##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 FORM 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended June 30, 2006
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to
 Commission File Number: 1-13025
 AirNet Systems, Inc.
  Ohio
(State or other jurisdiction of
incorporation or organization)
    
    31-1458309
(I.R.S. Employer
Identification No.)7250 Star Check Drive, Columbus, Ohio
(Address of principal executive offices)
    
    43217
(Zip Code)
 (614) 409-4900
 Not Applicable
  þ o
  o o þ
  o þ




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##### 



TABLE OF CONTENTS
 PAGEPART I. FINANCIAL INFORMATIONItem 1. Financial Statements:Condensed Consolidated Balance Sheets:June 30, 2006 (Unaudited) and December 31, 2005
    
    
    3Condensed Consolidated Statements of Operations:Three and Six Months Ended June 30, 2006 and 2005 (Unaudited)
    
    
    4Condensed Consolidated Statements of Cash Flows:Six Months Ended June 30, 2006 and 2005 (Unaudited)
    
    
    5Notes to Condensed Consolidated Financial Statements (Unaudited)
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and
Results of Operations
    
    
    12Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    20Item 4. Controls and Procedures
    
    
    21PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    21Item 1A. Risk Factors
    
    
    22Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    22Item 3. Defaults Upon Senior Securities
    
    
    22Item 4. Submission of Matters to a Vote of Security Holders
    
    
    22Item 5. Other Information
    
    
    22Item 6. Exhibits
    
    
    22SIGNATURES
    
    
    23INDEX TO EXHIBITS
    
    
    24EX-14EX-31.1EX-31.2EX-32
  2




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AIRNET SYSTEMS, INC.
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 June 30,
    
    
    December 31,In thousands, except par value data
    
    2006
    
    
    2005(unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    1,645
    
    
    $
    1,590Accounts receivable, less allowances
    
    
    22,552
    
    
    
    21,103Taxes receivable
    
    
    1,823
    
    
    
    1,786Deposits and prepaids
    
    
    2,043
    
    
    
    2,338Assets related to discontinued operations
    
    
    40,938
    
    
    
    42,621Total current assets
    
    
    69,001
    
    
    
    69,438Net property and equipment
    
    
    52,537
    
    
    
    53,701Deposits and other assets
    
    
    154
    
    
    
    154Total assets
    
    $
    121,692
    
    
    $
    123,293LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable and accrued expenses
    
    $
    8,372
    
    
    $
    10,037Salaries and related liabilities
    
    
    3,986
    
    
    
    4,719Current portion of notes payable
    
    
    1,854
    
    
    
    1,781Deferred income taxes
    
    
    
    
    
    
    124Notes payable related to discontinued operations
    
    
    28,761
    
    
    
    29,780Other liabilities related to discontinued operations
    
    
    583
    
    
    
    704Total current liabilities
    
    
    43,556
    
    
    
    47,145Notes payable, less current portion
    
    
    20,524
    
    
    
    24,458Deferred income taxes
    
    
    7,485
    
    
    
    5,311Shareholders equity:Preferred shares, $.01 par value; 10,000 shares authorized; no
shares issued and outstanding
    
    
    
    
    
    
    Common shares, $.01 par value; 40,000 shares authorized; 12,763
issued at June 30, 2006 and December 31, 2005, respectively
    
    
    128
    
    
    
    128Additional paid-in-capital
    
    
    76,186
    
    
    
    76,318Retained deficit
    
    
    (2,789
    )
    
    
    (6,454
    )Accumulated other comprehensive loss
    
    
    (13
    )
    
    
    (13
    )Treasury shares, 2,606and 2,614 common shares held at cost at
June 30, 2006 and December 31, 2005, respectively
    
    
    (23,385
    )
    
    
    (23,600
    )Total shareholders equity
    
    
    50,127
    
    
    
    46,379Total liabilities and shareholders equity
    
    $
    121,692
    
    
    $
    123,293
  3




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AIRNET SYSTEMS, INC.
 
 CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
 Three Months Ended
    
    
    Six Months EndedIn thousands, except per share data
    
    June 30,
    
    
    June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005NET REVENUES, NET OF EXCISE TAXBank services
    
    $
    29,101
    
    
    $
    28,845
    
    
    $
    57,385
    
    
    $
    56,138Express services
    
    
    14,981
    
    
    
    12,428
    
    
    
    29,025
    
    
    
    25,533Aviation services
    
    
    272
    
    
    
    117
    
    
    
    649
    
    
    
    284Total net revenues
    
    
    44,354
    
    
    
    41,390
    
    
    
    87,059
    
    
    
    81,955COSTS AND EXPENSESWages and benefits
    
    
    4,736
    
    
    
    4,971
    
    
    
    9,711
    
    
    
    10,091Aircraft fuel
    
    
    7,723
    
    
    
    7,049
    
    
    
    14,715
    
    
    
    13,281Aircraft maintenance
    
    
    4,190
    
    
    
    3,873
    
    
    
    8,285
    
    
    
    7,677Contracted air costs
    
    
    4,439
    
    
    
    3,681
    
    
    
    8,608
    
    
    
    6,932Ground courier
    
    
    8,717
    
    
    
    7,634
    
    
    
    16,896
    
    
    
    15,475Depreciation
    
    
    2,868
    
    
    
    3,133
    
    
    
    5,751
    
    
    
    6,249Insurance, rent and landing fees
    
    
    2,112
    
    
    
    2,244
    
    
    
    3,989
    
    
    
    4,495Travel, training and other
    
    
    1,147
    
    
    
    1,356
    
    
    
    2,678
    
    
    
    2,865Selling, general and administrative
    
    
    4,772
    
    
    
    4,893
    
    
    
    9,237
    
    
    
    10,091Net gain on disposition of assets
    
    
    (4
    )
    
    
    (2
    )
    
    
    (12
    )
    
    
    (52
    )Total costs and expenses
    
    
    40,700
    
    
    
    38,832
    
    
    
    79,858
    
    
    
    77,104Income from continuing operations before interest expense
    
    
    3,654
    
    
    
    2,558
    
    
    
    7,201
    
    
    
    4,851Interest expense
    
    
    443
    
    
    
    502
    
    
    
    973
    
    
    
    829Income from continuing operations before income taxes
    
    
    3,211
    
    
    
    2,056
    
    
    
    6,228
    
    
    
    4,022Provision for income taxes
    
    
    1,146
    
    
    
    563
    
    
    
    2,267
    
    
    
    1,536Income from continuing operations
    
    
    2,065
    
    
    
    1,493
    
    
    
    3,961
    
    
    
    2,486Income (loss) from discontinued operations, net of tax
    
    
    (87
    )
    
    
    562
    
    
    
    (296
    )
    
    
    1,085Net income
    
    $
    1,978
    
    
    $
    2,055
    
    
    $
    3,665
    
    
    $
    3,571Income (loss) per common share  basic and diluted:Continuing operations
    
    $
    0.20
    
    
    $
    0.15
    
    
    $
    0.39
    
    
    $
    0.25Discontinued operations
    
    
    (0.01
    )
    
    
    0.05
    
    
    
    (0.03
    )
    
    
    0.10Net income per common share  basic and diluted
    
    $
    0.19
    
    
    $
    0.20
    
    
    $
    0.36
    
    
    $
    0.35
  4




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AIRNET SYSTEMS, INC.
 
 CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
 Six Months EndedIn thousands
    
    June 30,2006
    
    
    2005Operating activities:Income from continuing operations
    
    $
    3,961
    
    
    $
    2,486Adjustments to reconcile income from continuing operations to net cash
provided by operating activities:Depreciation
    
    
    5,751
    
    
    
    6,249Deferred taxes
    
    
    2,174
    
    
    
    2,210Stock-based compensation expense
    
    
    58
    
    
    
    Other, net
    
    
    138
    
    
    
    41Cash provided by (used in) operating assets and liabilities:Accounts receivable
    
    
    (1,665
    )
    
    
    1,006Taxes receivable
    
    
    (37
    )
    
    
    (145
    )Accounts payable and accrued expenses
    
    
    (1,723
    )
    
    
    (2,843
    )Salaries and related liabilities
    
    
    (733
    )
    
    
    613Other, net
    
    
    248
    
    
    
    259Net cash provided by continuing operations
    
    
    8,172
    
    
    
    9,876Net cash provided by discontinued operations
    
    
    2,074
    
    
    
