |                                 |                            |        
|                                                                                                                             |                                                                                                                                                                                                     |                                
|                                                                                                                             |                                                                                                                                                                                                     | (In thousands                  
|                                                                                                                             |                                                                                                                                                                                                     | except share amounts)          
|ASSETS                                                                                                                      
|Current assets                                                                                                               |                                                                                                                                                                                                     |                                 |                            |         |        |        |         |        
|                                                                                                                             | Cash and cash equivalents                                                                                                                                                                           |                                 | $                          | 30,535  |        |        | $       | 20,839  |        
|                                                                                                                             | Restricted cash                                                                                                                                                                                     |                                 |                            | 23,290  |        |        |         | 665     |        
|                                                                                                                             |                                                                                                                                                                                                     |                                 |                            |         |        |        |         |        
|                                                                                                                             |                                                                                                                                                                                                     | Total cash and cash equivalents |                            |         | 53,825 |        |         |         | 21,504  |       
|                                                                                                                             | Accounts receivable, less allowance for doubtful
    accounts of $196 in 2003 and $255 in 2002                                                                                                      |                                 |                            | 31,446  |        |        |         | 28,391  |        
|                                                                                                                             | Prepaid expenses and other current assets                                                                                                                                                           |                                 |                            | 7,721   |        |        |         | 5,569   |        
|                                                                                                                             |                                                                                                                                                                                                     |                                 |                            |         |        |        |         |        
|                                                                                                                             |                                                                                                                                                                                                     |                                 | Total current assets       |         |        | 92,992 |         |         |         | 55,464 | 
|Equipment and property                                                                                                       |                                                                                                                                                                                                     |                                 |                            |         |        |        |         |        
|                                                                                                                             | Flight and other equipment                                                                                                                                                                          |                                 |                            | 86,346  |        |        |         | 84,331  |        
|                                                                                                                             | Less: accumulated depreciation and amortization                                                                                                                                                     |                                 |                            | 47,382  |        |        |         | 42,475  |        
|                                                                                                                             |                                                                                                                                                                                                     |                                 |                            |         |        |        |         |        
|                                                                                                                             |                                                                                                                                                                                                     |                                 | Net equipment and property |         |        | 38,964 |         |         |         | 41,856 | 
|Long-term deposits                                                                                                           |                                                                                                                                                                                                     |                                 | 17,664                     |         |        |        | 18,513  |        
|Other assets and deferred charges, net of
    amortization of $1,247 in 2002                                                 |                                                                                                                                                                                                     |                                 | 7,681                      |         |        |        | 1,429   |        
|                                                                                                                             |                                                                                                                                                                                                     |                                 |                            |         |        |        |         |        
|Total assets                                                                                                                 |                                                                                                                                                                                                     | $                               | 157,301                    |         |        | $      | 117,262 |        
|                                                                                                                             |                                                                                                                                                                                                     |                                 |                            |         |        |        |         |        
|LIABILITIES AND STOCKHOLDERS
    DEFICIENCY                                                                                
|Current liabilities                                                                                                          |                                                                                                                                                                                                     |                                 |                            |         |        |        |         |        
|                                                                                                                             | Notes payable                                                                                                                                                                                       |                                 | $                          |        |        |        | $       | 17,096  |        
|                                                                                                                             | Current maturities of long-term debt                                                                                                                                                                |                                 |                            | 18,000  |        |        |         |        |        
|                                                                                                                             | Accounts payable                                                                                                                                                                                    |                                 |                            | 28,167  |        |        |         | 30,497  |        
|                                                                                                                             | Accrued rent                                                                                                                                                                                        |                                 |                            | 9,881   |        |        |         | 17,993  |        
|                                                                                                                             | Unearned revenue                                                                                                                                                                                    |                                 |                            | 3,546   |        |        |         | 976     |        
|                                                                                                                             | Accrued maintenance                                                                                                                                                                                 |                                 |                            | 2,791   |        |        |         | 2,178   |        
|                                                                                                                             | Accrued salaries and wages                                                                                                                                                                          |                                 |                            | 16,957  |        |        |         | 10,000  |        
|                                                                                                                             | Accrued taxes                                                                                                                                                                                       |                                 |                            | 2,581   |        |        |         | 2,663   |        
|                                                                                                                             | Other accrued liabilities                                                                                                                                                                           |                                 |                            | 2,506   |        |        |         | 2,820   |        
|                                                                                                                             |                                                                                                                                                                                                     |                                 |                            |         |        |        |         |        
|                                                                                                                             |                                                                                                                                                                                                     | Total current liabilities       |                            |         | 84,429 |        |         |         | 84,223  |       
|                                                                                                                             |                                                                                                                                                                                                     |                                 |                            |         |        |        |         |        
|Long-term debt, net of current maturities                                                                                    |                                                                                                                                                                                                     |                                 | 57,177                     |         |        |        | 40,545  |        
|Deferred gain from sale-leaseback transactions,
    net of accumulated amortization of $3,137 in 2003 and $2,005 in
    2002 |                                                                                                                                                                                                     |                                 | 2,777                      |         |        |        | 3,909   |        
|Accrued post-retirement benefits                                                                                             |                                                                                                                                                                                                     |                                 | 3,583                      |         |        |        | 3,235   |        
|Deferred rent                                                                                                                |                                                                                                                                                                                                     |                                 | 16,008                     |         |        |        | 14,217  |        
|                                                                                                                             |                                                                                                                                                                                                     |                                 |                            |         |        |        |         |        
|Total liabilities                                                                                                            |                                                                                                                                                                                                     |                                 | 163,974                    |         |        |        | 146,129 |        
|                                                                                                                             |                                                                                                                                                                                                     |                                 |                            |         |        |        |         |        
|Stockholders deficiency                                                                                                     |                                                                                                                                                                                                     |                                 |                            |         |        |        |         |        
|                                                                                                                             | Preferred Stock, $.001 par value
    (5,000,000 shares authorized and no shares issued or
    outstanding)                                                                                          |                                 |                            |        |        |        |         |        |        
|                                                                                                                             | Common Stock, $.001 par value
    (100,000,000 shares authorized; 12,502,441 shares
    issued and 11,421,198 outstanding in 2003;
    12,158,341 shares issued and 11,077,098 outstanding in 2002) |                                 |                            | 13      |        |        |         | 12      |        
|                                                                                                                             | Additional paid-in capital                                                                                                                                                                          |                                 |                            | 31,233  |        |        |         | 24,361  |        
|                                                                                                                             | Accumulated deficit                                                                                                                                                                                 |                                 |                            | (25,062 | )      |        |         | (40,383 | )      
|                                                                                                                             | Treasury stock, at cost (Common Stock 
    1,081,243 shares in 2003 and 2002)                                                                                                                      |                                 |                            | (12,857 | )      |        |         | (12,857 | )      
|                                                                                                                             |                                                                                                                                                                                                     |                                 |                            |         |        |        |         |        
|                                                                                                                             |                                                                                                                                                                                                     | Total stockholders deficiency  |                            |         | (6,673 | )      |         |         | (28,867 | )     
|                                                                                                                             |                                                                                                                                                                                                     |                                 |                            |         |        |        |         |        
|Commitments and contingencies                                                                                                |                                                                                                                                                                                                     |                                 |                            |         |        |        |         |        
|Total liabilities and stockholders
    deficiency                                                                           |                                                                                                                                                                                                     | $                               | 157,301                    |         |        | $      | 117,262 |        
|                                                                                                                             |                                                                                                                                                                                                     |                                 |                            |         |        |        |         |        

See accompanying Notes to Consolidated Financial
Statements

36



---



##### 



WORLD AIRWAYS, INC.

CONSOLIDATED STATEMENTS OF
OPERATIONS

|                                          |                                                   |                                     |        |         |         |      |       |         |         |   |         |         |         |  
|----------------------------------------- | ------------------------------------------------- | ----------------------------------- | ------ | ------- | ------- | ---- | ----- | ------- | ------- | - | ------- | ------- | ------- | -
|                                          |                                                   |                                    
|                                          |                                                   | Years Ended December 31,           
|                                          |                                                   |                                    
|                                          |                                                   | 2003                                |        | 2002    |         | 2001
|                                          |                                                   |                                     |        |         |         |     
|                                          |                                                   |                                    
|                                          |                                                   | (In thousands                      
|                                          |                                                   | except per share amounts)          
|Operating revenues                        |                                                   |                                     |        |         |         |      |       |         |         |   |         |        
|                                          | Flight operations                                 |                                     | $      | 471,824 |         |      | $     | 382,509 |         |   | $       | 316,523 |        
|                                          | Other                                             |                                     |        | 3,026   |         |      |       | 1,980   |         |   |         | 1,343   |        
|                                          |                                                   |                                     |        |         |         |      |       |         |         |   |         |        
|                                          |                                                   | Total operating revenue             |        |         | 474,850 |      |       |         | 384,489 |   |         |         | 317,866 |  
|                                          |                                                   |                                     |        |         |         |      |       |         |         |   |         |        
|Operating expenses                        |                                                   |                                     |        |         |         |      |       |         |         |   |         |        
|                                          | Flight                                            |                                     |        | 143,640 |         |      |       | 116,012 |         |   |         | 106,022 |        
|                                          | Maintenance                                       |                                     |        | 75,513  |         |      |       | 59,628  |         |   |         | 63,560  |        
|                                          | Aircraft costs                                    |                                     |        | 85,487  |         |      |       | 86,834  |         |   |         | 77,631  |        
|                                          | Fuel                                              |                                     |        | 76,488  |         |      |       | 57,864  |         |   |         | 40,955  |        
|                                          | Flight operations subcontracted to other carriers |                                     |        | 2,454   |         |      |       | 2,087   |         |   |         | 924     |        
|                                          | Commissions                                       |                                     |        | 17,433  |         |      |       | 15,834  |         |   |         | 14,514  |        
|                                          | Depreciation and amortization                     |                                     |        | 5,239   |         |      |       | 4,525   |         |   |         | 5,908   |        
|                                          | Sales, general, and administrative                |                                     |        | 40,168  |         |      |       | 32,631  |         |   |         | 34,134  |        
|                                          | Airline stabilization act grant                   |                                     |        |        |         |      |       | 1,952   |         |   |         | (5,053  | )      
|                                          |                                                   |                                     |        |         |         |      |       |         |         |   |         |        
|                                          |                                                   | Total operating expenses            |        |         | 446,422 |      |       |         | 377,367 |   |         |         | 338,595 |  
|                                          |                                                   |                                     |        |         |         |      |       |         |         |   |         |        
|Operating income (loss)                   |                                                   |                                     | 28,428 |         |         |      | 7,122 |         |         |   | (20,729 | )      
|Other income (expense)                    |                                                   |                                     |        |         |         |      |       |         |         |   |         |        
|                                          | Interest expense                                  |                                     |        | (5,223  | )       |      |       | (4,690  | )       |   |         | (5,981  | )      
|                                          | Interest income                                   |                                     |        | 370     |         |      |       | 575     |         |   |         | 549     |        
|                                          | Other, net                                        |                                     |        | (4,452  | )       |      |       | (966    | )       |   |         | 124     |        
|                                          |                                                   |                                     |        |         |         |      |       |         |         |   |         |        
|                                          |                                                   | Total other, net                    |        |         | (9,305  | )    |       |         | (5,081  | ) |         |         | (5,308  | )
|                                          |                                                   |                                     |        |         |         |      |       |         |         |   |         |        
|Earnings (loss) before income tax expense |                                                   |                                     | 19,123 |         |         |      | 2,041 |         |         |   | (26,037 | )      
|Income tax expense                        |                                                   |                                     | 3,802  |         |         |      |      |         |         |   |        |        
|                                          |                                                   |                                     |        |         |         |      |       |         |         |   |         |        
|                                          |                                                   | Net earnings (loss)                 |        | $       | 15,321  |      |       | $       | 2,041   |   |         | $       | (26,037 | )
|                                          |                                                   |                                     |        |         |         |      |       |         |         |   |         |        
|Basic earnings (loss) per share:          |                                                   |                                     |        |         |         |      |       |         |         |   |         |        
|                                          | Net earnings (loss)                               |                                     | $      | 1.37    |         |      | $     | 0.18    |         |   | $       | (2.42   | )      
|                                          |                                                   |                                     |        |         |         |      |       |         |         |   |         |        
|                                          | Weighted average shares outstanding               |                                     |        | 11,224  |         |      |       | 11,073  |         |   |         | 10,775  |        
|                                          |                                                   |                                     |        |         |         |      |       |         |         |   |         |        
|Fully diluted earnings (loss) per share:  |                                                   |                                     |        |         |         |      |       |         |         |   |         |        
|                                          |                                                   | Net earnings (loss)                 |        | $       | 0.98    |      |       | $       | 0.18    |   |         | $       | (2.42   | )
|                                          |                                                   |                                     |        |         |         |      |       |         |         |   |         |        
|                                          |                                                   | Weighted average shares outstanding |        |         | 17,783  |      |       |         | 11,073  |   |         |         | 10,775  |  
|                                          |                                                   |                                     |        |         |         |      |       |         |         |   |         |        

See accompanying Notes to Consolidated Financial
Statements

37



---



##### 



WORLD AIRWAYS, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS DEFICIENCY

Years Ended December 31, 2003, 2002, and
2001


|                                                                                                                                 |  |                                     |    |            |  |              |        |             |  |          |        |               |  |   |         |   |  |   |         |   |  |   |         |  
|-------------------------------------------------------------------------------------------------------------------------------- |  | ----------------------------------- | -- | ---------- |  | ------------ | ------ | ----------- |  | -------- | ------ | ------------- |  | - | ------- | - |  | - | ------- | - |  | - | ------- | -
|                                                                                                                                 |  |                                     |    | Additional |  |              |        |             |  | Treasury |        | Total        
|                                                                                                                                 |  | Common                              |    | Paid-In    |  | Deferred     |        | Accumulated |  | Stock,   |        | Stockholders
|                                                                                                                                 |  | Stock                               |    | Capital    |  | Compensation |        | Deficit     |  | at Cost  |        | Deficiency   
|                                                                                                                                 |  |                                     |    |            |  |              |        |             |  |          |        |              
|                                                                                                                                 |  |                                    
|                                                                                                                                 |  | (In thousands except share amounts)
|Balance at December 31, 2000                                                                                                     |  | $                                   | 12 |            |  | $            | 23,980 |             |  | $        | (1,735 | )             |  | $ | (16,387 | ) |  | $ | (13,150 | ) |  | $ | (7,280  | )
|Common stock purchases (17,500 shares)                                                                                           |  |                                     |   |            |  |              |       |             |  |          |       |               |  |   |        |   |  |   | (18     | ) |  |   | (18     | )
|Amortization of deferred compensation, accrual of
    changes in Employee Salary Exchange Program and other
    (603,000 shares) |  |                                     |   |            |  |              |       |             |  |          | 1,735  |               |  |   |        |   |  |   | 311     |   |  |   | 2,046   |  
|Amortization of warrants                                                                                                         |  |                                     |   |            |  |              | 185    |             |  |          |       |               |  |   |        |   |  |   |        |   |  |   | 185     |  
|Net loss                                                                                                                         |  |                                     |   |            |  |              |       |             |  |          |       |               |  |   | (26,037 | ) |  |   |        |   |  |   | (26,037 | )
|                                                                                                                                 |  |                                     |    |            |  |              |        |             |  |          |        |               |  |   |         |   |  |   |         |   |  |   |         |  
|Balance at December 31, 2001                                                                                                     |  |                                     | 12 |            |  |              | 24,165 |             |  |          |       |               |  |   | (42,424 | ) |  |   | (12,857 | ) |  |   | (31,104 | )
|Exercise of 11,200 stock options                                                                                                 |  |                                     |   |            |  |              | 11     |             |  |          |       |               |  |   |        |   |  |   |        |   |  |   | 11      |  
|Accrual of changes in Employee Salary Exchange
    Program (145,000 shares)                                                      |  |                                     |   |            |  |              |       |             |  |          |       |               |  |   |        |   |  |   |        |   |  |   |        |  
|Amortization of warrants                                                                                                         |  |                                     |   |            |  |              | 185    |             |  |          |       |               |  |   |        |   |  |   |        |   |  |   | 185     |  
|Net earnings                                                                                                                     |  |                                     |   |            |  |              |       |             |  |          |       |               |  |   | 2,041   |   |  |   |        |   |  |   | 2,041   |  
|                                                                                                                                 |  |                                     |    |            |  |              |        |             |  |          |        |               |  |   |         |   |  |   |         |   |  |   |         |  
|Balance at December 31, 2002                                                                                                     |  |                                     | 12 |            |  |              | 24,361 |             |  |          |       |               |  |   | (40,383 | ) |  |   | (12,857 | ) |  |   | (28,867 | )
|Exercise of 344,100 stock options                                                                                                |  |                                     | 1  |            |  |              | 298    |             |  |          |       |               |  |   |        |   |  |   |        |   |  |   | 299     |  
|Fair market value of warrants issued                                                                                             |  |                                     |   |            |  |              | 4,792  |             |  |          |       |               |  |   |        |   |  |   |        |   |  |   | 4,792   |  
|Beneficial convertibility of debentures due in
    2009                                                                          |  |                                     |   |            |  |              | 1,357  |             |  |          |       |               |  |   |        |   |  |   |        |   |  |   | 1,357   |  
|Tax benefit of stock option exercises                                                                                            |  |                                     |   |            |  |              | 240    |             |  |          |       |               |  |   |        |   |  |   |        |   |  |   | 240     |  
|Amortization of warrants                                                                                                         |  |                                     |   |            |  |              | 185    |             |  |          |       |               |  |   |        |   |  |   |        |   |  |   | 185     |  
|Net earnings                                                                                                                     |  |                                     |   |            |  |              |       |             |  |          |       |               |  |   | 15,321  |   |  |   |        |   |  |   | 15,321  |  
|                                                                                                                                 |  |                                     |    |            |  |              |        |             |  |          |        |               |  |   |         |   |  |   |         |   |  |   |         |  
|Balance at December 31, 2003                                                                                                     |  | $                                   | 13 |            |  | $            | 31,233 |             |  | $        |       |               |  | $ | (25,062 | ) |  | $ | (12,857 | ) |  | $ | (6,673  | )
|                                                                                                                                 |  |                                     |    |            |  |              |        |             |  |          |        |               |  |   |         |   |  |   |         |   |  |   |         |  

See accompanying Notes to Consolidated Financial
Statements

38



---



##### 



WORLD AIRWAYS, INC.

CONSOLIDATED STATEMENTS OF CASH
FLOWS

|                                               |                                                                                                   |                                                                                             |                                                              |         |        |        |        |        |        |        |        |         |         |         |  
|---------------------------------------------- | ------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------- | ------------------------------------------------------------ | ------- | ------ | ------ | ------ | ------ | ------ | ------ | ------ | ------- | ------- | ------- | -
|                                               |                                                                                                   |                                                                                            
|                                               |                                                                                                   | Years Ended December 31,                                                                   
|                                               |                                                                                                   |                                                                                            
|                                               |                                                                                                   | 2003                                                                                        |                                                              | 2002    |        | 2001  
|                                               |                                                                                                   |                                                                                             |                                                              |         |        |       
|                                               |                                                                                                   |                                                                                            
|                                               |                                                                                                   | (In thousands)                                                                             
|Cash and cash equivalents at beginning of year |                                                                                                   | $                                                                                           | 21,504                                                       |         |        | $      | 19,540 |        |        | $      | 14,386 |        
|Cash flows from operating activities:          |                                                                                                   |                                                                                             |                                                              |         |        |        |        |        |        |        |        |        
|                                               | Net earnings (loss)                                                                               |                                                                                             |                                                              | 15,321  |        |        |        | 2,041  |        |        |        | (26,037 | )      
|                                               | Adjustments to reconcile net earnings (loss) to
    cash provided (used) by operating activities: |                                                                                             |                                                              |         |        |        |        |        |        |        |        |         |        
|                                               |                                                                                                   | Depreciation and amortization                                                               |                                                              |         | 5,239  |        |        |        | 4,525  |        |        |         | 5,908   |        
|                                               |                                                                                                   | Deferred gain recognition                                                                   |                                                              |         | (1,132 | )      |        |        | (2,187 | )      |        |         | (1,655  | )      
|                                               |                                                                                                   | Provision for doubtful accounts                                                             |                                                              |         | (59    | )      |        |        | (695   | )      |        |         | 1,019   |        
|                                               |                                                                                                   | Loss on debt extinguishment                                                                 |                                                              |         | 2,989  |        |        |        |       |        |        |         |        |        
|                                               |                                                                                                   | Deferred compensation and other                                                             |                                                              |         | (414   | )      |        |        | 447    |        |        |         | 2,311   |        
|                                               |                                                                                                   | Increase (decrease) in cash resulting from
    changes in operating assets and liabilities: |                                                              |         |        |        |        |        |        |        |        |         |         |        
|                                               |                                                                                                   |                                                                                             | Accounts receivable                                          |         |        | (2,996 | )      |        |        | (2,477 | )      |         |         | (10,480 | )
|                                               |                                                                                                   |                                                                                             | Deposits, prepaid expenses and other assets                  |         |        | 729    |        |        |        | 336    |        |         |         | (175    | )
|                                               |                                                                                                   |                                                                                             | Accounts payable, accrued expenses and other
    liabilities |         |        | 7,289  |        |        |        | 4,878  |        |         |         | 12,386  |  
|                                               |                                                                                                   |                                                                                             | Unearned revenue                                             |         |        | 2,570  |        |        |        | (2,424 | )      |         |         | (2,878  | )
|                                               |                                                                                                   |                                                                                             |                                                              |         |        |        |        |        |        |        |        |        
|                                               |                                                                                                   | Net cash provided (used) by operating
    activities                                        |                                                              |         | 29,536 |        |        |        | 4,444  |        |        |         | (19,601 | )      
|                                               |                                                                                                   |                                                                                             |                                                              |         |        |        |        |        |        |        |        |        
|Cash flows from investing activities:          |                                                                                                   |                                                                                             |                                                              |         |        |        |        |        |        |        |        |        
|                                               | Purchases of equipment and property                                                               |                                                                                             |                                                              | (2,773  | )      |        |        | (5,184 | )      |        |        | (3,563  | )      
|                                               | Proceeds from disposals of equipment and property                                                 |                                                                                             |                                                              | 18      |        |        |        | 164    |        |        |        | 996     |        
|                                               | Maturities of marketable investments, net                                                         |                                                                                             |                                                              |        |        |        |        |       |        |        |        | 1,685   |        
|                                               |                                                                                                   |                                                                                             |                                                              |         |        |        |        |        |        |        |        |        
|                                               |                                                                                                   | Net cash used by investing activities                                                       |                                                              |         | (2,755 | )      |        |        | (5,020 | )      |        |         | (882    | )      
|                                               |                                                                                                   |                                                                                             |                                                              |         |        |        |        |        |        |        |        |        
|Cash flows from financing activities:          |                                                                                                   |                                                                                             |                                                              |         |        |        |        |        |        |        |        |        
|                                               | (Decrease) increase in notes payable                                                              |                                                                                             |                                                              | (17,096 | )      |        |        | (2,659 | )      |        |        | 8,224   |        
|                                               | Deferral (repayments) of aircraft rent
    obligations, net                                       |                                                                                             |                                                              | (8,418  | )      |        |        | 7,284  |        |        |        | 9,760   |        
|                                               | Proceeds from issuance of debentures due in 2009,
    net of debentures due in 2004 exchanged     |                                                                                             |                                                              | 3,000   |        |        |        |       |        |        |        |        |        
|                                               | Proceeds from issuance of ATSB guaranteed term
    loan                                           |                                                                                             |                                                              | 30,000  |        |        |        |       |        |        |        |        |        
|                                               | Repayment of debt                                                                                 |                                                                                             |                                                              |        |        |        |        | (2,096 | )      |        |        | (9,852  | )      
|                                               | Payment of debt issuance costs                                                                    |                                                                                             |                                                              | (2,245  | )      |        |        |       |        |        |        |        |        
|                                               | Proceeds of sale/leaseback transactions                                                           |                                                                                             |                                                              |        |        |        |        |       |        |        |        | 17,505  |        
|                                               | Proceeds from exercise of stock options                                                           |                                                                                             |                                                              | 299     |        |        |        | 11     |        |        |        |        |        
|                                               |                                                                                                   |                                                                                             |                                                              |         |        |        |        |        |        |        |        |        
|                                               |                                                                                                   | Net cash provided by financing activities                                                   |                                                              |         | 5,540  |        |        |        | 2,540  |        |        |         | 25,637  |        
|                                               |                                                                                                   |                                                                                             |                                                              |         |        |        |        |        |        |        |        |        
|Net increase in cash and cash equivalents      |                                                                                                   |                                                                                             | 32,321                                                       |         |        |        | 1,964  |        |        |        | 5,154  |        
|                                               |                                                                                                   |                                                                                             |                                                              |         |        |        |        |        |        |        |        |        
|Cash and cash equivalents at end of year       |                                                                                                   | $                                                                                           | 53,825                                                       |         |        | $      | 21,504 |        |        | $      | 19,540 |        
|                                               |                                                                                                   |                                                                                             |                                                              |         |        |        |        |        |        |        |        |        

See accompanying Notes to Consolidated Financial
Statements

39



---



##### 



WORLD AIRWAYS, INC.

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS



|   |                                               
|-- | ----------------------------------------------
|1. | Summary of Significant Accounting
    Policies



| |             
| | ------------
| | Organization

The accompanying consolidated financial
statements include the accounts of World Airways, Inc. and
its wholly-owned subsidiary, World Airways Parts Company LLC
(World Airways or the Company). All
significant inter-company accounts and transactions have been
eliminated. World Airways, Inc. was organized in March 1948
and is a U.S. certificated air carrier. Air transportation
operations account for 100% of the Companys operating
revenue. World Airways provides long-range passenger and cargo
charter and wet lease air transportation, serving the
U.S. Government, international passenger and cargo air
carriers, tour operators, international freight forwarders and
cruise ship companies (see Note 12).



| |                                          
| | -----------------------------------------
| | Financial Statement
    Reclassifications

Certain items in the prior year financial
statements included herein have been reclassified to conform to
the 2003 financial statement presentation.



| |                    
| | -------------------
| | Segment Information

World Airways operates within one segment, air
transportation.



| |                 
| | ----------------
| | Use of Estimates

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



| |                 
| | ----------------
| | Cash Equivalents

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

Restricted cash consists of amounts required to
pay off senior convertible debentures called on
December 30, 2003, letters of credit that had to be secured
by cash collateral, and prepayments from customers for flights
that are scheduled to be flown within 30 days of the
balance sheet date.



| |                    
| | -------------------
| | Revenue Recognition

Revenues are recognized as the transportation
services are provided.



| |             
| | ------------
| | Income Taxes

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

40



---



##### 



WORLD AIRWAYS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



| |                          
| | -------------------------
| | Earnings (Loss) Per Share

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



| |                       
| | ----------------------
| | Equipment and Property

Equipment and property are stated at cost or, if
acquired under capital leases, at the present value of minimum
lease payments.

Provisions for depreciation and amortization of
equipment and property are computed over estimated useful lives
or the term of the lease, if shorter, for capital leases, by the
straight-line method, with estimated salvage values of 0-15%.
Estimated useful lives of equipment and property are as follows:

|                                 |  |  |              | 
|-------------------------------- |  |  | ------------ | 
|DC-10 and MD-11 flight equipment |  |  | 15-16  years | 
|Other equipment and property     |  |  | 5-7 years    | 

Major modifications and improvements to capital
equipment, including those performed in response to
Airworthiness Directives issued by the Federal Aviation
Administration, are capitalized at cost. Routine maintenance and
repairs are expensed as incurred.

Deferred gains realized in connection with the
sale-leaseback of aircraft and equipment are amortized over the
periods of the respective leases.



| |                     
| | --------------------
| | Aircraft Maintenance

Airframe and engine maintenance costs are
recognized using the direct expense method of accounting. Under
this method, maintenance costs are recognized as expense as
maintenance services are performed and as flight hours are flown
for nonrefundable maintenance payments required by lease
agreements.



| |                                    
| | -----------------------------------
| | Impairment of Long-Lived
    Assets

The Company reviews its long-lived assets used in
operations for impairment whenever events or circumstances
indicate that the carrying amount of an asset may not be
recoverable. To the extent that the future undiscounted net cash
flows expected to be generated from an asset are less than the
carrying amount of the asset, an impairment loss will be
recognized based on the difference between the assets
carrying amount and its estimated fair market value.



| |                       
| | ----------------------
| | Exit or Disposal Costs

Liabilities for costs associated with an exit or
disposal activity are recognized and measured at their fair
value in the period in which the liability is incurred.
Liabilities for costs to terminate a contract before the end of
its term are recognized and measured at their fair value when
the Company terminates the contract in accordance with the
contract terms. Liabilities for costs that will continue to be
incurred under a contract for its remaining term without
economic benefit to the Company are recognized and measured at
their fair value when the Company ceases using the right
conveyed by the contract. If the contract is an operating lease,
the fair value of the liability at the cease-use date is
determined based on the remaining lease rentals, reduced by the
sublease rentals that can be reasonably obtained for the
property.



| |                                      
| | -------------------------------------
| | Other Assets and Deferred
    Charges

Debt issuance costs are amortized on a
straight-line basis over the period the related debt is expected
to be outstanding.

41



---



##### 



WORLD AIRWAYS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The fair market value of the warrants issued to
the Air Transportation Stabilization Board in connection with
the loan guarantee is recorded as a long-term other asset and
amortized to December 2008 using the interest method (see
Note 7).



| |                                                 
| | ------------------------------------------------
| | Post-retirement Benefits Other Than
    Pensions

World Airways cockpit crewmembers and
eligible dependents are covered under post-retirement health
care benefits to age 65. The Company accounts for the
benefit costs in accordance with Statement of Financial
Accounting Standards No. 106, Employers Accounting
for Post-retirement Benefits Other Than Pensions
(FAS No. 106). The Company funds the
benefit costs on a pay-as-you-go (cash) basis.



| |                                            
| | -------------------------------------------
| | Accounting for Stock-Based
    Compensation

At December 31, 2003, the Company had three
stock-based compensation plans, which are described more fully
in Note 9. The Company accounts for those plans under the
recognition and measurement principles of Accounting Principles
Board (APB) Opinion No. 25, Accounting for
Stock Issued to Employees, and related Interpretations. No
stock-based compensation cost is reflected in net earnings
(loss), as all options granted under those plans had an exercise
price equal to the market value of the underlying common stock
on the date of grant. The following table illustrates the effect
on net earnings (loss) and earnings (loss) per share if the
Company had applied the fair value recognition provisions of
FASB Statement No. 123, Accounting for Stock-Based
Compensation,to stock-based compensation (in thousands,
except share data):

|                                                                                                                                           |                       |                         |        |      |  |      |       |      |  |   |         |       |  
|------------------------------------------------------------------------------------------------------------------------------------------ | --------------------- | ----------------------- | ------ | ---- |  | ---- | ----- | ---- |  | - | ------- | ----- | -
|                                                                                                                                           |                       |                        
|                                                                                                                                           |                       | Year Ended December 31,
|                                                                                                                                           |                       |                        
|                                                                                                                                           |                       | 2003                    |        | 2002 |  | 2001
|                                                                                                                                           |                       |                         |        |      |  |     
|Net earnings (loss), as reported                                                                                                           |                       | $                       | 15,321 |      |  | $    | 2,041 |      |  | $ | (26,037 | )    
|Deduct: Total stock-based compensation expense
    determined under fair value based method for all awards, net of
    related tax effects |                       |                         | (528   | )    |  |      | (877  | )    |  |   | (1,513  | )    
|                                                                                                                                           |                       |                         |        |      |  |      |       |      |  |   |         |      
|Pro forma net income (loss)                                                                                                                |                       |                         | 14,793 |      |  |      | 1,164 |      |  |   | (27,550 | )    
|Earnings (loss) per share                                                                                                                  |                       |                         |        |      |  |      |       |      |  |   |         |      
|                                                                                                                                           | Basic  as reported   |                         | $      | 1.37 |  |      | $     | 0.18 |  |   | $       | (2.42 | )
|                                                                                                                                           | Basic  pro forma     |                         | $      | 1.32 |  |      | $     | 0.11 |  |   | $       | (2.56 | )
|                                                                                                                                           | Diluted  as reported |                         | $      | 0.98 |  |      | $     | 0.18 |  |   | $       | (2.42 | )
|                                                                                                                                           | Diluted  pro forma   |                         | $      | 0.95 |  |      | $     | 0.07 |  |   | $       | (2.56 | )

The per share weighted-average fair value of
stock options granted during 2003, 2002 and 2001 was $1.08,
$0.86, and $0.81, respectively, on the date of grant using the
Black Scholes option-pricing model with the following
weighted-average assumptions:

|                         |  |      |     |      |  |      |     |   |  |  |     |  
|------------------------ |  | ---- | --- | ---- |  | ---- | --- | - |  |  | --- | -
|                         |  | 2003 |     | 2002 |  | 2001
|                         |  |      |     |      |  |     
|Expected dividend yield  |  |      | 0   | %    |  |      | 0   | % |  |  | 0   | %
|Risk-free interest rate  |  |      | 3.1 | %    |  |      | 4.1 | % |  |  | 4.3 | %
|Expected life (in years) |  |      | 5.2 |      |  |      | 4.9 |   |  |  | 5.2 |  
|Expected volatility      |  |      | 102 | %    |  |      | 141 | % |  |  | 102 | %



| |                                         
| | ----------------------------------------
| | Recently Issued Accounting
    Standards

The Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting
Standards (SFAS) No, 132 (revised in 2003),
Employers Disclosures about Pensions and Other
Postretire-

42



---



##### 



WORLD AIRWAYS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

ment Benefits, an amendment of FASB Statements
No. 87, 88 and 106(SFAS 132R) in
December 2003. SFAS 132R revised employers
disclosures about pension plans and other postretirement benefit
plans by requiring additional disclosures about assets,
obligations, cash flows and net periodic benefit costs.
SFAS 132R is effective for financial statements issued
after December 15, 2003 and for interim periods thereafter.
See Note 10 for the Companys disclosures required
under SFAS 132R.