    4,894Net cash provided by operating activities
    
    
    10,246
    
    
    
    14,770Investing activities:Purchases of property and equipment   net
    
    
    (4,587
    )
    
    
    (11,280
    )Net cash used in continuing operations
    
    
    (4,587
    )
    
    
    (11,280
    )Net cash used in discontinued operations
    
    
    (749
    )
    
    
    (1,617
    )Net cash used in investing activities
    
    
    (5,336
    )
    
    
    (12,897
    )Financing activities:Proceeds from incentive stock plan programs
    
    
    25
    
    
    
    72Net repayments of debt
    
    
    (3,861
    )
    
    
    (972
    )Net cash used in continuing operations
    
    
    (3,836
    )
    
    
    (900
    )Net cash used in discontinued operations
    
    
    (1,019
    )
    
    
    (933
    )Net cash used in financing activities
    
    
    (4,855
    )
    
    
    (1,833
    )Net increase in cash
    
    
    55
    
    
    
    40Cash and cash equivalents at beginning of period
    
    
    1,590
    
    
    
    1,086Cash and cash equivalents at end of period
    
    $
    1,645
    
    
    $
    1,126
  5




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AIRNET SYSTEMS, INC.
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 1. Basis of Presentation
     Accounting
for Uncertainty in Income Taxes
  2. Discontinued Operations
  Accounting for
the Impairment or Disposal of Long-Lived Assets
  6




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3. Stock Plans and Awards
 Accounting for Stock Issued to Employees, Accounting for Stock-Based Compensation
   Impact of the Adoption of FAS 123(R)
  7




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Three Months Ended
    
    
    Six Months EndedJune 30, 2005
    
    
    June 30, 2005Income from continuing operations
    
    $
    1,493
    
    
    $
    2,486Income from discontinued operations, net of tax
    
    
    562
    
    
    
    1,085Net income, as reported
    
    $
    2,055
    
    
    $
    3,571Deduct: Total stock-based employee compensation expense determined
under fair value method for all awards, net of related tax effects
    
    
    (31
    )
    
    
    (54
    )Pro forma net income
    
    $
    2,024
    
    
    $
    3,517Net income per common share  basic and diluted:Income per common share from continuing operations
    
    $
    .15
    
    
    $
    .25Income per common share from discontinued operations, net of tax
    
    $
    .05
    
    
    $
    .10Net income per common share
    
    $
    .20
    
    
    $
    .35
  4. Net Income Per Common Share
  Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Numerator:Income from continuing operations
    
    $
    2,065
    
    
    $
    1,493
    
    
    $
    3,961
    
    
    $
    2,486Income (loss) from discontinued operations, net of tax
    
    
    (87
    )
    
    
    562
    
    
    
    (296
    )
    
    
    1,085Net income
    
    $
    1,978
    
    
    $
    2,055
    
    
    $
    3,665
    
    
    $
    3,571Denominator:Basic  weighted average common shares outstanding
    
    
    10,144
    
    
    
    10,127
    
    
    
    10,140
    
    
    
    10,123DilutedDilutive effect of stock optionsemployees, officers, and directors
    
    
    
    
    
    
    32
    
    
    
    
    
    
    
    16Adjusted weighted average common shares outstanding
    
    
    10,144
    
    
    
    10,159
    
    
    
    10,140
    
    
    
    10,139Net income (loss) per common share  basic and diluted:Income from continuing operations
    
    $
    0.20
    
    
    $
    0.15
    
    
    $
    0.39
    
    
    $
    0.25Income (loss) from discontinued operations, net of tax
    
    
    (.01
    )
    
    
    .05
    
    
    
    (.03
    )
    
    
    .10Net income per common share
    
    $
    0.19
    
    
    $
    0.20
    
    
    $
    0.36
    
    
    $
    0.35
  8




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5. Bank Financing Matters
 Term Notes and Revolving Credit Facility
       9




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##### Table of Contents



Other Term Notes
  Term Loans  Discontinued Operations
  6. Income Taxes
  10




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7. Contingencies
   11




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##### Table of Contents



AIRNET SYSTEMS, INC.
 