In December 2003, the FASB issued a revised FASB
Interpretation No. 46 (FIN 46R),
Consolidation of Variable Interest Entities, which
addresses how a business enterprise should evaluate whether it
has a controlling financial interest in an entity through means
other than voting rights and accordingly should consolidate the
entity. FIN 46R replaces FASB Interpretation No. 46,
Consolidation of Variable Interest Entities(VIE), which was issued in January 2003. The
application of this interpretation (or Interpretation 46) is
required in financial statements of public entities that have
interests in variable interest entities or potential variable
interest entities commonly referred to as special interest
entities for periods ending after December 15, 2003.
Application by public entities (other than small business
issuers) for all other types of entities is required in
financial statements for periods ending after March 15,
2004. For any VIEs that must be consolidated under FIN 46R
that were created before January 1, 2004, the assets,
liabilities and non-controlling interests of the VIE initially
would be measured at their carrying amounts with any difference
between the net amount added to the balance sheet and any
previously recognized interest being recognized as the
cumulative effect of an accounting change. If determining the
carrying amounts is not practicable, fair value at the date
FIN 46R first applies may be used to measure the assets,
liabilities and non-controlling interest of the VIE. The Company
currently does not have any interests in variable interest
entities or special interest entities.

FASB Statement No. 150, Accounting for
Certain Financial Instruments with Characteristics of both
Liabilities and Equity,was issued in May 2003. This
Statement establishes standards for the classification and
measurement of certain financial instruments with
characteristics of both liabilities and equity. The Statement
also includes required disclosures for financial instruments
within its scope. For the Company, the Statement was effective
for instruments entered into or modified after May 31, 2003
and otherwise was effective as of July 1, 2003. The Company
currently does not have any financial instruments that are
within the scope of this Statement.



|   |                                    
|-- | -----------------------------------
|2. | Operating Environment and Liquidity

The terrorist attacks of September 11, 2001
continued to have a significant effect on the entire
U.S. air transportation industry, with lower demand for
travel, more price competition and increased costs for security
and aviation insurance. During 2003, the war and conflict in
Iraq had a significant effect on the Company due to the
increased demand for military flying. In February 2003, the
Secretary of Defense gave authority to the commander,
U.S. Transportation Command (USTRANSCOM) to activate
Stage I of the Civil Reserve Air Fleet (CRAF)
to provide the Department of Defense additional airlift
capability to move U.S. troops and military cargo. This
measure was necessary due to increased operations associated
with the build-up of U.S. forces in the Persian Gulf
region. CRAF aircraft are U.S. commercial passenger and
cargo aircraft that are contractually pledged to move passengers
and cargo when the Department of Defenses airlift
requirements exceed the capability of U.S. military
aircraft and volunteer commercial aircraft.

The authority to activate CRAF Stage I
involved 22 U.S. airline companies and their
78 commercial aircraft  47 passenger aircraft
and 31 wide-body cargo aircraft. While this authority was
for all 78 commercial aircraft in the CRAF Stage I program,
the USTRANSCOM commander only activated 47 passenger aircraft.
U.S. military airlift aircraft and CRAF volunteered
commercial cargo aircraft met the cargo airlift requirements.
The Company had three MD-11 passenger aircraft activated under
CRAF Stage I, which ended in June 2003.

43



---



##### 



WORLD AIRWAYS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

World Airways is highly leveraged. At
December 31, 2003, World Airways current assets were
$93.0 million, which included the $18.8 million of
restricted cash to pay the principal and interest on the
convertible debentures called in December 2003. The
Companys current liabilities were $84.4 million,
which included current maturities of long-term debt of
$18.0 million that were redeemed on January 28, 2004.
As of December 31, 2003, the Company had a
$30.0 million term loan, with three annual principal
payments of $6.0 million commencing December 2005 and a
final payment of $12.0 million due in December 2008. The
Company also had outstanding long-term debt of
$27.2 million, which has a principal amount of
$25.5 million and is due December 2009. In addition, the
Company has significant long-term obligations relating to
operating leases for aircraft and spare engines.

See Operating Leases in Note 8
for information on amendments to the Companys aircraft
lease agreements.

The Company has historically financed working
capital and capital expenditure requirements out of cash flow
from operating activities, secured borrowings, sales of its
Common Stock and other financings. The degree to which the
Company is leveraged could have important consequences
including: (i) World Airways ability to obtain
additional financing in the future for working capital, capital
expenditures or other purposes may be limited; (ii) a
substantial portion of the Companys cash flow from
operations must be dedicated to the payment of principal and
interest on its indebtedness; (iii) World Airways
degree of leverage and related debt service obligations, as well
as its obligations under operating leases, may make it more
vulnerable than some of its competitors in a prolonged economic
downturn; and (iv) World Airways financial position
may restrict its ability to pursue new business opportunities
and limit its flexibility in responding to changing business
conditions.

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

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

Factors that affect the Companys ability to
achieve high utilization of its aircraft include the
compatibility of the Companys aircraft with customer needs
and the Companys ability to react on short notice to
customer requirements (which can be unpredictable due to changes
in traffic rights, aircraft delivery schedules and aircraft
maintenance requirements). Other factors that affect the Company
include domestic and foreign regulatory requirements, as well as
a trend towards aviation deregulation that is increasing
alliances and code share arrangements.

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

The Company has unsold capacity in the second
quarter of 2004 and beyond; however, historically it has been
successful in obtaining additional business to utilize some or
all of its available capacity. Although there

44



---



##### 



WORLD AIRWAYS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

can be no assurance that it will be able to
secure additional business to utilize unsold capacity, the
Company is actively seeking additional business for 2004 and
beyond.

Although there can be no assurances, the Company
believes the combination of its existing contracts and
additional business that it expects to obtain, along with its
existing cash and financing arrangements, will be sufficient to
allow the Company to meet its cash requirements related to
operating and capital requirements for 2004.

3.     Supplemental
Information  Statements of Cash Flows

Additional information pertaining to certain cash
payments and non-cash investing and financing activities is as
follows (in thousands):

|               |              |                          |   |       |  |      |   |       |  |  |   |       | 
|-------------- | ------------ | ------------------------ | - | ----- |  | ---- | - | ----- |  |  | - | ----- | 
|               |              |                         
|               |              | Years Ended December 31,
|               |              |                         
|               |              | 2003                     |   | 2002  |  | 2001
|               |              |                          |   |       |  |     
|Cash paid for: |              |                          |   |       |  |      |   |       |  |  |   |      
|               | Interest     |                          | $ | 4,662 |  |      | $ | 3,407 |  |  | $ | 4,582 | 
|               |              |                          |   |       |  |      |   |       |  |  |   |      
|               | Income taxes |                          | $ | 3,819 |  |      | $ |      |  |  | $ |      | 
|               |              |                          |   |       |  |      |   |       |  |  |   |      



|   |                                              
|-- | ---------------------------------------------
|4. | Prepaid Expenses and Other Current
    Assets

Prepaid expenses and other current assets consist
of the following (in thousands):

|             |       |              |       |       |  |   |       |       | 
|------------ | ----- | ------------ | ----- | ----- |  | - | ----- | ----- | 
|             |       |             
|             |       | December 31,
|             |       |             
|             |       | 2003         |       | 2002 
|             |       |              |       |      
|Prepaid rent |       | $            | 3,109 |       |  | $ | 3,094 |      
|Deposits     |       |              | 2,293 |       |  |   | 1,643 |      
|Other        |       |              | 2,319 |       |  |   | 832   |      
|             |       |              |       |       |  |   |       |      
|             | Total |              | $     | 7,721 |  |   | $     | 5,569 | 
|             |       |              |       |       |  |   |       |      



|   |                                  
|-- | ---------------------------------
|5. | Other Assets and Deferred Charges

Other assets and deferred charges consist of the
following (in thousands):

|                                                       |       |              |       |       |  |   |        |       | 
|------------------------------------------------------ | ----- | ------------ | ----- | ----- |  | - | ------ | ----- | 
|                                                       |       |             
|                                                       |       | December 31,
|                                                       |       |             
|                                                       |       | 2003         |       | 2002 
|                                                       |       |              |       |      
|Fair market value of ATSB warrants                     |       | $            | 4,792 |       |  | $ |       |      
|Debt issuance costs  convertible debt
    due in 2009 |       |              | 1,507 |       |  |   | 393    |      
|Debt issuance costs  term loan due in
    2008        |       |              | 1,262 |       |  |   | 129    |      
|Debt issuance costs  Wells Fargo
    Foothill         |       |              |      |       |  |   | 619    |      
|Debt issuance costs  convertible debt
    due in 2004 |       |              |      |       |  |   | 1,510  |      
|Other                                                  |       |              | 120   |       |  |   | 25     |      
|                                                       |       |              |       |       |  |   |        |      
|                                                       |       |              | 7,681 |       |  |   | 2,450  |      
|Accumulated amortization                               |       |              |      |       |  |   | (1,247 | )    
|                                                       |       |              |       |       |  |   |        |      
|                                                       | Total |              | $     | 7,681 |  |   | $      | 1,429 | 
|                                                       |       |              |       |       |  |   |        |      

45



---



##### 



WORLD AIRWAYS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



|   |              
|-- | -------------
|6. | Notes Payable

On December 30, 2003, in connection with the
closing of the $30.0 million term loan supported by the
$27.0 million federal guarantee (see Note 7), the
Company terminated its loan facility with Foothill. The Company
repaid all borrowings outstanding with Foothill, incurred
$1.3 million of fees and expenses connected with the early
termination of the loan facility and wrote off $0.5 million
of deferred issuance fees. Accordingly, the Company had no
current notes payable outstanding at December 31, 2003, but
did have $3.3 million of letters of credit outstanding,
which were collateralized by $3.4 million of restricted
cash. Letters of credit with Foothill were subject to a fee of
2.75% of the face amounts of the letters of credit issued and
outstanding. Subsequent to December 31, 2003, the Company
moved its current outstanding letters of credit to Wachovia
Bank, N.A. (Wachovia), which are collateralized by
$3.2 million of restricted cash. Letters of credit with
Wachovia are subject to a fee of 0.75% of the face amounts of
the letters of credit issued and outstanding, and their terms
are one year or less.



|   |               
|-- | --------------
|7. | Long-term Debt

The Companys long-term debt, including
current maturities thereof, at December 31 are as follows
(in thousands):

|                                                                                                                                                                                                                         |                                                 |      |        |        |  |   |        |        | 
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | ----------------------------------------------- | ---- | ------ | ------ |  | - | ------ | ------ | 
|                                                                                                                                                                                                                         |                                                 | 2003 |        | 2002  
|                                                                                                                                                                                                                         |                                                 |      |        |       
|Term loan, with variable interest payable
    semi-annually and three annual principal payments of
    $6.0 million commencing December 2005, with a final payment
    of $12.0 million due in December 2008             |                                                 | $    | 30,000 |        |  | $ |       |       
|Convertible senior subordinated debentures due
    December 2009  principal amount of $25.5 million
    with interest at 8% payable semi-annually                                                                       |                                                 |      | 27,177 |        |  |   |       |       
|Convertible senior subordinated debentures due
    August 2004, the balance of which were called on
    December 30, 2003 with a redemption date of
    January 28, 2004  with interest at 8% payable
    semi-annually |                                                 |      | 18,000 |        |  |   | 40,545 |       
|                                                                                                                                                                                                                         |                                                 |      |        |        |  |   |        |       
|                                                                                                                                                                                                                         | Total                                           |      |        | 75,177 |  |   |        | 40,545 | 
|Less: current maturities                                                                                                                                                                                                 |                                                 |      | 18,000 |        |  |   |       |       
|                                                                                                                                                                                                                         |                                                 |      |        |        |  |   |        |       
|                                                                                                                                                                                                                         | Total long-term debt, net of current maturities |      | $      | 57,177 |  |   | $      | 40,545 | 
|                                                                                                                                                                                                                         |                                                 |      |        |        |  |   |        |       

On December 30, 2003, the Company closed a
$30.0 million term loan of which $27.0 million
(Tranche A Loan) is guaranteed by the Air
Transportation Stabilization Board (ATSB) and
$3.0 million (Tranche B Loan) is
guaranteed by another third party. The Companys
obligations under the loan agreement are secured by
substantially all of the assets of the Company and its
subsidiary. The Tranche A Loan bears an interest rate equal
to the lenders weighted average cost of issuing commercial
paper plus 0.5% per annum. The Tranche B Loan bears
interest at a rate equal to LIBOR plus 1.0% per annum.
Interest on the term loan is payable semi-annually on
June 12th and December 12th of each year. At
December 31, 2003, the blended rate on both Tranches
approximated 2%. The Company is required to pay semi-annual
guarantee fees commencing on the date of the closing of the term
loan (i) to the ATSB at an annual rate of 4.5% of the
principal amount of the Tranche A Loan scheduled to be
outstanding for the interest periods ending on June 12 and
December 12, 2004, increasing by 0.5% each year for
subsequent semi-annual interest periods through
December 12, 2008; and (ii) to the guarantor of the
Tranche B Loan at an annual rate of 3.0% of the principal
amount of the Tranche B Loan scheduled to be outstanding
for the interest periods ending on June 12th and
December 12th through December 12, 2008. The principal
amount of the term loan will be repaid in three annual
installments of $6.0 million each, commencing on
December 12, 2005, and a final fourth installment of
$12.0 million due on December 12, 2008. The Company
will be required to pre-pay the term loan, subject to certain
limitations and exclusions, from (a) the proceeds of future
borrowings from other sources and issuances of debt or equity
securities; (b) the proceeds of any significant asset
sales; and (c) the

46



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##### 



WORLD AIRWAYS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

net proceeds from insurance or condemnation. In
the event of a change in control, as defined in the loan
agreement, the ATSB will have the right to require the Company
to repay the term loan in full.

The loan agreement contains negative covenants
that limit the Companys ability to (a) grant
additional liens on its property; (b) make significant
investments; (c) pay dividends, redeem capital stock or
repay indebtedness other than the term loan; (d) liquidate,
wind up, dissolve or engage in certain acquisitions;
(e) engage in certain sale-leaseback transactions;
(f) engage in certain transactions with affiliates;
(g) engage in any business unrelated to its existing
business; (h) consolidate, merge with or into another
entity or sell substantially all of its assets unless certain
conditions are satisfied; (i) engage in certain assets
sales; (j) create or acquire certain subsidiaries;
(k) enter into joint ventures involved in speculative
transactions; (l) amend the terms of agreements relating to
the Companys other indebtedness for borrowed money;
(m) enter into any going-private transactions;
(n) grant any additional negative pledges; or
(o) re-price outstanding stock options. In addition, the
loan agreement contains certain financial covenants requiring
the Company to maintain a certain amount of unrestricted cash
and cash equivalents and to comply with certain financial
ratios, including indebtedness to EBITDAR (earnings before
interest, taxes, depreciation, amortization and aircraft rent)
and EBITDAR to fixed charges.

The Company issued to the ATSB, as additional
compensation for the federal loan guarantee, warrants to
purchase an aggregate of 2,378,223 shares of Common Stock.
The warrants were vested and fully exercisable at the date of
grant. The Company recorded the fair value of these warrants as
an addition to other long-term assets, with a credit to
additional paid in capital. This long-term asset will be
amortized over to December 2008 using the interest method (see
Note 9).

In addition, on December 30, 2003, the
Company issued $25.5 million aggregate principal amount of
new 8.0% Convertible Senior Subordinated Debentures due in
2009 (the New Debentures), in exchange for
$22.5 million aggregate principal amount of its then
outstanding 8.0% Convertible Senior Subordinated Debentures
due in 2004 (the Old Debentures) and
$3.0 million in cash. The Company called for redemption the
remainder, or $18.0 million aggregate principal amount, of
its Old Debentures which were redeemed on January 28, 2004.
Interest on the New Debentures is payable semi-annually on
June 30th and December 30th of each year. The New
Debentures are convertible, at any time, into the Companys
Common Stock at a conversion price of $3.20 per share, and
are not callable for one year. The New Debentures may be called
by the Company at 100% of the principal amount after one year if
the Companys Common Stock closes at a price equal to or
greater than 200% of the conversion price for 20 of
30 consecutive trading days and after two years if the
Common Stock closes for a similar period at a price equal to or
greater than 150% of the conversion price. After three years,
the Company may call the New Debentures, at any time, at 100% of
the principal amount regardless of the stock price. Until the
date that all of the New Debentures have been converted into the
Companys Common Stock, the Company may not, directly or
indirectly, declare or pay any cash dividend, or make any other
cash payment or distribution, on account of the Common Stock or
to the direct or indirect holders of its Common Stock. The
conversion price of the New Debentures is subject to customary
anti-dilution adjustments. The holders of the New Debentures
have the right to require the Company to repurchase all or any
part of the New Debentures upon the occurrence of (a) a
change in control, as defined in the indenture governing the New
Debentures (the New Indenture), or (b) a
termination of trading of the Common Stock of the Company, as
defined in the New Indenture, in each case at a price equal to
100% of the principal amount thereof together with accrued and
unpaid interest to the repurchase date.