 ITEM 2  MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
 Safe Harbor Statement
  General
    12




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Purchase Agreement Related to Sale of Jetrides Passenger Charter Business
  Results of Operations
 Financial Overview
    Net Revenues
 Three Months Ended
    
    
    Increase (Decrease)
    
    
    Six Months Ended
    
    
    Increase (Decrease)June 30,
    
    
    2006 to 2005
    
    

June 30,
    
    
    2006 to 2005Dollars in 000s
    
    
    
    
    
    % of
    
    
    
    
    
    
    % of
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    % of
    
    
    
    
    
    
    % ofNet Revenues
    
    2006
    
    
    Total
    
    
    2005
    
    
    Total
    
    
    $
    
    
    %
    
    
    2006
    
    
    Total
    
    
    2005
    
    
    Total
    
    
    $
    
    
    %Revenues Net of Excise TaxBank Services
    
    $
    29,101
    
    
    
    66
    %
    
    $
    28,845
    
    
    
    70
    %
    
    $
    256
    
    
    
    1
    %
    
    $
    57,385
    
    
    
    66
    %
    
    $
    56,138
    
    
    
    69
    %
    
    $
    1,247
    
    
    
    2
    %Express Services
    
    
    14,981
    
    
    
    34
    %
    
    
    12,428
    
    
    
    30
    %
    
    
    2,553
    
    
    
    21
    %
    
    
    29,025
    
    
    
    33
    %
    
    
    25,533
    
    
    
    31
    %
    
    
    3,492
    
    
    
    14
    %Aviation Services
    
    
    272
    
    
    
    0
    %
    
    
    117
    
    
    
    0
    %
    
    
    155
    
    
    
    132
    %
    
    
    649
    
    
    
    1
    %
    
    
    284
    
    
    
    0
    %
    
    
    365
    
    
    
    129
    %Total Net Revenues
    
    $
    44,354
    
    
    
    100
    %
    
    $
    41,390
    
    
    
    100
    %
    
    $
    2,964
    
    
    
    7
    %
    
    $
    87,059
    
    
    
    100
    %
    
    $
    81,955
    
    
    
    100
    %
    
    $
    5,104
    
    
    
    6
    %
   13




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Bank Services Revenues
 Three Months Ended
    
    
    Increase (Decrease)
    
    
    Six Months Ended
    
    
    Increase (Decrease)Dollars in 000s
    
    June 30,
    
    
    2006 to 2005
    
    
    June 30,
    
    
    2006 to 2005Bank Services Revenues
    
    2006
    
    
    2005
    
    
    $
    
    
    %
    
    
    2006
    
    
    2005
    
    
    $
    
    
    %Bank Services Revenues, Net of
Federal Excise Tax Fees
    
    $
    24,783
    
    
    $
    26,003
    
    
    $
    (1,220
    )
    
    
    (5
    )%
    
    $
    49,528
    
    
    $
    51,185
    
    
    $
    (1,657
    )
    
    
    (3
    )%Fuel Surcharge
    
    
    4,318
    
    
    
    2,842
    
    
    
    1,476
    
    
    
    52
    %
    
    
    7,857
    
    
    
    4,953
    
    
    
    2,904
    
    
    
    59
    %Total Net Bank Services Revenues
    
    $
    29,101
    
    
    $
    28,845
    
    
    $
    256
    
    
    
    1
    %
    
    $
    57,385
    
    
    $
    56,138
    
    
    $
    1,247
    
    
    
    2
    %
    Express Services Revenues
 Three Months Ended
    
    
    Increase (Decrease)
    
    
    Six Months Ended
    
    
    Increase (Decrease)Dollars in 000s
    
    June 30,
    
    
    2006 to 2005
    
    
    June 30,
    
    
    2006 to 2005Express Services Revenues
    
    2006
    
    
    2005
    
    
    $
    
    
    %
    
    
    2006
    
    
    2005
    
    
    $
    
    
    %Express Revenues  Non Charter
    
    $
    9,130
    
    
    $
    8,214
    
    
    $
    916
    
    
    
    11
    %
    
    $
    18,061
    
    
    $
    17,244
    
    
    $
    817
    
    
    
    5
    %Express Revenues  Charter
    
    
    3,589
    
    
    
    3,621
    
    
    
    (32
    )
    
    
    (1
    )%
    
    
    7,199
    
    
    
    7,208
    
    
    
    (9
    )
    
    
    0
    %Fuel Surcharge
    
    
    2,593
    
    
    