Because the New Debentures and the Old Debentures
had substantially different terms under Emerging Issues Task
Force (EITF) No. 96-19, Debtors
Accounting for a Modification or Exchange of Debt
Instruments, the New Debentures were recorded at their
estimated fair value of $28.5 million at the time of
issuance on December 30, 2003. The following are the key
assumptions used in determining the fair value of the New
Debentures: principal amount of $25.5 million, closing
stock price of $3.37 per share, risk free interest rate of
1.28%, expected volatility of 50%, and average life of
2.5 years. Because the fair value of the

47



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##### 



WORLD AIRWAYS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

New Debentures exceeded the carrying amount of
the Old Debentures, the Company recorded a loss on debt
extinguishment of $3.0 million in December 2003.
Amortization of the excess of the fair value of
$28.5 million over the par amount of $25.5 million
will be recognized over the term of the New Debentures as a
credit to interest expense.

The closing price of the Companys Common
Stock on December 30, 2003 was $3.37, which was greater
than the New Debentures conversion price of $3.20. This
in the money conversion feature was valued at
$1.4 million which was computed by multiplying
7,982,813 shares ($25,545,000 principal amount of New
Debentures/ $3.20 conversion price) by $0.17 per share (the
$3.37 closing price on December 30, 2003 less the
$3.20 conversion price). Amortization of this debt discount
will be on a straight-line basis over the term of the New
Debentures and charged to interest expense. If a conversion
takes place prior to the end of the term of the New Debentures,
a pro-rated portion of the unamortized debt discount then
remaining will be recognized as interest expense.

The following table summarizes balances recorded
related to the New Debentures as well as the accounting method
(in thousands):

|                                  |                           |                   |        |                   |   |                                                                                                                                                                          |                                       
|--------------------------------- | ------------------------- | ----------------- | ------ | ----------------- | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | --------------------------------------
|                                  |                           | Balance at        |        |                  
|                                  |                           | December 31, 2003 |        | Accounting Method
|                                  |                           |                   |        |                  
|Fair value of New Debentures      |                           | $                 | 28,534 |                   |   | The excess of fair value over the principal
    amount is amortized as a reduction of interest expense on a
    straight-line basis over the term of the New Debentures.
|Discount on New Debentures due to |                           |                   |        |                   |   |                                                                                                                                                                         
|                                  | beneficial convertibility |                   |        | (1,357            | ) |                                                                                                                                                                          | This discount is amortized as interest
|                                  |                           |                   |        |                   |   | expense on a straight-line basis over the term of
    New Debentures, or until a conversion occurs.                                                                     
|Convertible senior subordinated   |                           |                   |        |                   |   |                                                                                                                                                                         
|                                  | Debentures due 2009, net  |                   | $      | 27,177            |   |                                                                                                                                                                          |                                       
|                                  |                           |                   |        |                   |   |                                                                                                                                                                         

The following table shows annual amounts of
scheduled principal maturities of debt outstanding at
December 31, 2003 (in thousands):

|      |  |   |        | 
|----- |  | - | ------ | 
|2004  |  | $ | 18,000 | 
|2005  |  |   | 6,000  | 
|2006  |  |   | 6,000  | 
|2007  |  |   | 6,000  | 
|2008  |  |   | 12,000 | 
|2009  |  |   | 25,545 | 
|      |  |   |        | 
|Total |  | $ | 73,545 | 
|      |  |   |        | 



|   |                 
|-- | ----------------
|8. | Operating Leases

At December 31, 2003, the Companys
operating fleet consisted of eleven MD-11 and seven DC-10-30
aircraft, all of which are leased under operating leases. The
MD-11 aircraft included eight passenger aircraft (four of which
are long-range versions) and three freighter aircraft. The
DC-10-30 aircraft included four freighter aircraft and three
passenger aircraft. One DC-10-30 freighter aircraft was returned
to its lessor in the first quarter of 2004. The term of the
lease agreement for another DC-10 freighter aircraft has
expired. The

48



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##### 



WORLD AIRWAYS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Company is currently negotiating with the lessor
regarding various issues relating to the return of this
aircraft. Under the terms of the lease, the Company has
continued to pay rent on a month-to-month basis on this aircraft
until its return is accepted by the lessor.

In prior years, the Company paid amounts less
than its contractual aircraft rent obligations in order to
conserve cash. The Company continued to recognize expense for
the full amount of its contractual rent payments due. The
accrual for unpaid contractual rent obligations was
$8.9 million and $17.0 million at December 31,
2003 and 2002, respectively. This accrual is included as accrued
rent in the current liabilities section of the Consolidated
Balance Sheet. The Companys aircraft lessors agreed to
amended terms of the aircraft lease agreements to provide for
the repayment of the unpaid contractual rent obligations. The
amended lease terms on leases for which the Company is still
obligated to repay rent as of December 31, 2003, provide
for repayment of contractual rent obligations based on a
percentage of profits in future years.

Lease terms for three DC-10 aircraft expire in
the second half of 2004, and two expire in 2008. The lease terms
for five of the MD-11 aircraft expire throughout 2005 and 2006,
and three expire in 2008. The three that expire in 2008
previously had lease terms that were to expire in 2005. These
leases were extended in conjunction with the closing of the ATSB
guaranteed loan which occurred on December 30, 2003. The
three remaining MD-11 aircraft leases were amended in the first
quarter of 2004, and these amendments include changes to the
lease expiration dates. The term for one aircraft will expire in
January 2006, and may be automatically extended for a one-year
period depending on the market price of the Companys
Common Stock during a specified time period. If the lease is
extended, there is a further provision that would allow for a
second automatic one-year extension through January 2008, which
is also dependent on the market price of the Companys
Common Stock during a specified period of time. If at any time
during the term of the lease, the Companys Common Stock is
no longer traded publicly, the lease term for this aircraft is
automatically extended to expire in January 2008. The remaining
two MD-11 leases, which were also restructured in the first
quarter of 2004, will now expire in either 2011 or 2012,
depending on the Companys ability to meet certain
financial conditions.

In 1999, the Company granted warrants to each of
two MD-11 aircraft lessors to purchase up to one million shares
of Common Stock (see Note 9). The fair value of the
warrants at the time of issuance is being amortized as rent
expense over the remaining terms of the related aircraft lease
agreements.

The Company is obligated under an operating lease
for office space at its former headquarters in Herndon,
Virginia, through April 2006. The Companys total
obligation at December 31, 2003 under the lease is
$3.7 million. The Company received rental income,
sufficient to offset its lease expense through March 2002, after
which time no rental income was received except
$0.4 million in 2003. The Company is currently seeking a
new sub-lessee for this office space. The Company recognized a
$1.7 million liability at December 31, 2002 for costs
that would continue to be incurred, without economic benefit to
the Company, over the remaining term of its lease of this office
space. During 2003, the Company used $1.4 million of the
accrual, reviewed its estimates and assumptions on a quarterly
basis, and determined that an additional $1.7 million
should be added to the accrual, resulting in a $2.0 million
balance at December 31, 2003. The liability was determined
based on the remaining lease rentals, reduced by estimated
sublease rentals that can be reasonably obtained for the
property. The liability is included in other accrued liabilities
on the accompanying Consolidated Balance Sheet and the cost is
included in sales, general and administrative on the
accompanying Consolidated Statement of Operations.

Management was required to make significant
estimates and assumptions in determining this liability. These
included an estimated eight-month period, starting
January 1, 2004, in which the Company will not obtain any
sublease rentals while seeking a sub-lessee and an estimated
54 percent discount that will be provided to a suitable
sub-lessee from the Companys current monthly lease
rentals. These assumptions were

49



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##### 



WORLD AIRWAYS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

determined based on current market conditions for
commercial office space in Herndon, Virginia and the
metropolitan Washington, D.C. area.

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

In November 2003, the Company agreed to convert
the total amount due from the previous sub-lessee into equity,
and received 5.1 million shares of common stock of the
sub-lessee. This investment is not currently reflected on the
Consolidated Balance Sheets.

In 2001, the Company relocated its corporate
headquarters to Peachtree City, Georgia. Hollis L. Harris,
World Airways Chairman and CEO, is a principal in the
company that owns the building for which the Company signed a
lease for a 15-year term beginning May 1, 2001. The
Companys Board of Directors verified with a nationally
recognized tenant brokerage firm that the new lease rate was
equivalent to what could be obtained in arms length
negotiations with an independent party. In addition, the lease
rate in Georgia was less than what was being paid in Virginia.
Obligations for rent under the lease aggregating
$16.1 million at December 31, 2003 are included with
future annual minimum lease payments for operating leases

In June 2003, the Georgia Department of Revenue
approved the Companys application for the Georgia
Headquarters Job Tax Credit (the HQC). The HQC is
available for corporate taxpayers (a) establishing or
relocating their headquarters to Georgia, (b) investing a
minimum of $1.0 million in certain property, and
(c) employing a minimum number of new full-time employees
in the State of Georgia that pay at or above a required wage
level. This credit may be used for either corporate state income
tax or payroll withholding tax. The Company has qualified for
$510,000 and $590,000 of tax credits related to 2001 and 2002,
respectively. The application for tax credits related to 2003 is
in process at this time. If the Company continues to meet the
statutory requirements for each year that it is eligible, its
total potential estimated benefit could be in excess of
$2.0 million on a pre-tax basis.

Net rental expense, primarily relating to
aircraft leases, totaled approximately $89.3 million,
$89.2 million, and $77.9 million for the years ended
December 31, 2003, 2002 and 2001, respectively. Included in
net rental expense was $0.4 million of sublease rental
income for the year ended 2003 and $1.2 million for fiscal
2001. Certain of the Companys operating leases require
rental payments that vary in amount from year to year. The
Company accounts for the cost of these leases on a straight-line
basis, thereby recognizing rent expense evenly over the lease
term. A long-term deferred rent liability is recognized in the
consolidated balance sheets to reflect the cumulative-to-date
difference between rent expense recognized and cash payments
made.

As of December 31, 2003, future annual
minimum lease payments (including unpaid contractual rent) for
operating leases that have initial or remaining lease terms in
excess of one year were as follows (in thousands):

|           |       |   |         |         | 
|---------- | ----- | - | ------- | ------- | 
|2004       |       | $ | 85,064  |        
|2005       |       |   | 75,859  |        
|2006       |       |   | 50,495  |        
|2007       |       |   | 44,530  |        
|2008       |       |   | 30,338  |        
|Thereafter |       |   | 248,712 |        
|           |       |   |         |        
|           | Total |   | $       | 534,998 | 
|           |       |   |         |        

50



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##### 



WORLD AIRWAYS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



|   |              
|-- | -------------
|9. | Capital Stock

At December 31, 2003, 18,962,508 shares
of Common Stock were reserved for issuance: upon conversion of
outstanding convertible debentures (10,005,285 shares),
under stock option plans (4,440,000 shares), upon the
exercise of warrants (4,378,223 shares), and under an
employee salary exchange program (139,000 shares). On
December 30, 2003, the Company called for redemption
$18.0 million aggregate principal amount of its Old
Debentures remaining outstanding at that time, which were
convertible at a conversion price of $8.90 per share. All
of these Old Debentures were redeemed on January 28, 2004.
As a consequence, subsequent to January 28, 2004, the
Company had outstanding $25.5 million principal amount of
convertible debentures, consisting of the New Debentures,
convertible into an aggregate of 7,982,813 shares of Common
Stock at an exercise price of $3.20 per share.

In December 2003, the Company issued to the ATSB,
as additional compensation for the federal loan guarantee,
warrants to purchase an aggregate of 2,378,223 shares of
Common Stock. These warrants were vested and fully exercisable
at the date of grant. The fair value of these warrants on the
date of grant using the Black Scholes option-pricing model was
$4.8 million. The following table shows details of the
warrants issued to the ATSB as well as the assumptions used in
the Black Scholes option-pricing model:

|          |  |                |      |                 |  |               |            |                |  |            |      |               |  |  |   |   |  |  |    |   |  |  |         | 
|--------- |  | -------------- | ---- | --------------- |  | ------------- | ---------- | -------------- |  | ---------- | ---- | ------------- |  |  | - | - |  |  | -- | - |  |  | ------- | 
|          |  |                |      |                 |  | Risk Free     |            | Expected       |  |            |      |              
|Number    |  | Exercise Price |      | Expiration Date |  | Interest Rate |            | Dividend Yield |  | Volatility |      | Expected Life
|          |  |                |      |                 |  |               |            |                |  |            |      |              
|1,269,022 |  | $              | 0.78 |                 |  |               | 12/31/2008 |                |  |            | 3.23 | %             |  |  | 0 | % |  |  | 50 | % |  |  | 5.0 yrs | 
|111,111   |  | $              | 2.50 |                 |  |               | 8/23/2004  |                |  |            | 1.22 | %             |  |  | 0 | % |  |  | 50 | % |  |  | 1.2 yrs | 
|111,111   |  | $              | 2.50 |                 |  |               | 3/29/2005  |                |  |            | 0.96 | %             |  |  | 0 | % |  |  | 50 | % |  |  | 0.7 yrs | 
|886,979   |  | $              | 3.20 |                 |  |               | 12/31/2009 |                |  |            | 3.43 | %             |  |  | 0 | % |  |  | 50 | % |  |  | 6.0 yrs | 

The Company recorded the fair value of these
warrants as a charge to other long-term assets, with a credit to
additional paid in capital. This long-term asset will be
amortized as interest expense over the next five years using the
effective interest method. The amount of amortization by year
will be as follows (in millions):

|     |  |   |     | 
|---- |  | - | --- | 
|2004 |  | $ | 1.5 | 
|2005 |  |   | 1.3 | 
|2006 |  |   | 1.0 | 
|2007 |  |   | 0.7 | 
|2008 |  |   | 0.3 | 
|     |  |   |     | 
|     |  | $ | 4.8 | 
|     |  |   |     | 

In 1999, pursuant to amendments to lease
agreements for the Companys MD-11 aircraft, the Company
granted warrants to each of two lessors to purchase up to
1,000,000 shares of Common Stock at an exercise price of
$2.50 per share. The warrants were vested and fully
exercisable at the date of grant. Warrants to purchase
1,000,000 shares expire in August 2004 and the other
warrants to purchase 1,000,000 shares expire in March 2005.
The per share weighted-average fair value of the warrants was
$0.90 on the date of grant using the Black Scholes
option-pricing model with the following assumptions: expected
dividend yield of 0.0%, risk free interest rate of 5.735%,
expected life of 5 years and expected volatility of 78%.



| |                   
| | ------------------
| | Stock Option Plans

Under a 1995 Stock Option Plan, as amended (the
1995 Plan), members of the Companys Board of
Directors, employees, and consultants to the Company or its
affiliates are eligible to receive stock options. The Company
has reserved 3,290,000 shares of Common Stock for issuance
under the 1995 Plan. Options expire at the earlier of the stated
expiration, which shall not exceed ten years from the date of
grant, or one year after the termination of a grantees
employment with the Company. Options are granted with an
exercise price that

51



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##### 



WORLD AIRWAYS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

shall not be less than 85% of the fair market
value of the Common Stock on the date of grant. Outstanding
options become vested and fully exercisable at various times
through February 2013.

Under a Non-Employee Directors Stock Option
Plan (the Directors Plan), non-affiliate
directors are offered options to purchase 10,000 shares of
Common Stock, upon election or appointment to the Board of
Directors of the Company. The Company has reserved
250,000 shares of Common Stock for issuance under the
Directors Plan. On the third anniversary of an initial
award, the director will be given an option for 5,000 additional
shares. Options granted under the Directors Plan vest in
36 equal monthly installments following the award, as long as
the individual remains a director of the Company. The exercise
price for options granted is the average closing price of the
Common Stock during the 30 trading days immediately preceding
the date of grant.

Under a 1999 Chief Executive Stock Option Plan
(the CEO Plan), the Chief Executive Officer (the
CEO) of the Company was granted an option to
purchase 900,000 shares of Common Stock at $1.00 per
share in conjunction with the CEOs acceptance of an offer
of employment in 1999. The option was granted at fair market
value and will expire April 1, 2007. As of
December 31, 2003, all of these options were exercisable.
Stock option activity during the last three years is as follows
(in thousands, except per share amounts):

|                             |           |             |       |          |   |   |      |      | 
|---------------------------- | --------- | ----------- | ----- | -------- | - | - | ---- | ---- | 
|                             |           |             |       | Weighted
|                             |           | Number of   |       | Average 
|                             |           | Options     |       | Exercise
|                             |           | Outstanding |       | Price   
|                             |           |             |       |         
|Balance at December 31, 2000 |           |             | 3,914 |          |   | $ | 1.78 |     
|                             | Granted   |             |       | 316      |   |   |      | 1.08 | 
|                             | Forfeited |             |       | (579     | ) |   |      | 1.20 | 
|                             |           |             |       |          |   |   |      |     
|Balance at December 31, 2001 |           |             | 3,651 |          |   |   | 1.81 |     
|                             | Granted   |             |       | 353      |   |   |      | 0.96 | 
|                             | Exercised |             |       | (11      | ) |   |      | 0.97 | 
|                             | Forfeited |             |       | (160     | ) |   |      | 2.09 | 
|                             |           |             |       |          |   |   |      |     
|Balance at December 31, 2002 |           |             | 3,833 |          |   |   | 1.73 |     
|                             | Granted   |             |       | 1,067    |   |   |      | 1.14 | 
|                             | Exercised |             |       | (344     | ) |   |      | 0.87 | 
|                             | Forfeited |             |       | (739     | ) |   |      | 2.29 | 
|                             |           |             |       |          |   |   |      |     
|Balance at December 31, 2003 |           |             | 3,817 |          |   |   | 1.54 |     
|                             |           |             |       |          |   |   |      |     

52



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##### 



WORLD AIRWAYS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

At December 31, 2003, the range of exercise
prices and weighted-average remaining life of outstanding
options was $0.51-$8.63 and 4.8 years, respectively. The
following table summarizes stock options outstanding and
exercisable at December 31, 2003 (in thousands, except per
share amounts):

|               |  |             |       |                |  |                |     |           |  |          |      |  |  |  |       |  |  |   |      | 
|-------------- |  | ----------- | ----- | -------------- |  | -------------- | --- | --------- |  | -------- | ---- |  |  |  | ----- |  |  | - | ---- | 
|               |  |             |       |               
|               |  | Outstanding |       | Exercisable   
|               |  |             |       |               
|               |  |             |       | Weighted       |  |                |     |           |  | Weighted
|               |  |             |       | Average        |  | Weighted       |     |           |  | Average 
|Range of       |  | Number      |       | Remaining Life |  | Average        |     | Number of |  | Exercise
|Exercise Price |  | of Options  |       | Years          |  | Exercise Price |     | Options   |  | Price   
|               |  |             |       |                |  |                |     |           |  |         
|$0.00 - 1.25   |  |             | 3,216 |                |  |                | 5.0 |           |  | $        | 0.92 |  |  |  | 2,227 |  |  | $ | 0.94 | 
|1.26 - 2.50    |  |             | 129   |                |  |                | 3.6 |           |  |          | 1.70 |  |  |  | 121   |  |  |   | 1.71 | 
|2.51 - 3.75    |  |             | 150   |                |  |                | 7.7 |           |  |          | 2.99 |  |  |  | 15    |  |  |   | 2.99 | 
|5.01 - 6.25    |  |             | 40    |                |  |                | 1.8 |           |  |          | 5.58 |  |  |  | 40    |  |  |   | 5.58 | 
|6.26 - 7.50    |  |             | 262   |                |  |                | 1.9 |           |  |          | 7.11 |  |  |  | 112   |  |  |   | 7.09 | 
|7.51 - 8.75    |  |             | 20    |                |  |                | 0.5 |           |  |          | 8.63 |  |  |  | 20    |  |  |   | 8.63 | 
|               |  |             |       |                |  |                |     |           |  |          |      |  |  |  |       |  |  |   |      | 
|               |  |             | 3,817 |                |  |                |     |           |  |          |      |  |  |  | 2,535 |  |  |   |      | 
|               |  |             |       |                |  |                |     |           |  |          |      |  |  |  |       |  |  |   |      | 

At December 31, 2003, 2002, and 2001, the
number of options exercisable was 2,535,016, 2,742,000, and
2,303,000, respectively, and the weighted-average exercise price
of the options was $1.39, $1.61, and $1.79, respectively.



|    |                       
|--- | ----------------------
|10. | Employee Benefit Plans

The World Airways Crewmembers Target
Benefit Plan (the Target Benefit Plan) is a defined
contribution plan covering cockpit crewmembers with
contributions based upon wages, as defined. It is a
tax-qualified retirement plan under Section 401(a) of the
Internal Revenue Code of 1986, as amended (the
Code). Pension expense for the Target Benefit Plan
totaled $2.4 million, $2.5 million, and
$2.1 million for the years ended December 31, 2003,
2002 and 2001, respectively.

The Company also sponsors a Crewmembers Deferred
Income Plan (the Deferred Income Plan). It is a
tax-qualified retirement plan under Section 401(k) of the
Code. Under the Deferred Income Plan, crewmembers may elect to
invest salary deferrals of up to $12,000 or 25% of their salary
in selected investment funds. The Company does not make any
contributions to the Deferred Income Plan.

The Companys flight attendants participate
in a pension plan maintained by the International Brotherhood of
Teamsters (Teamsters). Pension contributions made to
the Teamsters on behalf of the flight attendants totaled
$0.8 million, $0.6 million, and $0.7 million for
the years ended December 31, 2003, 2002 and 2001,
respectively.

Under the Companys 401(k) Administrative
Plan (401(k) Plan) employees may elect to invest
salary deferrals of up to $12,000 or 25% of their salary in
selected investment funds. The Company contributes matching
funds to the 401(k) Plan equal to 33% of participants
voluntary deferrals up to 10% of salary. The Company expensed,
for its contribution to the 401(k) Plan, approximately
$0.2 million, $0.1 million and $0.2 million
during the years ended December 31, 2003, 2002 and 2001,
respectively.

The Company has a profit sharing bonus plan (the
Profit Sharing Plan) for its cockpit crewmembers and
flight attendants pursuant to agreements with the unions
representing the two groups. It is not a tax-qualified plan
under the Code. Distributions under the Profit Sharing Plan are
equal to 20% of earnings, as defined, subject to an annual
limitation of 10% of the total annual aggregate compensation of
World Airways employees participating in the Profit Sharing Plan
in that year. The Company incurred $3.7 million and
$0.6 million for this plan in 2003 and 2002, respectively.
No distributions were made for 2001. The $3.7 million of
profit sharing for 2003 will be paid in 2004.

53



---



##### 



WORLD AIRWAYS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

World Airways cockpit crewmembers and
eligible dependents are covered under a post-retirement health
care benefits plan to age 65. The Company accrues for the
cost of health benefits in accordance with FAS No. 106
but funds the benefit costs on a pay-as-you-go (cash) basis.

The Company uses a December 31st
measurement date for the post-retirement health care benefits
plan. A summary of the net periodic post-retirement benefit
costs is as follows (in thousands):

|                                                                    |  |                         |     |      |  |      |     |   |  |   |     |  
|------------------------------------------------------------------- |  | ----------------------- | --- | ---- |  | ---- | --- | - |  | - | --- | -
|                                                                    |  |                        
|                                                                    |  | Year Ended December 31,
|                                                                    |  |                        
|                                                                    |  | 2003                    |     | 2002 |  | 2001
|                                                                    |  |                         |     |      |  |     
|Service cost                                                        |  | $                       | 310 |      |  | $    | 260 |   |  | $ | 193 |  
|Interest cost on accumulated post-retirement
    benefit obligation |  |                         | 237 |      |  |      | 212 |   |  |   | 171 |  
|Net amortized (gain) loss                                           |  |                         | 12  |      |  |      | (2  | ) |  |   | (14 | )
|                                                                    |  |                         |     |      |  |      |     |   |  |   |     |  
|Net periodic post-retirement benefit cost                           |  | $                       | 559 |      |  | $    | 470 |   |  | $ | 350 |  
|                                                                    |  |                         |     |      |  |      |     |   |  |   |     |  

The reconciliation of the accumulated
post-retirement benefit obligation was as follows (in thousands):

|                                                                      |                |      |       |      |   |   |       |      |  
|--------------------------------------------------------------------- | -------------- | ---- | ----- | ---- | - | - | ----- | ---- | -
|                                                                      |                | 2003 |       | 2002
|                                                                      |                |      |       |     
|Accumulated post-retirement benefit obligation,
    beginning of year |                | $    | 3,791 |      |   | $ | 3,142 |     
|                                                                      | Service cost   |      |       | 310  |   |   |       | 260  |  
|                                                                      | Interest cost  |      |       | 237  |   |   |       | 212  |  
|                                                                      | Benefits paid  |      |       | (210 | ) |   |       | (164 | )
|                                                                      | Actuarial loss |      |       | 116  |   |   |       | 341  |  
|                                                                      |                |      |       |      |   |   |       |     
|Accumulated post-retirement benefit obligation,
    end of year       |                | $    | 4,244 |      |   | $ | 3,791 |     
|                                                                      |                |      |       |      |   |   |       |     

The reconciliation of the accrued post-retirement
benefits as of year-end was as follows (in thousands):

|                                                                                            |  |      |       |      |  |   |       |  
|------------------------------------------------------------------------------------------- |  | ---- | ----- | ---- |  | - | ----- | -
|                                                                                            |  | 2003 |       | 2002
|                                                                                            |  |      |       |     
|Unfunded status                                                                             |  | $    | 4,244 |      |  | $ | 3,792 |  
|Unrecognized net gain                                                                       |  |      | (661  | )    |  |   | (557  | )
|                                                                                            |  |      |       |      |  |   |       |  
|Accrued post-retirement benefits included in
    liabilities on accompanying balance sheets |  | $    | 3,583 |      |  | $ | 3,235 |  
|                                                                                            |  |      |       |      |  |   |       |  

The assumed discount rate used to measure the
accumulated post-retirement benefit obligation for 2003 and 2002
was 6.0% and 6.5%, respectively. The medical cost trend rate in
2003 was 10% trending down to an ultimate rate in 2014 and
beyond of 5%. A one percentage point increase in the assumed
health care cost trend rates for each future year would have
increased the aggregate of the service and interest cost
components of 2003 net periodic post-retirement benefit
cost by $57,000 and would have increased the accumulated
post-retirement benefit obligation as of December 31, 2003
by $373,000. A one percentage point decrease in the assumed
health care cost trend rates for each future year would have
decreased the aggregate of the service and interest cost
components of 2003 net periodic post-retirement benefit
cost by $50,000 and would have decreased the accumulated
post-retirement benefit obligation as of December 31, 2003
by $332,000.

The Company used the following actuarial
assumptions to determine its net periodic benefit cost for the
years ended December 31, 2003 and 2002, as measured at
December 31, 2003, and its benefit obligations at
December 31, 2003 and 2002.

54



---



##### 



WORLD AIRWAYS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

|                          |  |                                       |                |                                    |  |  |                | 
|------------------------- |  | ------------------------------------- | -------------- | ---------------------------------- |  |  | -------------- | 
|                          |  | Used for Net Periodic Post-retirement |                | Used for Benefit Obligations as of
|Assumption                |  | Benefit Cost for 2003                 |                | December 31, 2003                 
|                          |  |                                       |                |                                   
|Discount Rate             |  |                                       | 6.5%           |                                    |  |  | 6.0%           | 
|Salary Increase*          |  |                                       | not applicable |                                    |  |  | not applicable | 
|Long-term rate of return* |  |                                       | not applicable |                                    |  |  | not applicable | 

|                          |  |                                       |                |                                    |  |  |                | 
|------------------------- |  | ------------------------------------- | -------------- | ---------------------------------- |  |  | -------------- | 
|                          |  | Used for Net Periodic Post-retirement |                | Used for Benefit Obligations as of
|Assumption                |  | Benefit Cost for 2002                 |                | December 31, 2002                 
|                          |  |                                       |                |                                   
|Discount Rate             |  |                                       | 7.0%           |                                    |  |  | 6.5%           | 
|Salary Increase*          |  |                                       | not applicable |                                    |  |  | not applicable | 
|Long-term rate of return* |  |                                       | not applicable |                                    |  |  | not applicable | 



| |   |                                                                                                                                                                                                             
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | * | The salary increase assumption is not applicable
    because the benefits are not related to compensation. The
    long-term rate of return assumption is not applicable because
    the plan is not funded.

The Company expects to contribute approximately
$230,000 to the post-retirement health care benefit plan in
2004. Benefit payments, which reflect expected future service,
are based on assumptions about future events. Actual benefit
payments may vary significantly from these estimates.



|    |             
|--- | ------------
|11. | Income Taxes

Components of income tax expense for the year
ended December 31, 2003 consists of the following (in
thousands):

|          |         |      |       |       | 
|--------- | ------- | ---- | ----- | ----- | 
|          |         | 2003
|          |         |     
|Current:  |         |      |       |      
|          | Federal |      | $     | 3,562 | 
|          | State   |      |       | 240   | 
|Deferred: |         |      |       |      
|          | Federal |      |       |      | 
|          | State   |      |       |      | 
|          |         |      |       |      
|          |         | $    | 3,802 |      
|          |         |      |       |      

There were no income taxes for the years ended
December 31, 2002 and 2001.

Income tax expense attributable to earnings
(loss) differed from the statutory income tax rate as a result
of the following (in thousands):

|                                                                       |                         |                          |        |      |   |      |        |     |  |   |        |      |  
|---------------------------------------------------------------------- | ----------------------- | ------------------------ | ------ | ---- | - | ---- | ------ | --- |  | - | ------ | ---- | -
|                                                                       |                         |                         
|                                                                       |                         | Years Ended December 31,
|                                                                       |                         |                         
|                                                                       |                         | 2003                     |        | 2002 |   | 2001
|                                                                       |                         |                          |        |      |   |     
|Expected Federal income tax (benefit) at the
    statutory rate of 35% |                         | $                        | 6,693  |      |   | $    | 694    |     |  | $ | (8,853 | )   
|State and local taxes (net of federal benefit)                         |                         |                          | 156    |      |   |      |       |     |  |   |       |     
|Change in valuation allowance                                          |                         |                          | (3,644 | )    |   |      | (1,600 | )   |  |   | 8,074  |     
|Other:                                                                 |                         |                          |        |      |   |      |        |     |  |   |        |     
|                                                                       | Meals and entertainment |                          |        | 961  |   |      |        | 833 |  |   |        | 998  |  
|                                                                       | Other                   |                          |        | (344 | ) |      |        | 73  |  |   |        | (219 | )
|                                                                       |                         |                          |        |      |   |      |        |     |  |   |        |     
|Income tax expense                                                     |                         | $                        | 3,802  |      |   | $    |       |     |  | $ |       |     
|                                                                       |                         |                          |        |      |   |      |        |     |  |   |        |     

The tax effects of temporary differences that
give rise to significant portions of deferred tax assets and
liabilities at December 31 are as follows (in thousands):

55



---



##### 



WORLD AIRWAYS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

|                     |                                              |                           |   |        |        |   |   |        |         |  
|-------------------- | -------------------------------------------- | ------------------------- | - | ------ | ------ | - | - | ------ | ------- | -
|                     |                                              | 2003                      |   | 2002  
|                     |                                              |                           |   |       
|Deferred tax assets: |                                              |                           |   |        |        |   |   |       
|                     | Net operating loss carry-forward             |                           | $ | 2,004  |        |   | $ | 8,998  |        
|                     | Recognition of sale/leaseback gains          |                           |   | 1,014  |        |   |   | 1,368  |        
|                     | Accrued post-retirement benefit obligation   |                           |   | 1,308  |        |   |   | 1,132  |        
|                     | Compensated absences                         |                           |   | 3,575  |        |   |   | 1,283  |        
|                     | Deferred rent                                |                           |   | 5,843  |        |   |   | 4,976  |        
|                     | Allowance for doubtful accounts receivable   |                           |   | 71     |        |   |   | 89     |        
|                     | Alternative minimum tax credit carry-forward |                           |   | 2,789  |        |   |   | 2,789  |        
|                     | Loss on convertible debt extinguishment      |                           |   | 1,091  |        |   |   |       |        
|                     | Other                                        |                           |   | 1,047  |        |   |   | 856    |        
|                     |                                              |                           |   |        |        |   |   |       
|                     | Gross deferred tax assets                    |                           |   | 18,742 |        |   |   | 21,491 |        
|                     |                                              | Less: valuation allowance |   |        | (8,823 | ) |   |        | (12,487 | )
|                     |                                              |                           |   |        |        |   |   |       
|                     | Net deferred tax assets                      |                           |   | 9,919  |        |   |   | 9,004  |        
|                     | Deferred tax liabilities:                    |                           |   |        |        |   |   |        |        
|                     |                                              | Property and equipment    |   |        | 9,919  |   |   |        | 9,004   |  
|                     |                                              |                           |   |        |        |   |   |       
|                     | Net deferred tax asset/(liability)           |                           | $ |       |        |   | $ |       |        
|                     |                                              |                           |   |        |        |   |   |       

The Company has significant net operating loss
(NOL) carry-forwards for federal tax purposes, which
are subject to a $343,000 annual use limitation resulting from a
change in ownership occurring in 2000. In 2002 and prior years,
these NOL carry-forwards were included regardless of whether the
use limitation would render them unusable. A valuation allowance
was recorded against the unusable portion, resulting in no
deferred tax asset being recognized. For 2003, the Company
changed its presentation to reflect only the potentially usable
NOL carry-forwards. These reclassifications affected the income
tax rate reconciliation and the deferred tax assets and
liabilities table presented above.

The net changes in the total valuation allowance
for the years ended December 31, 2003 and 2002 were due to
the limitation or use of NOL carry-forwards and the realization
of other deferred tax assets and liabilities. In assessing the
realizability of the deferred tax assets, management considers
whether it is more likely than not that some portion or all of
the deferred tax assets will not be realized. The ultimate
realization of deferred tax assets is dependent upon the
generation of future taxable income (including reversals of
deferred tax liabilities) during the periods in which those
temporary differences will become deductible. Management
believes it is not likely the deferred tax assets, net of the
valuation allowance, will be realized.