    1,012
    
    
    
    1,581
    
    
    
    156
    %
    
    
    4,535
    
    
    
    1,888
    
    
    
    2,647
    
    
    
    140
    %Federal Excise Tax Fee
    
    
    (331
    )
    
    
    (419
    )
    
    
    88
    
    
    
    21
    %
    
    
    (770
    )
    
    
    (807
    )
    
    
    37
    
    
    
    5
    %Net Express Services Revenues
    
    $
    14,981
    
    
    $
    12,428
    
    
    $
    2,553
    
    
    
    21
    %
    
    $
    29,025
    
    
    $
    25,533
    
    
    $
    3,492
    
    
    
    14
    %
  14




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Aviation Services
  Costs and Expenses
 Three Months Ended
    
    
    Increase (Decrease)
    
    
    Six Months Ended
    
    
    Increase (Decrease)Dollars in 000s
    
    June 30,
    
    
    2006 to 2005
    
    
    June 30,
    
    
    2006 to 2005Costs and Expenses
    
    2006
    
    
    2005
    
    
    $
    
    
    %
    
    
    2006
    
    
    2005
    
    
    $
    
    
    %Wages and benefits
    
    $
    4,736
    
    
    $
    4,971
    
    
    $
    (235
    )
    
    
    (5
    )%
    
    $
    9,711
    
    
    $
    10,091
    
    
    $
    (380
    )
    
    
    (4
    )%Aircraft fuel
    
    
    7,723
    
    
    
    7,049
    
    
    
    674
    
    
    
    10
    %
    
    
    14,715
    
    
    
    13,281
    
    
    
    1,434
    
    
    
    11
    %Aircraft maintenance
    
    
    4,190
    
    
    
    3,873
    
    
    
    317
    
    
    
    8
    %
    
    
    8,285
    
    
    
    7,677
    
    
    
    608
    
    
    
    8
    %Contracted air costs
    
    
    4,439
    
    
    
    3,681
    
    
    
    758
    
    
    
    21
    %
    
    
    8,608
    
    
    
    6,932
    
    
    
    1,676
    
    
    
    24
    %Ground courier
    
    
    8,717
    
    
    
    7,634
    
    
    
    1,083
    
    
    
    14
    %
    
    
    16,896
    
    
    
    15,475
    
    
    
    1,421
    
    
    
    9
    %Depreciation
    
    
    2,868
    
    
    
    3,133
    
    
    
    (265
    )
    
    
    (8
    )%
    
    
    5,751
    
    
    
    6,249
    
    
    
    (498
    )
    
    
    (8
    )%Insurance, rent and landing fees
    
    
    2,112
    
    
    
    2,244
    
    
    
    (132
    )
    
    
    (6
    )%
    
    
    3,989
    
    
    
    4,495
    
    
    
    (506
    )
    
    
    (11
    )%Travel, training and other
    
    
    1,147
    
    
    
    1,356
    
    
    
    (209
    )
    
    
    (15
    )%
    
    
    2,678
    
    
    
    2,865
    
    
    
    (187
    )
    
    
    (7
    )%Selling,
general and administrative
    
    
    4,772
    
    
    
    4,893
    
    
    
    (121
    )
    
    
    (2
    )%
    
    
    9,237
    
    
    
    10,091
    
    
    
    (854
    )
    
    
    (8
    )%Net gain on disposition of assets
    
    
    (4
    )
    
    
    (2
    )
    
    
    (2
    )
    
    
    100
    %
    
    
    (12
    )
    
    
    (52
    )
    
    
    40
    
    
    
    77
    %Total Costs and Expenses
    
    $
    40,700
    
    
    $
    38,832
    
    
    $
    1,868
    
    
    
    5
    %
    
    $
    79,858
    
    
    $
    77,104
    
    
    $
    2,754
    
    
    
    4
    %
  15




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##### Table of Contents



Liquidity and Capital Resources
 Cash flow from operating activities  Continuing Operations
  Cash flow from operating activities  Discontinued Operations
  16




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##### Table of Contents



Financing Activities  Continuing Operations
       17




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##### Table of Contents



Financing Activities  Discontinued Operations
  Investing Activities  Continuing Operations
   18




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Investing Activities  Discontinued Operations
  Regulation
      19