The availability of NOL carry-forwards and
alternative minimum tax credits carry-forwards to reduce the
Companys future federal income tax liability is subject to
limitations under Section 382 of the Code. Generally, these
limitations restrict the availability of NOL carry-forwards upon
certain changes in stock ownership by five percent shareholders
which, in aggregate, exceed 50 percentage points in value
in a three-year period (Ownership Change). The
Company experienced an Ownership Change on July 17, 2000
primarily due to vesting of restricted shares that were issued
in February 2000 under the Companys Employee Salary
Exchange Program and the liquidation of WorldCorp, Inc. in
July 2000.

As of December 31, 2003, the Company had NOL
carry-forwards for federal income tax purposes which were
limited to $5.5 million. This is computed based upon the
$343,000 annual limitation resulting from the 2000 Ownership
Change. Subsequent ownership changes, if any, would impose
additional limitations on the Companys NOL carry-forwards.
The Companys NOLs expire in 2019.

56



---



##### 



WORLD AIRWAYS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The application of the Code in this area is
subject to interpretation by the Internal Revenue Service. The
NOLs are subject to examination by the IRS and, thus, are
subject to adjustment or disallowance resulting from any such
IRS examination.



|    |                
|--- | ---------------
|12. | Major Customers

The Company operates in one business segment, the
air transportation industry.

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

|                             |  |                          |       |      |  |      |       |  |  |   |       | 
|---------------------------- |  | ------------------------ | ----- | ---- |  | ---- | ----- |  |  | - | ----- | 
|                             |  |                         
|                             |  | Years Ended December 31,
|                             |  |                         
|                             |  | 2003                     |       | 2002 |  | 2001
|                             |  |                          |       |      |  |     
|Passenger Charter Operations |  | $                        | 343.3 |      |  | $    | 306.5 |  |  | $ | 279.2 | 
|Cargo Charter Operations     |  |                          | 128.5 |      |  |      | 76.0  |  |  |   | 37.3  | 

Information concerning customers for years in
which their revenues comprised 10% or more of the Companys
operating revenues is presented in the following table (in
thousands):

|                                                 |  |                          |         |      |  |      |         |  |  |   |         | 
|------------------------------------------------ |  | ------------------------ | ------- | ---- |  | ---- | ------- |  |  | - | ------- | 
|                                                 |  |                         
|                                                 |  | Years Ended December 31,
|                                                 |  |                         
|                                                 |  | 2003                     |         | 2002 |  | 2001
|                                                 |  |                          |         |      |  |     
|U.S. Air Force (USAF) Air
    Mobility Command |  | $                        | 354,703 |      |  | $    | 277,573 |  |  | $ | 203,787 | 

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

The USAF awards points to air carriers acting
alone or through teaming arrangements in proportion to the
number and type of aircraft made available to CRAF. The Company
participates in a teaming arrangement to maximize the value of
potential awards. The USAF grants fixed awards for
transportation to CRAF participants. These fixed
awards provide for known and determinable amounts of revenue to
be received during the contract period, which runs from October
1st to September 30th, in exchange for air
transportation services. In addition, CRAF participants may be
awarded additional revenue during the contract period for air
transportation services required beyond those specified in the
fixed awards. The Company refers to this additional revenue as
expansion revenue.

The following table shows the original contract
awards (in millions) which include fixed and an expansion
estimate for 2003 and 2002, and run from October
1st through September 30th. The actual revenue from
the USAF for each of the Companys last three fiscal years
is shown below the contract award amounts.

|                                                        |  |      |       |      |  |      |       |  |  |   |       | 
|------------------------------------------------------- |  | ---- | ----- | ---- |  | ---- | ----- |  |  | - | ----- | 
|                                                        |  | 2003 |       | 2002 |  | 2001
|                                                        |  |      |       |      |  |     
|Original Contract Award (year ended
    September 30th) |  | $    | 120.0 |      |  | $    | 175.0 |  |  | $ | 127.0 | 
|                                                        |  |      |       |      |  |      |       |  |  |   |       | 
|Fixed passenger revenue earned                          |  | $    | 73.6  |      |  | $    | 125.3 |  |  | $ | 121.5 | 
|Expansion passenger revenue earned                      |  |      | 207.1 |      |  |      | 141.5 |  |  |   | 79.8  | 
|Cargo fixed and expansion revenue earned                |  |      | 74.0  |      |  |      | 10.8  |  |  |   | 2.5   | 
|                                                        |  |      |       |      |  |      |       |  |  |   |       | 
|Total revenue earned (year ended December 31)           |  | $    | 354.7 |      |  | $    | 277.6 |  |  | $ | 203.8 | 
|                                                        |  |      |       |      |  |      |       |  |  |   |       | 

The original contract award for the year
beginning October 1, 2003 and ending September 30,
2004 is $125.8 million for fixed passenger flying. This
years airlift contract does not include long-term
expansion flying or cargo components. These missions will be
included along with normal ad-hoc expansion business solicited
by the USAF throughout the fiscal year. The USAF continues to
request both passenger and cargo

57



---



##### 



WORLD AIRWAYS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

expansion flying to support U.S. troops in
Afghanistan and Iraq. From February through June 2003, the USAF
activated Stage I of the CRAF program to support the
U.S. military. The USAF utilized passenger aircraft only
under Stage I of the CRAF program in order to meet
increased airlift needs for U.S. troop movement. The
Company, however, cannot determine how future military spending
budgets, airlift requirements, national security considerations
for a continued strong and balanced CRAF and teaming
arrangements will combine to affect future business with the
USAF.

The classification between domestic and export
revenue is based on entity definitions prescribed in the
economic regulations of the Department of Transportation.
Information concerning the Companys export revenues is
presented in the following table (in thousands):

|                    |          |                          |       |         |        |         |   |         |        |         |   |         |        |         | 
|------------------- | -------- | ------------------------ | ----- | ------- | ------ | ------- | - | ------- | ------ | ------- | - | ------- | ------ | ------- | 
|                    |          |                         
|                    |          | Years Ended December 31,
|                    |          |                         
|                    |          | 2003                     |       | 2002    |        | 2001   
|                    |          |                          |       |         |        |        
|Operating Revenues: |          |                          |       |         |        |         |   |         |        |         |   |        
|                    | Domestic |                          | $     | 440,947 |        |         | $ | 344,170 |        |         | $ | 258,735 |       
|                    | Export   |                          |       |         |        |         |   |         |        |         |   |         |       
|                    |          | Indonesia                |       |         |       |         |   |         |       |         |   |         | 17,651 |        
|                    |          | Angola                   |       |         | 27,622 |         |   |         | 22,325 |         |   |         | 26,300 |        
|                    |          | Hong Kong                |       |         |       |         |   |         | 10,310 |         |   |         |       |        
|                    |          | Other                    |       |         | 6,281  |         |   |         | 7,684  |         |   |         | 15,180 |        
|                    |          |                          |       |         |        |         |   |         |        |         |   |        
|                    |          |                          | Total |         | $      | 474,850 |   |         | $      | 384,489 |   |         | $      | 317,866 | 
|                    |          |                          |       |         |        |         |   |         |        |         |   |        



|    |                           
|--- | --------------------------
|13. | Related Party Transactions

In 2001, the Company relocated its corporate
headquarters to Peachtree City, Georgia. Hollis L. Harris, World
Airways current Chairman and CEO, is a principal in the
company that owns the building, for which the Company signed a
lease for a 15-year term beginning May 1, 2001. Obligations
for rent under the lease aggregating $16.1 million at
December 31, 2003 are included with future annual minimum
lease payments for operating leases in Note 8. The Company
incurred $1.3 million of rental expense in 2003 and 2002,
and $0.8 million of rental expense in 2001, under the lease.



|    |                              
|--- | -----------------------------
|14. | Commitments and Contingencies

The Companys flight attendants,
representing approximately 40% of the Companys employees,
are represented by the International Brotherhood of Teamsters
(Teamsters). On September 2, 2003, a new
collective bargaining agreement was ratified, with an amendable
date of August 31, 2006. The agreement includes pay
increases and other benefit changes requested by the flight
attendants while providing the Company work-rule changes in
support of its financial goals.

The Companys cockpit crewmembers,
representing approximately 28% of the Companys employees,
who are also represented by the Teamsters, are subject to a
collective bargaining agreement that became amendable on
June 30, 2003. On January 16, 2004, the Company
announced that it had reached a tentative agreement with the
Teamsters for a three-year extension of the agreement from
January 1, 2004. However, on February 27, 2004, the
Company received notification that the tentative agreement was
not ratified by the membership group. As a result, negotiations
will be reconvened with the Teamsters at a later date.

A claim has been filed in the 19th Civil Court
District Court, Frankfurt, Germany, against the Company by a
tour operator seeking approximately $4.2 million in
compensation related to the cancellation of a summer

58



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##### 



WORLD AIRWAYS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

program in 1996. The Company believes it has
substantial defenses to this action, although no assurance can
be given of the eventual outcome of this litigation. Because of
the uncertain outcome of this action, no amounts have been
accrued in the consolidated financial statements.

Miami-Dade County is currently investigating and
remediating various environmental conditions at the Miami
International Airport (MIA). During the second quarter of 2001,
the County filed a lawsuit against 17 defendants, which does not
currently include World Airways, in an attempt to recover its
past and future clean-up costs. This claim has been filed in the
Florida Circuit Court for the 11th Judicial District in Dade
County Florida. In addition to the seventeen 17 named in the
lawsuit, 243 other agencies and companies that were prior
tenants at MIA (potentially responsible parties, or
PRPs), including World Airways, were issued
letters advising of the lawsuit and indicating that any
PRPs could be named as additional defendants in the future
depending upon a determination as to the levels of contamination
and the extent to which any PRP may have contributed to any
alleged contamination. At this point certain PRPs,
including World Airways, have joined a joint defense group to
respond to the Countys inquiries and investigation of the
PRPs. This group is conducting preliminary investigations
of the site in question to determine each PRPs potential
exposure. This process is ongoing and the potential exposure of
World Airways has yet to be determined.

In January and February 2004, seven purported
class action complaints (four in the United States District
Court for the Eastern District of New York, one in the
United States District Court for the Southern District of New
York, one in the Superior Court of DeKalb County, Georgia, and
one in the United States District Court for the Northern
District of Illinois) and four individual complaints (one in the
United States District Court for the Southern District of New
York, one small claims action in New York, one small claims
action in New Jersey, and one small claims action in California)
were filed against the Company arising out of the discontinuance
of charter flights upon the expiration of the Companys
obligation to provide services under an air services agreement.
The Company had operated the charter flights between cities in
the United States and Lagos, Nigeria for Ritetime Aviation and
Travel Services, Inc. (Ritetime). The
Companys obligation to perform air services for Ritetime
ended with the last chartered flight on December 30, 2003.
From the allegations made by the various plaintiffs, it appears
that Ritetime continues to sell tickets for flights purportedly
scheduled to depart after the expiration of the Companys
contractual obligations for air services. The plaintiffs purport
to act for themselves and on behalf of other persons who held
tickets issued by Ritetime for the non-contracted flights.
Ritetime is also named as a defendant in each of these lawsuits.
The plaintiffs seek compensatory, punitive and/or treble damages
and costs and expenses, including attorneys fees, based on
various legal theories including breach of contract, fraud,
negligent misrepresentation, unjust enrichment, illegal/excess
tax and violations of U.S. federal laws and regulations
governing air transportation and of the Federal Racketeer
Influenced and Corrupt Organization Statute. The Company is
cooperating with the DOT in its inquiry concerning this matter.
During March 2004, Ritetime filed a Demand to Arbitrate in
Peachtree City, Georgia, and subsequently the Company responded
and filed a counterclaim. The Company believes that the
allegations against it are without merit and intends to
vigorously defend itself in these lawsuits, although it cannot
give any assurance that these lawsuits will not have a material
adverse effect on the Companys financial condition or
results of operations.

On January 9, 2004, Whitebox Convertible
Arbitrage Partners, L.P. and Pandora Select Partners, L.P. filed
a complaint in the United States District Court for the District
of Minnesota alleging breach of contract by the Company in
connection with its purchase in December 2003 of $22,545,000
aggregate amount of 8% Convertible Senior Subordinated
Debentures due 2004 (the Old Debentures) in exchange
for a like amount of newly-issued 8% Convertible Senior
Subordinated Debentures due 2009 (the New
Debentures). The plaintiffs in this lawsuit allege that
they have held at all relevant times $2,530,000 and $780,000
principal amount, respectively, of Old Debentures and that the
Company breached the terms of the indenture governing the Old
Debentures by purchasing Old Debentures from a selected group of
holders rather than from holders determined by lot or from all
holders on a pro rata basis. The plaintiffs are seeking damages
in an amount equal to the difference in value between the New
Debentures and the Old Debentures held by the plaintiffs

59



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##### 



WORLD AIRWAYS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

and interest lost by the plaintiffs on the Old
Debentures through maturity on August 26, 2004 as well as
costs and reasonable attorney fees. The Company believes that
this claim is without merit and intends to defend itself
vigorously in this lawsuit, although it cannot give any
assurance that this litigation will not have a material adverse
effect on the Companys financial condition or results of
operation.

In February 2004, the Company made a
self-disclosure to the Federal Aviation Administration
(FAA) concerning aircraft record irregularities
discovered upon preparing for the return of two DC-10-30
aircraft. The Company subsequently received a letter from the
FAA opening an investigation into a possible violation of the
Code of Federal Regulations. The Company has complied with all
requests of the FAA and is waiting to receive notification of
the FAAs findings. At the present time, the Company cannot
determine what impact, if any, the FAAs findings will have
on the Company operationally or financially.

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

In 1993, the Company returned certain DC-10-30
aircraft to the lessor prior to the expiration dates of the
leases. As a result of this early lease termination, the Company
is responsible, until 2004 for one aircraft and 2005 for the
second aircraft, for one-third of any deficit in rent incurred
in future leases of the aircraft, up to $100,000 monthly
per plane, with an overall combined cap. The Companys
remaining contingent liability related to this matter
approximates $866,000.



|    |                                  
|--- | ---------------------------------
|15. | Valuation and Qualifying Accounts

|                             |                                         |                |       |                     |   |   |        |         |  
|---------------------------- | --------------------------------------- | -------------- | ----- | ------------------- | - | - | ------ | ------- | -
|                             |                                         | Allowance      |       | Valuation Allowance
|                             |                                         | for Doubtful   |       | for Deferred Tax   
|                             |                                         | Accounts       |       | Assets             
|                             |                                         |                |       |                    
|                             |                                         |               
|                             |                                         | (In thousands)
|Balance at December 31, 2000 |                                         | $              | 331   |                     |   | $ | 21,255 |        
|                             | Additions charged to expense            |                |       | 1,019               |   |   |        |        |  
|                             | Amounts charged to allowance            |                |       |                    |   |   |        | 7,218   |  
|                             |                                         |                |       |                     |   |   |        |        
|Balance at December 31, 2001 |                                         |                | 1,350 |                     |   |   | 28,473 |        
|                             | Additions charged (credited) to expense |                |       | (695                | ) |   |        |        |  
|                             | Amounts credited to allowance           |                |       | (400                | ) |   |        | (1,330  | )
|                             |                                         |                |       |                     |   |   |        |        
|Balance at December 31, 2002 |                                         |                | 255   |                     |   |   | 27,143 |        
|                             | Additions charged (credited) to expense |                |       | (59                 | ) |   |        |        |  
|                             | Amounts charged to allowance            |                |       |                    |   |   |        | (19,411 | )
|                             |                                         |                |       |                     |   |   |        |        
|Balance at December 31, 2003 |                                         | $              | 196   |                     |   | $ | 7,732  |        
|                             |                                         |                |       |                     |   |   |        |        

60



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##### 



WORLD AIRWAYS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



|    |                              
|--- | -----------------------------
|16. | Quarterly Results (unaudited)

The results of the Companys quarterly
operations (unaudited) for 2003 and 2002 are as follows (in
thousands except share data):

|                                         |  |               |         |         |  |              |         |             |  |   |         |  |  |   |         |  
|---------------------------------------- |  | ------------- | ------- | ------- |  | ------------ | ------- | ----------- |  | - | ------- |  |  | - | ------- | -
|                                         |  |              
|                                         |  | Quarter Ended
|                                         |  |              
|                                         |  | March 31      |         | June 30 |  | September 30 |         | December 31
|                                         |  |               |         |         |  |              |         |            
|2003                                     |  |               |         |         |  |              |         |             |  |   |         |  |  |   |         |  
|Operating revenues                       |  | $             | 123,643 |         |  | $            | 116,631 |             |  | $ | 112,294 |  |  | $ | 122,282 |  
|Operating income                         |  |               | 7,663   |         |  |              | 7,820   |             |  |   | 5,874   |  |  |   | 7,071   |  
|Net earnings                             |  |               | 6,615   |         |  |              | 6,393   |             |  |   | 1,444   |  |  |   | 869     |  
|                                         |  |               |         |         |  |              |         |             |  |   |         |  |  |   |         |  
|Basic earnings per common share          |  |               | 0.60    |         |  |              | 0.58    |             |  |   | 0.13    |  |  |   | 0.08    |  
|                                         |  |               |         |         |  |              |         |             |  |   |         |  |  |   |         |  
|Diluted earnings per common share        |  |               | 0.47    |         |  |              | 0.44    |             |  |   | 0.11    |  |  |   | 0.06    |  
|                                         |  |               |         |         |  |              |         |             |  |   |         |  |  |   |         |  
|2002                                     |  |               |         |         |  |              |         |             |  |   |         |  |  |   |         |  
|Operating revenues                       |  | $             | 88,039  |         |  | $            | 88,399  |             |  | $ | 107,923 |  |  | $ | 100,128 |  
|Operating income (loss)                  |  |               | 6,252   |         |  |              | 3,080   |             |  |   | 2,773   |  |  |   | (4,983  | )
|Net earnings (loss)                      |  |               | 4,928   |         |  |              | 2,020   |             |  |   | 1,884   |  |  |   | (6,791  | )
|                                         |  |               |         |         |  |              |         |             |  |   |         |  |  |   |         |  
|Basic earnings (loss) per common share   |  |               | 0.45    |         |  |              | 0.18    |             |  |   | 0.17    |  |  |   | (0.61   | )
|                                         |  |               |         |         |  |              |         |             |  |   |         |  |  |   |         |  
|Diluted earnings (loss) per common share |  |               | 0.37    |         |  |              | 0.18    |             |  |   | 0.17    |  |  |   | (0.61   | )
|                                         |  |               |         |         |  |              |         |             |  |   |         |  |  |   |         |  

The sum of the four quarterly earnings (loss) per
share amounts may not agree with the earnings (loss) per share
amounts for the full year due to the fact that the full year
calculation uses a 12-month weighted average number of shares.

The fourth quarter of 2003 included the following
transactions:



| |   |                                                                                                                                                                                                                                                                                                      
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Recording a loss on debt extinguishment of
    $3.0 million due to the restructuring of the Companys
    convertible senior subordinated debentures. This represents the
    difference between the fair value of the New Debentures and the
    carrying amount of the Old Debentures extinguished.
|
| |  | Recording $1.9 million of bad debt expense
    associated with air services provided to Ritetime Aviation
    Services.                                                                                                                                                                              
|
| |  | Fees and expenses of $1.3 million paid due
    to termination of the Foothill loan facility.                                                                                                                                                                                                         
|
| |  | A $0.5 million write-off of deferred
    issuance fees related to the Foothill loan facility.                                                                                                                                                                                                        

The fourth quarter of 2002 included the following
transactions:



| |   |                                                                                                                                                                                                                                                                                                              
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Recording a $2.0 million liability to the
    federal government for the return in 2003 of a portion of the
    grant funds received under the Stabilization Act.                                                                                                                                            
|
| |  | Recording a $1.7 million liability for
    estimated losses based on contractual lease costs (reduced by
    estimated sub-lease rentals) that will continue to be incurred
    for the remaining term of the Companys lease agreement for
    office space at its former headquarters in Herndon, Virginia.
|
| |  | Recording an $0.8 million receivable due
    from a lessor related to unused maintenance reserves.                                                                                                                                                                                                           

61



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##### 



INDEPENDENT AUDITORS REPORT

The Board of Directors and Stockholders 
 World Airways, Inc.:

We have audited the accompanying consolidated
balance sheets of World Airways, Inc. and subsidiary
(World Airways) as of December 31, 2003 and
2002, and the related consolidated statements of operations,
changes in stockholders deficiency and cash flows for each
of the years in the three-year period ended December 31,
2003. These consolidated financial statements are the
responsibility of World Airways management. Our
responsibility is to express an opinion on these consolidated
financial statements based on our audits.

We conducted our audits in accordance with
auditing standards generally accepted in the United States of
America. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
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 World Airways as of
December 31, 2003 and 2002, and the results of their
operations and their cash flows for each of the years in the
three-year period ended December 31, 2003, in conformity
with accounting principles generally accepted in the United
States of America.



| |         
| | --------
| | KPMG LLP

McLean, Virginia

March 5, 2004


62



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##### 








|        |                                                                                         
|------- | ----------------------------------------------------------------------------------------
|Item 9. | Changes in and Disagreements with
    Accountants on Accounting and Financial Disclosure

Not applicable.






|         |                        
|-------- | -----------------------
|Item 9A. | Controls and Procedures

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




PART III






|         |                                                       
|-------- | ------------------------------------------------------
|Item 10. | Directors and Executive Officers of the
    Registrant

Directors

The Company incorporates herein by reference the
information concerning directors contained in its Notice of
Annual Stockholders Meeting and Proxy Statement to be
filed within 120 days after the end of the Companys
fiscal year (the 2004 Proxy Statement).

Executive Officers

Executive officers of the Company are appointed
by and serve at the discretion of the Companys board of
directors. Information regarding the Companys executive
officers as of December 31, 2003 is provided below:

|                        |  |  |    |  |  |                                                               
|----------------------- |  |  | -- |  |  | --------------------------------------------------------------
|Hollis L. Harris        |  |  | 72 |  |  | Chairman of the Board and Chief Executive Officer             
|Randy J. Martinez       |  |  | 48 |  |  | President and Chief Operating Officer                         
|Gilberto M. Duarte, Jr. |  |  | 59 |  |  | Chief Financial Officer                                       
|Jeffrey L. MacKinney    |  |  | 47 |  |  | Senior Vice President  Planning and
    Corporate Development
|Cindy M. Swinson        |  |  | 46 |  |  | General Counsel and Secretary                                 
|Charles H.J. Addison    |  |  | 43 |  |  | Executive Vice President  Operations                         

Hollis L. Harriscurrently serves as Chairman and Chief
Executive Officer (CEO) of the Company having been
appointed Chairman, President, and CEO on May 1, 1999.
Effective April 1, 2004, Mr. Harris will relinquish
the title of CEO and will retire as Chairman of the board of
directors at the Companys May 6, 2004 annual general
meeting. Prior to joining World Airways, Mr. Harris was
Chairman, President, and CEO of HLH Corporation from November
1998. From August 1996 to May 1998, he was Chairman and CEO of
CalJet Airline. From 1992 to 1996, Mr. Harris served as
Chairman, President, and CEO of Air Canada. From September 1990
to October 1991, Mr. Harris served as Chairman, President,
and CEO of Continental Airlines and President and CEO of
Continental Holdings, Inc. Prior to joining Continental
Airlines, Mr. Harris worked with Delta Air Lines for
36 years, last serving as President and Chief Operating
Officer for several years and as a member of the board of
directors.

Randy J. Martinezbecame President and Chief Operating
Officer in November 2003. He joined the airline in October 1998
as the Director of Crew Resources and was later appointed
Special Assistant to the Chairman in May 1999. In August 1999,
he was named the Chief Information Officer of World Airways and
in June 2002 became Executive Vice President, Marketing and
Administration. Effective April 1, 2004,

63



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##### 



Mr. Martinez will assume the title and
responsibilities of Chief Executive Officer, relinquish the
Chief Operating Officer position and become a member of the
board of directors to fill the unexpired term of a member that
resigned in 2003. Mr. Martinez came to World after a
distinguished 21-year career with the United States Air Force
(Colonel retired and Command Pilot). Prior to his leaving the
military, he was the Principal Advisor to the Chief of Staff of
the North Atlantic Treaty Organizations
(NATO) senior-most Strategic Planning Staff.
Mr. Martinez also served as the Senior Aide-de-Camp to the
Chairman of the Joint Chiefs of Staff at the Pentagon, Commander
of the 457th Airlift Squadron at Andrews Air Force Base
(AFB) in Maryland and Chief of the Wing
Standardization & Evaluation Division in Operation
DESERT STORM for C-130s. He is a combat experienced pilot
and decorated officer.


Gilberto M.
Duarte, Jr.serves as Chief
Financial Officer. He joined the Company in August 1998 as Vice
President and Controller and was named Chief Financial Officer,
effective December 1998. Mr. Duartes career spans
35 years in the airline industry having held positions with
Eastern Airlines as Division Controller and Vice President of
Airport Operations. From 1992 to 1995, he served as Executive
Vice President of Universal Aviation Services. From 1995 to
1997, he served as Executive Vice President of BWIA
International, based in Trinidad & Tobago. Prior to
joining World Airways, Mr. Duarte served as President for
Inktel Marketing from 1997 to 1998.

Jeffrey L. MacKinneyjoined the Company in August 2003 as
Senior Vice President, Planning and Corporate Development after
serving as President of his own aviation consulting firm. At
World Airways, his responsibilities have included strategic and
fleet planning, fleet management and information technology.
Effective April 1, 2004, Mr. MacKinney will assume the
title of Chief Operating Officer. Mr. MacKinney has
considerable aviation experience having served as President and
Chief Executive Officer for TransMeridian Airlines, an Atlanta
based charter airline, and as Senior Vice President of Marketing
and Planning for AirTran Airways. He held various leadership
positions during nine years with American Airlines, his last
position as Managing Vice President of AMR Consulting Group.
Prior to American, he served as Vice President of Marketing and
Planning for Air Virginia, a regional airline that became the
third American Eagle carrier.

Cindy M. Swinsonjoined the Company as General Counsel
and Corporate Secretary effective July 16, 2001. Prior to
joining World Airways, Ms. Swinson was Vice President,
Corporate Secretary and General Counsel at Waffle
House, Inc. From July 1987 to May 1999, she was Vice
President, Corporate Secretary and General Counsel for the
Cotton States Insurance Group. From March 1985 to July 1987,
Ms. Swinson served as Corporate Counsel for Canada Life
Assurance Company, where she was responsible for the legal
function of the United States division. Prior to 1985,
Ms. Swinson was in private practice in Savannah, Georgia,
representing corporate clients in all aspects of civil
litigation, securities, corporate and real estate transactions.

Charles H.J. Addisonbecame the Executive Vice President,
Operations of World Airways in June 2002. He joined the Company
in May 1988 as Supervisor, Revenue Accounting and in June 1989
moved into a Financial Analyst position. Mr. Addison was
promoted to Director, Materials Services in February 1992 and
held this position for seven years. Between January 1999 and
April 2001, Mr. Addison held two other Director
positions  Director, Material and Scheduled Service
Administration, and Director, Contracts and Purchasing. In April
2001, Mr. Addison was appointed to Senior Director,
Strategic Planning and Contracts. In his current position as
Executive Vice President, Operations, Mr. Addison is
responsible for managing the Technical Services, Customer
Services, Flight Operations, In-flight Services and Travel
Departments.

Beneficial Ownership Reporting

The Company incorporates herein by reference the
information required by Item 405 of Regulation S-K
contained in its 2004 Proxy Statement.

Code of Ethics

The Company has adopted a Code of Ethics, which
applies to the Companys principal executive officer,
principal financial officer and principal accounting officer or
controller, or persons performing similar functions. The Code of
Ethics is posted in the Companys website at
www.worldairways.com. The Company intends to disclose any
amendments to, or waivers from, the Code of Ethics on its
website.

64



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##### 








|         |                       
|-------- | ----------------------
|Item 11. | Executive Compensation

The Company incorporates herein by reference the
information required by Item 402 of Regulation S-K
concerning executive compensation contained in the 2004 Proxy
Statement.






|         |                                                                   
|-------- | ------------------------------------------------------------------
|Item 12. | Security Ownership of Certain Beneficial
    Owners and Management

The Company incorporates herein by reference the
information required by Items 201(d) and 403 of
Regulation S-K concerning security ownership of certain
beneficial owners and management and equity beneficial plans
contained in the 2004 Proxy Statement.






|         |                                                   
|-------- | --------------------------------------------------
|Item 13. | Certain Relationships and Related
    Transactions

The Company incorporates herein by reference the
information required by Item 404 of Regulation S-K
concerning certain relationships and related transactions
contained in the 2004 Proxy Statement.






|         |                                           
|-------- | ------------------------------------------
|Item 14. | Principal Accountant Fees and
    Services

The Company incorporates herein by reference the
information required by Item 9(e) of Schedule 14A
concerning principal accountant fees and services contained in
the 2004 Proxy Statement.




PART IV






|         |                                                                     
|-------- | --------------------------------------------------------------------
|Item 15. | Exhibits, Financial Statement Schedules,
    and Reports on Form 8-K

(a)(1) Financial Statements



| |   |                                                                                                                     
| | - | --------------------------------------------------------------------------------------------------------------------
| |  | Consolidated Balance Sheets, December 31,
    2003 and 2002                                                         
|
| |  | Consolidated Statements of Operations, Years
    Ended December 31, 2003, 2002 and 2001                             
|
| |  | Consolidated Statements of Changes in
    Stockholders Deficiency, Years Ended December 31,
    2003, 2002 and 2001
|
| |  | Consolidated Statements of Cash Flows, Years
    Ended December 31, 2003, 2002 and 2001                             
|
| |  | Notes to Consolidated Financial Statements                                                                          
|
| |  | Independent Auditors Report                                                                                        

(2) Financial Statement
Schedules

NOTE: All schedules are omitted because the
requisite information is either presented in the financial
statements or notes thereto or is not present in amounts
sufficient to require submission of the schedules.

(b) Reports on Form 8-K

During the last quarter covered by this Annual
Report, the Company filed or furnished the following Current
Reports on Form 8-K:

Current Reports of Item 5 (Other
Events)



| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1. | The Company filed a Current Report on
    Form 8-K with the SEC on October 10, 2003, announcing
    the termination of the exchange offer for its outstanding
    8% Convertible Senior Subordinated Debentures due 2004.                                                                                                                                                                                                                                                                                                                                                                                            
|
| | 2. | The Company filed a Current Report on
    Form 8-K with the SEC on November 12, 2003, announcing
    agreements with three institutional holders of its
    8% Convertible Senior Subordinated Debentures due 2004, for
    these holders to acquire $25.5 million aggregate principal
    amount of the Companys newly-issued six-year
    8.0% Convertible Senior Subordinated Debentures in exchange
    for $22.5 million aggregate principal amount of existing
    debentures and $3.0 million in cash (the third paragraph of
    the accompanying press release shall not be deemed filed with
    the SEC).

65



---



##### 





| |    |                                                                                                                                                                                                                                                                     
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 3. | The Company filed a Current Report on
    Form 8-K with the SEC on December 15, 2003, announcing
    that the Company adjourned the special meeting of stockholders
    scheduled for December 15, 2003 because of lack of a quorum.                                
|
| | 4. | The Company filed a Current Report on
    Form 8-K with the SEC on December 19, 2003, announcing
    that, at its reconvened special meeting of stockholders, the
    Companys stockholders approved both proposals presented
    for their consideration and vote.
|
| | 5. | The Company filed a Current Report on
    Form 8-K with the SEC on December 31, 2003, announcing
    the closing of a $30,000,000 term loan supported by a
    $27,000,000 federal guarantee from the Air Transportation
    Stabilization Board.                   

Current Reports of Item 9
(Regulation FD Disclosure) and/or Item 12 (Results of
Operations and Financial Conditions)



| |    |                                                                                                                                                                                           
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1. | The Company furnished a Current Report on
    Form 8-K to the SEC on October 3, 2003, providing an
    update on the exchange offer and announcing financial guidance.                    
|
| | 2. | The Company furnished a Current Report on
    Form 8-K to the SEC on November 12, 2003, announcing
    its financial results for the quarter and nine months ended
    September 30, 2003.



| |     |         
| | --- | --------
| | (c) | Exhibits

|            |   |             |  |                                                                                                                                                                                                                                                                          |  |  |   | 
|----------- | - | ----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  |  | - | 
|Exhibit No. |   | Description |  | Notes                                                                                                                                                                                                                                                                   
|            |   |             |  |                                                                                                                                                                                                                                                                         
|            | 3 | .1          |  | Amended and Restated Certificate of
    Incorporation, as amended (incorporated by reference to
    Exhibit 3.1 to the Companys Annual Report on
    Form 10-K for the fiscal year ended December 31, 2002,
    filed March 27, 2003).                                  |  |  | * | 
|            | 3 | .2          |  | Amended and Restated Bylaws (incorporated by
    reference to Exhibit 3.2 to the Companys Registration
    Statement on Form S-1, SEC file no. 033-95488, filed on
    August 8, 1995).                                                                                 |  |  | * | 
|            | 4 | .1          |  | Stock Registration Rights Agreement between
    Malaysian Helicopter Services Berhad and the Company
    (incorporated by reference to Exhibit 10.2 to the Current
    Report on Form 8-K of WorldCorp, Inc., SEC file
    no. 1-9591, filed March 14, 1994).            |  |  | * | 
|            | 4 | .2          |  | Indenture, dated as of December 30, 2003, by
    and between the Company and Wachovia Bank, National Association,
    as trustee (incorporated by reference to Exhibit 99.1 to
    the Companys Current Report on Form 8-K, filed
    January 21, 2004).                |  |  | * | 
|            | 4 | .3          |  | Form of Purchase Agreement relating to the
    Companys 8.0% Convertible Senior Subordinated
    Debentures due 2009 (incorporated by reference to
    Exhibit 99.1 to the Companys Current Report on
    Form 8-K, filed on November 12, 2003).                       |  |  | * | 
|            | 4 | .4          |  | Form of World Airways, Inc.
    8.0% Convertible Senior Subordinated Debentures due 2009
    (incorporated by reference to Exhibit 4.2 to the
    Companys Registration Statement on Form S-3, SEC file
    no. 333-113135, filed February 27, 2004).                   |  |  | * | 
|            | 4 | .5          |  | Registration Rights Agreement, dated as of
    December 30, 2003, by and between the Company and the Air
    Transportation Stabilization Board (incorporated by reference to
    Exhibit 99.9 to the Companys Current Report on
    Form 8-K, filed January 21, 2004). |  |  | * | 
|            | 4 | .6          |  | Warrant No. D-1-1, dated as of
    December 30, 2003 in favor of the Air Transportation
    Stabilization Board (incorporated by reference to
    Exhibit 99.5 to Current Report on Form 8-K, filed
    January 21, 2004).                                               |  |  | * | 
|            | 4 | .7          |  | Warrant No. D-1-2, dated as of
    December 30, 2003 in favor of the Air Transportation
    Stabilization Board (incorporated by reference to
    Exhibit 99.6 to Current Report on Form 8-K, filed
    January 21, 2004).                                               |  |  | * | 
|            | 4 | .8          |  | Warrant No. D-1-3, dated as of
    December 30, 2003 in favor of the Air Transportation
    Stabilization Board (incorporated by reference to
    Exhibit 99.7 to Current Report on Form 8-K, filed
    January 21, 2004).                                               |  |  | * | 