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##### Table of Contents



Continuation of Brown Gibbons Lang & Company Engagement and Establishment of Strategy Committee
   Off-Balance Sheet Arrangements
  Seasonality and Variability in Quarterly Results
  
 ITEM 3  Quantitative and Qualitative Disclosures About Market Risk
 Inflation and Interest Rates
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##### Table of Contents



Fuel Surcharge
  
 ITEM 4  Controls and Procedures
 Evaluation of Disclosure Controls and Procedures
  
    
    information required to be disclosed by AirNet in this Quarterly Report on
Form 10-Q and the other reports that AirNet files or submits under the
Exchange Act would be accumulated and communicated to AirNets management,
including its principal executive officer and principal financial officer, as
appropriate to allow timely decisions regarding required disclosure;
    
    information required to be disclosed by AirNet in this Quarterly Report on
Form 10-Q and the other reports that AirNet files or submits under the Exchange
Act would be recorded, processed, summarized and reported within the time
period specified in the SECs rules and forms; and
    
    AirNets disclosure controls and procedures are effective as of the end of
the quarterly period covered by this Quarterly Report on Form 10-Q to ensure that
material information relating to AirNet
and its consolidated subsidiaries is made known to them by others within those
entities, particularly during the period in which this Quarterly Report on Form
10-Q is being prepared.
 Changes in Internal Control Over Financial Reporting
  
 PART II  OTHER INFORMATION
 
 ITEM 1  Legal Proceedings
 In July 2005, AirNet received a letter from an attorney representing an association of
software publishers indicating that the association had evidence that AirNet had engaged
in the unlawful installation and use of certain software products. At the request of
the associations attorney, AirNet conducted a company wide review of its use of
software published by members of the association. The internal review did not disclose
any unauthorized installation or use of such software and the results of the review were
submitted to the associations attorney. The attorney for the association has requested
certain supplemental information regarding AirNets software usage. AirNet is in the
process of compiling the supplemental information regarding its software usage, which it
intends to submit to the associations attorney. AirNet believes that it is in
compliance with all software licensing requirements and that it has not engaged in any
unlawful use of the software published by the associations members.In prior years, AirNet used a significant number of independent contractors as couriers
to pick up and deliver its packages. During 2004, the California Employment Development
Department (the EDD) concluded an employment tax audit of AirNets operations in
California. As a result of its audit, the
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##### Table of Contents



EDD concluded that certain independent
contractors used by AirNet should be reclassified as employees. Based upon such
reclassification, the EDD proposed a $53,061 assessment against AirNet under Section
1127 of the California Unemployment Insurance Code. After receipt of the proposed
assessment, AirNet filed a Petition for Reassessment with the California Unemployment
Insurance Appeals Board. Since the filing of the Petition for Reassessment, AirNet has
submitted further documentation to the EDD to reduce the assessment based upon
employment taxes paid directly to the State of California by the affected independent
contractors. No hearing has been scheduled with regard to AirNets Petition for
Reassessment.Other than the items noted above, there are no pending legal proceedings involving
AirNet and its subsidiaries other than routine litigation incidental to their respective
business. In the opinion of AirNets management, these proceedings should not,
individually or in the aggregate, have a material adverse effect on AirNets results of
operations or financial condition.
 
 ITEM 1A  Risk Factors
 There are certain risks and uncertainties in our business that could cause our actual
results to differ materially from those anticipated.  In Item 1A  Risk Factors of Part I
of our Annual Report on Form 10-K for the fiscal year ended December 31, 2005 (the 2005
Form 10-K), we included a detailed discussion of our risk factors.  The following
additional risk factor should be read in conjunction with the other information set forth in this
Quarterly Report on Form 10-Q as well as the risk factors disclosed in the 2005 Form 10-K,
as filed with the U.S. Securities and Exchange Commission on March 31, 2006 and available at
www.sec.gov.The conditions to the consummation of the sale of the Jetride passenger charter
business to Pinnacle required by the definitive purchase agreement may not be satisfied.The pending sale of Jetrides passenger charter business to Pinnacle is subject to
standard closing conditions (including that there be no material adverse change in Jetrides
business) and receipt of requisite assurances from the FAA that New Jetride is deemed to possess
the Part 135 air carrier operating certificate issued by the FAA with respect to Jetrides
passenger charter business and that the Part 135 air carrier operating certificate
will continue to be operable by New Jetride upon and immediately after the transfer of the New
Jetride capital stock to Pinnacle in connection with the closing of the sale transaction.
While AirNet expects to be able to close the sale of the Jetride passenger charter business to
Pinnacle, there can be no assurance that the closing conditions, as well as the FAA assurances,
required by the definitive purchase agreement will be satisfied and that the closing will occur.The foregoing could materially affect our business, financial condition or future
results.  These risk factors are not the only risks facing AirNet. Additional risks and
uncertainties not currently known to us or that we currently deem to be immaterial also
may materially adversely affect our business, financial condition and/or operating results.
 