66



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##### 



|            |    |             |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |  |  |    | 
|----------- | -- | ----------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  |  | -- | 
|Exhibit No. |    | Description |  | Notes                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|            |    |             |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|            | 4  | .9          |  | Warrant No. D-1-4, dated as of
    December 30, 2003 in favor of the Air Transportation
    Stabilization Board (incorporated by reference to
    Exhibit 99.8 to Current Report on Form 8-K, filed
    January 21, 2004).                                                                                                                                                                                                                                                                                                                                                                     |  |  | *  | 
|            | 10 | .1          |  | First Amendment to Second Restated and Amended
    Accounts Receivable Management and Security Agreement dated
    August 8, 2001 between the Company and BNY Financial
    Corporation (Exhibit 10.1 to the Companys Annual
    Report on Form 10-K for the fiscal year ended
    December 31, 2001, filed April 1, 2002).                                                                                                                                                                                                                                                                   |  |  | *  | 
|            | 10 | .2          |  | Loan Agreement, dated as of December 30,
    2003, by and among the Registrant, as borrower, Govco
    Incorporated, as primary Tranche A lender, Citibank, N.A.,
    as alternate Tranche A lender, collateral agent and agent,
    Citicorp North America Inc., as Govco administrative agent,
    Citicorp USA Inc., as Tranche B lender, Phoenix American
    Financial Services, Inc., as loan administrator, and the
    Air Transportation Stabilization Board (incorporated by
    reference to Exhibit 99.3 to the Companys Current
    Report on Form 8-K, filed January 21, 2004). |  |  | *  | 
|            | 10 | .3          |  | Intellectual Property Security Agreement, dated
    as of December 30, 2003, in favor of Citibank, N.A., the
    lenders signatory thereto, the Air Transportation Stabilization
    Board and International Lease Finance Corporation.                                                                                                                                                                                                                                                                                                                                                        |  |  |    | 
|            | 10 | .4          |  | Payoff Letter, dated as of December 30,
    2003, issued by Wells Fargo Foothill, Inc. in favor of the
    Company.                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |  |  |    | 
|            | 10 | .5          |  | Mortgage and Security Agreement, dated as of
    December 30, 2003, by and among the Registrant and World
    Airways Parts Company, LLC, as grantors, in favor of Citibank,
    N.A., as collateral agent (incorporated by reference to
    Exhibit 99.4 to the Companys Current Report on
    Form 8-K, filed January 21, 2004).                                                                                                                                                                                                                                                            |  |  | *  | 
|            | 10 | .6          |  | Third Amended and Restated Employment Agreement,
    dated as of June 1, 2002, by and between the Company and
    Hollis L. Harris (incorporated by reference to Exhibit 10.2
    to the Companys Annual Report on Form 10-K for the
    fiscal year ended December 31, 2002, filed March 27,
    2003).                                                                                                                                                                                                                                                                                      |  |  | *+ | 
|            | 10 | .7          |  | Amended and Restated Employment Agreement, dated
    as of January 22,1999, by and between the Company and Gilberto
    M. Duarte, Jr. (incorporated by reference to
    Exhibit 10.16 to the Companys Quarterly Report for
    the period ended March 31, 1999, filed May 10, 1999).                                                                                                                                                                                                                                                                                                         |  |  | *+ | 
|            | 10 | .8          |  | Amendment Two to the Employment Agreement, dated
    as of May 1, 2001, by and between the Company and Gilberto
    M. Duarte, Jr. (incorporated by reference to
    Exhibit 10.7 to the Companys Annual Report on
    Form 10-K for the fiscal year ended December 31, 2001,
    filed April 1, 2002).                                                                                                                                                                                                                                                                                       |  |  | *+ | 
|            | 10 | .9          |  | Employment Agreement, dated as of
    September 1, 1999, by and between the Company and Randy
    Martinez (incorporated by reference to Exhibit 10.8 to the
    Companys Annual Report on Form 10-K for the fiscal
    year ended December 31, 2000, filed March 23, 2001).                                                                                                                                                                                                                                                                                                                  |  |  | *+ | 
|            | 10 | .10         |  | Amendment One to the Employment Agreement, dated
    as of May 1, 2001, by and between the Company and Randy
    Martinez (incorporated by reference to Exhibit 10.9 to the
    Companys Annual Report on Form 10-K for the fiscal
    year ended December 31, 2001, filed April 1, 2002).                                                                                                                                                                                                                                                                                                    |  |  | *+ | 
|            | 10 | .11         |  | Amendment Two to the Employment Agreement, dated
    as of May 1, 2003 by and between the Company and Randy
    Martinez.                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |  |  | +  | 
|            | 10 | .12         |  | Employment Agreement, dated as of
    January 16, 2002, by and between the Company and Cindy M.
    Swinson (incorporated by reference to Exhibit 10.12 to the
    Companys Annual Report on Form 10-K for the fiscal
    year ended December 31, 2001, filed April 1, 2002).                                                                                                                                                                                                                                                                                                                 |  |  | *+ | 
|            | 10 | .13         |  | Form of Indemnification Agreement with Directors
    and Executive Officers (incorporated by reference to
    Exhibit 10.13 to the Companys Annual Report on
    Form 10-K for the fiscal year ended December 31, 2001,
    filed April 1, 2002).                                                                                                                                                                                                                                                                                                                                             |  |  | *+ | 

67



---



##### 



|            |    |             |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |  |  |    | 
|----------- | -- | ----------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  |  | -- | 
|Exhibit No. |    | Description |  | Notes                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|            |    |             |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|            | 10 | .14         |  | Lease Agreement, dated as of October 13,
    2000, by and between the Company, as tenant, and Air Eagle
    Holdings, LLC, as landlord (incorporated by reference to
    Exhibit 10.14 to the Companys Annual Report on
    Form 10-K for the fiscal year ended December 31, 2001,
    filed April 1, 2002).                                                                                                                                                                                                         |  |  | *  | 
|            | 10 | .15         |  | Amendment One to the Lease Agreement, dated as of
    April 18, 2001, by and between the Company, as tenant, and
    Air Eagle Holdings, LLC, as landlord (incorporated by reference
    to Exhibit 10.15 to the Companys Annual Report on
    Form 10-K for the fiscal year ended December 31, 2001,
    filed April 1, 2002).                                                                                                                                                                                      |  |  | *  | 
|            | 10 | .16         |  | Escrow Agreement, dated as of October 27,
    2000, by and among the Company, as lessee, Air Eagle Properties,
    LLC, as lessor, and Peachtree National Bank, as lender
    (incorporated by reference to Exhibit 10.16 to the
    Companys Annual Report on Form 10-K for the fiscal
    year ended December 31, 2001, filed April 1, 2002).                                                                                                                                                                      |  |  | *  | 
|            | 10 | .17         |  | Restricted Stock Plan for Eligible Employees of
    the Company, including forms for Award Agreements and Stock
    Option Agreements (incorporated by reference to
    Exhibit 10.17 to the Companys Annual Report on
    Form 10-K for the fiscal year ended December 31, 2001,
    filed April 1, 2002).                                                                                                                                                                                                          |  |  | *+ | 
|            | 10 | .18         |  | Key Employee Retention Plan (incorporated by
    reference to Exhibit 10.18 to the Companys Annual
    Report on Form 10-K for the fiscal year ended
    December 31, 2001, filed April 1, 2002).                                                                                                                                                                                                                                                                                                                    |  |  | *+ | 
|            | 10 | .19         |  | Amended and Restated World Airways, Inc.
    1995 Stock Option Plan, including forms for Award Agreements and
    Stock Option Agreements (incorporated by reference to
    Exhibit 10.19 to the Companys Annual Report on
    Form 10-K for the fiscal year ended December 31, 2001,
    filed April 1, 2002).                                                                                                                                                                                                      |  |  | *+ | 
|            | 10 | .20         |  | World Airways, Inc. 1999 Chief Executive
    Stock Option Plan (incorporated by reference to
    Exhibit 10.20 to the Companys Annual Report on
    Form 10-K for the fiscal year ended December 31, 2001,
    filed April 1, 2002).                                                                                                                                                                                                                                                                                 |  |  | *+ | 
|            | 10 | .21         |  | Loan and Security Agreement, dated as of
    December 12, 2002, by and among the Company, World Airways
    Parts Company, LLC, the lender identified on the signature pages
    thereof, and Foothill Capital Corporation (incorporated by
    reference to Exhibit 10.21 to the Companys Annual
    Report on Form 10-K for the fiscal year ended
    December 31, 2002, filed March 27, 2003).                                                                                                                    |  |  | *  | 
|            | 10 | .22         |  | Stock Pledge Agreement, dated as of
    December 12, 2002, by and between the Company and Foothill
    Capital Corporation (incorporated by reference to
    Exhibit 10.22 to the Companys Annual Report on
    Form 10-K for the fiscal year ended December 31, 2002,
    filed March 27, 2003).                                                                                                                                                                                                                    |  |  | *  | 
|            | 10 | .23         |  | Trademark Security Agreement, dated as of
    December 12, 2002, by and between the Company and Foothill
    Capital Corporation (incorporated by reference to
    Exhibit 10.23 to the Companys Annual Report on
    Form 10-K for the fiscal year ended December 31, 2002,
    filed March 27, 2003).                                                                                                                                                                                                              |  |  | *  | 
|            | 10 | .24         |  | World Airways Parts Company, LLC Limited
    Liability Company Agreement, dated as of November 27, 2002
    (incorporated by reference to Exhibit 10.24 to the
    Companys Annual Report on Form 10-K for the fiscal
    year ended December 31, 2002, filed March 27, 2003).                                                                                                                                                                                                                                       |  |  | *  | 
|            | 10 | .25         |  | Support and Management Agreement, dated as of
    December 12, 2002, by and between the Company and World
    Airways Parts Company, LLC (incorporated by reference to
    Exhibit 10.25 to the Companys Annual Report on
    Form 10-K for the fiscal year ended December 31, 2002,
    filed March 27, 2003).                                                                                                                                                                                                      |  |  | *  | 
|            | 10 | .26         |  | Master Assignment of Inventory, dated as of
    December 12, 2002, in favor of World Airways Parts Company,
    LLC, entered into pursuant to the Loan and Security Agreement,
    dated as of the same date, by and among the Company World
    Airways Parts Company, LLC, the lender parties thereto, and
    Foothill Capital Corporation (incorporated by reference to
    Exhibit 10.26 to the Companys Annual Report on
    Form 10-K for the fiscal year ended December 31, 2002,
    filed March 27, 2003). |  |  | *  | 

68



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##### 



|            |    |             |  |                                                                                                                                                                                                                                                                                  |  |  |    | 
|----------- | -- | ----------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  |  | -- | 
|Exhibit No. |    | Description |  | Notes                                                                                                                                                                                                                                                                           
|            |    |             |  |                                                                                                                                                                                                                                                                                 
|            | 10 | .27         |  | Employment Agreement, dated as of June 1,
    2002, by and between the Company and Charles H. J. Addison
    (incorporated by reference to Exhibit 10.27 to the
    Companys Annual Report on Form 10-K for the fiscal
    year ended December 31, 2002, filed March 27, 2003). |  |  | *+ | 
|            | 10 | .28         |  | Employment Agreement, dated as of June 1,
    2002, by and between the Company and John E. Ellington
    (incorporated by reference to Exhibit 10.28 to the
    Companys Annual Report on Form 10-K for the fiscal
    year ended December 31, 2002, filed March 27, 2003).     |  |  | *+ | 
|            | 10 | .29         |  | Amendment Three to the Employment Agreement,
    dated as of November 1, 2003 by and between the Company and
    Randy J. Martinez.                                                                                                                                              |  |  | +  | 
|            | 10 | .30         |  | Employment Agreement, dated as of August 22,
    2003, by and between the Company and Jeffrey L. MacKinney.                                                                                                                                                                      |  |  | +  | 
|            | 10 | .31         |  | World Airways, Inc. Non-Employees Stock
    Option Plan (incorporated by reference to Exhibit 10.46 to
    the Companys Registration Statement on Form S-1, SEC
    File No. 33-95488).                                                                                        |  |  | *+ | 
|            | 12 | .1          |  | Statement regarding Computation of Ratio of
    Earnings to Fixed Charges.                                                                                                                                                                                                       |  |  |    | 
|            | 21 | .1          |  | Subsidiaries of the Registrant.                                                                                                                                                                                                                                                  |  |  |    | 
|            | 23 | .1          |  | Consent of KPMG LLP.                                                                                                                                                                                                                                                             |  |  |    | 
|            | 31 | .1          |  | Certification of Chairman of the Board and Chief
    Executive Officer pursuant to Rule 13a-14(a) to
    Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                          |  |  |    | 
|            | 31 | .2          |  | Certification of Chief Financial Officer pursuant
    to Rule 13a-14(a) to Section 302 of the Sarbanes-Oxley
    Act of 2002.                                                                                                                                                    |  |  |    | 
|            | 32 | .1          |  | Certification pursuant to
    18 U.S.C. §1350, as adopted pursuant to
    Section 906 of the Sarbanes Oxley Act of 2002.                                                                                                                                                         |  |  |    | 
|            | 32 | .2          |  | Certification pursuant to
    18 U.S.C. §1350, as adopted pursuant to
    Section 906 of the Sarbanes Oxley Act of 2002.                                                                                                                                                         |  |  |    | 



---



|  |                                                       
|- | ------------------------------------------------------
|* | Incorporated by reference pursuant to
    Rule 12b-32.



|  |                                                             
|- | ------------------------------------------------------------
|+ | Management contract or compensatory plan or
    arrangement.



| |                          
| | -------------------------
| | Status of Prior Documents

World Airways Annual Report on
Form 10-K for the year ended December 31, 2003, at the
time of filing with the SEC, shall modify and supersede all
prior documents filed pursuant to Sections 13, 14, and
15(d) of the Securities Exchange Act of 1934, as amended, for
purposes of any offers or sales of any securities after the date
of such filing pursuant to any Registration Statement or
Prospectus filed pursuant to the Securities Act of 1933, as
amended, which incorporates by reference such Annual Report on
Form 10-K.

69



---



##### 



SIGNATURES

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



| |                    
| | -------------------
| | WORLD AIRWAYS, INC.



| |     |                            
| | --- | ---------------------------
| | By: | /s/ GILBERTO M. DUARTE, JR.

| |                        
| | -----------------------
| |                        
| | Gilberto M. Duarte, Jr.
| | Chief Financial Officer

Pursuant to the requirements of the Securities
Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the Registrant and in the
capacities and on the dates indicated.

|                                                   |  |                                           |  |                |  | 
|-------------------------------------------------- |  | ----------------------------------------- |  | -------------- |  | 
|                                                   |  |                                           |  |               
|Signature                                          |  | Title                                     |  | Date          
|                                                   |  |                                           |  |               
|                                                  
|/s/ HOLLIS L. HARRISHollis L. Harris               |  | Chairman and
    Chief Executive Officer  |  | March 26, 2004
|                                                  
|/s/ RANDY J. MARTINEZRandy J. Martinez             |  | President and
    Chief Operating Officer |  | March 26, 2004
|                                                  
|/s/ GILBERTO M. DUARTE, JR.Gilberto M. Duarte, Jr. |  | Chief Financial Officer                   |  | March 26, 2004
|                                                  
|/s/ DANIEL J. ALTOBELLODaniel J. Altobello         |  | Director                                  |  | March 26, 2004
|                                                  
|/s/ A. SCOTT ANDREWSA. Scott Andrews               |  | Director                                  |  | March 26, 2004
|                                                  
|/s/ JOEL H. COWANJoel H. Cowan                     |  | Director                                  |  | March 26, 2004
|                                                  
|/s/ JOHN E. ELLINGTONJohn E. Ellington             |  | Director                                  |  | March 26, 2004
|                                                  
|/s/ RONALD R. FOGLEMANRonald R. Fogleman           |  | Director                                  |  | March 26, 2004
|                                                  
|/s/ RUSSELL L. RAY, JR.Russell L. Ray, Jr.         |  | Director                                  |  | March 26, 2004
|                                                  
|/s/ PETER M. SONTAGPeter M. Sontag                 |  | Director                                  |  | March 26, 2004

70