 ITEM 2  Unregistered Sales of Equity Securities and Use of Proceeds
 (a)
    
    Not applicable.(b)
    
    Not applicable.(c)
    
    Neither AirNet Systems, Inc. nor any affiliated purchaser, as
defined in Rule 10b-18(a)(3) under the Securities Exchange Act of 1934, as
amended, purchased any common shares of AirNet Systems, Inc. during the fiscal
quarter ended June 30, 2006. On February 18, 2000, AirNet Systems, Inc.
announced a stock repurchase plan under which up to $3.0 million
of its common shares may be repurchased from time to time. These repurchases may be made in
open market transactions or through privately negotiated transactions. As of
June 30, 2006, AirNet Systems, Inc. had the authority to repurchase
approximately $0.6 million of its common shares under this stock repurchase
plan.
 
 ITEM 3   Defaults Upon Senior Securities. Not Applicable
 
 ITEM 4  Submission of Matters to a Vote of Security Holders.
   Director
    
    For
    
    
    WithheldJoel E. Biggerstaff
    
    
    7,136,312
    
    
    
    2,695,355James M. Chadwick
    
    
    9,501,464
    
    
    
    330,203Russell M. Gertmenian
    
    
    9,517,586
    
    
    
    314,081Gerald Hellerman
    
    
    9,465,401
    
    
    
    366,266Bruce D. Parker
    
    
    9,465,791
    
    
    
    365,876James E. Riddle
    
    
    9,515,754
    
    
    
    315,913
 
 ITEM 5  Other Information  None
 
 ITEM 6  Exhibits
 Exhibits:
 Exhibit No.
    
    Description2
    
    Purchase Agreement dated as of July 26, 2006, among Jetride, Inc., an Ohio Corporation, Pinnacle Air, LLC,
 a Delaware Limited Liability Company, and AirNet Systems, Inc., an Ohio Corporation (Incorporated herein by reference to Exhibit 2.1 to the Current Report on Form 8-K of AirNet
 Systems, Inc. dated and filed July 28, 2006 (SEC File No. 001-13025))14
    
    Code of Business Conduct and Ethics, as revised on August 2, 200631.1
    
    Rule 13a-14(a)/15d-14(a) Certification (Principal Executive Officer)31.2
    
    Rule 13a-14(a)/15d-14(a) Certification (Principal Financial Officer)32
    
    Section 1350 Certification
(Principal Executive Officer and Principal Financial Officer)
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##### Table of Contents



AIRNET SYSTEMS, INC.
 
 SIGNATURES
  AIRNET SYSTEMS, INC.Dated: August 9, 2006
    
    By:
    
    /s/ Gary W. QualmannGary W. Qualmann,Chief Financial Officer, Treasurer and Secretary(Duly Authorized Officer)(Principal Financial Officer)Dated: August 9, 2006
    
    By:
    
    /s/ Ray L. DruseikisRay L. Druseikis,Vice President of Finance and Controller(Duly Authorized Officer)(Principal Accounting Officer)
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##### Table of Contents



AIRNET SYSTEMS, INC.
 
 INDEX TO EXHIBITS
 Exhibit No.
    
    Description14
    
    Code of Business Conduct and Ethics, as revised on August 2, 200631.1
    
    Rule 13a-14(a)/15d-14(a) Certification (Principal Executive Officer)31.2
    
    Rule 13a-14(a)/15d-14(a) Certification (Principal Financial Officer)32
    
    Section 1350 Certification (Principal Executive Officer and Principal Financial Officer)
 24