Saker Aviation Services 10QSB 2006 Q2 Quarterly report (small business)

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-QSB

(Mark One)

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE

SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2006

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: 333-56046

FBO AIR, INC.

(Exact name of Small Business Issuer as Specified in Its Charter)

Nevada

(State or other jurisdiction of

incorporation or organization)

87-0617649

(I.R.S. Employer

Identification No.)

101 Hangar Road

Avoca, PA 18641

(Address of principal executive offices)

(570) 414-1400

(Issuer’s telephone number)

Check whether the issuer (1) 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 x

No o

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

Yes o

No x

As of August 17, 2006, the Registrant had 16,539,180 shares of its Common Stock, $0.001 par value, issued and outstanding.

Transitional Small Business Disclosure Format

Yes o

No x

FBO AIR, INC. AND SUBSIDIARIES

Form 10-QSB

June 30, 2006

Index

PART I - FINANCIAL INFORMATION

ITEM 1.

CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Page

Balance Sheet as of June 30, 2006

Statements of Operations for the Three and Six Months Ended June 30, 2006 and 2005

Statements of Cash Flows for the Six Months Ended June 30, 2006 and 2005

Notes to Financial Statements

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS

ITEM 3.

CONTROLS AND PROCEDURES

PART II - OTHER INFORMATION

ITEM 1.

LEGAL PROCEEDINGS

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

ITEM 4.

SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

ITEM 5.

OTHER INFORMATION

ITEM 6.

EXHIBITS

SIGNATURES

CERTIFICATIONS

FBO AIR, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
June 30, 2006
(Unaudited)

ASSETS

CURRENT ASSETS
Cash and cash equivalents	$ 867,885
Accounts receivable, net of allowance for
doubtful accounts of $215,635		4,040,186
Inventory		195,560
Prepaid expenses and other current assets		147,275
Total current assets		5,250,906

PROPERTY AND EQUIPMENT, net
of accumulated depreciation of $179,325		1,156,144

OTHER ASSETS
Deposits		26,500
Note receivable		150,000
Intangible assets - trade names		420,000
Other intangible assets, net of
accumulated amortization of $169,267		470,733
Goodwill		4,194,770
Total other assets		5,262,003
TOTAL ASSETS	$	11,669,053

LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES
Accounts payable	$	4,177,109
Customer deposits		723,017
Accrued expenses		1,090,885
Accrued interest and dividends		573,350
Term loan - related party		1,500,000
Notes payable - other - current portion		209,793
Total current liabilities		8,274,154

LONG-TERM LIABILITIES
Notes payable - other - less current portion		375,114
Senior secured notes payable - net of discount of $702,936		793,388
Total long-term liabilities		1,168,502

Total liabilities		9,442,656

MANDATORILY REDEEMABLE CONVERTIBLE
PREFERRED STOCK- net of discount of $1,774,955
$0.001 par value; 1,000 shares authorized;
Series A Cumulative Convertible - 625 shares issued
and outstanding, with rights to a cumulative 8% dividend
payable quarterly; liquidation preference of $3,980,148		1,356,029

COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS' EQUITY
Preferred stock - $.001 par value; authorized 10,000,000;
none issued and outstanding		-
Common stock - $.001 par value; authorized 100,000,000;
16,372,513 issued and outstanding		16,372
Additional paid-in capital		9,859,415
Deferred financing costs		(811,333	)
Deferred compensation		(529,598	)
Accumulated deficit		(7,664,488	)

TOTAL STOCKHOLDERS' EQUITY		870,368

TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY	$	11,669,053

See notes to condensed consolidated financial statements.

FBO AIR, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)


	For the Three Months Ended June 30,						For the Six Months Ended June 30,
	2006			2005			2006			2005

REVENUE	$	8,968,720		$	2,158,867		$	19,670,841		$	2,158,867
COST OF SALES		7,175,640			1,430,546			16,108,756			1,430,546
GROSS PROFIT		1,793,080			728,321			3,562,085			728,321

SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES (including $234,469, $ -, $271,469 and
$- of stock based compensation in the three months
ended June 30, 2006 and 2005 and for the six months
ended June 30, 2006 and 2005)		2,605,236			1,190,865			4,569,976			1,406,192

OPERATING LOSS		(812,156	)		(462,544	)		(1,007,891	)		(677,871	)

OTHER INCOME (EXPENSE)
OTHER INCOME		155,700			--			155,700			--
INTEREST INCOME		4,641			3,360			10,093			3,360
INTEREST EXPENSE		(197,027	)		(146,410	)		(373,493	)		(154,208	)

TOTAL OTHER INCOME (EXPENSE)		(36,686	)		(143,050	)		(207,700	)		(150,848	)

NET LOSS	$	(848,842	)	$	(605,594	)	$	(1,215,591	)	$	(828,719	)

Deemed dividend to preferred stockholders:
Amortization of discount		(327,435	)		(352,625	)		(1,056,348	)		(352,625	)

Amortization of deferred financing costs		(141,804	)		(159,514	)		(625,861	)		(159,514	)

Preferred stock dividend		(63,395	)		(84,630	)		(132,276	)		(84,630	)

Net loss applicable to common stockholders	$	(1,381,476	)	$	(1,202,363	)	$	(3,030,076	)	$	(1,425,488	)

Basic and Diluted Net Loss Per
Common Share applicable to common stockholders	$	(0.09	)	$	(0.12	)	$	(0.19	)	$	(0.18	)

Weighted Average Number of Common Shares
Outstanding - Basic and Diluted		16,236,834			10,044,397			15,816,809			8,079,317

See notes to condensed consolidated financial statements.

FBO AIR, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS
OF CASH FLOWS
(Unaudited)

	For the Six Months Ended June 30,
	2006			2005
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss	$	(1,215,591	)	$	(828,719	)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization		206,338			20,900
Amortization of debt discount		240,049			100,100
Stock based compensation		271,469			--

Changes in operating assets and liabilities:
Accounts receivable		(618,731	)		(646,386	)
Inventory		(4,305	)		43,383
Prepaid expenses and other current assets		74,319			(83,385	)
Due from stockholder		--			15,510
Accounts payable		27,197			555,508
Customer deposits		272,211			67,339
Accrued interest and dividends		68,963			--
Accrued expenses		285,138			11,050
TOTAL ADJUSTMENTS		822,648			84,019

NET CASH USED IN OPERATING
ACTIVITIES		(392,943	)		(744,700	)
CASH FLOWS FROM INVESTING ACTIVITIES
Issuance of note receivable					(350,000	)
Repayment of note receivable		200,000
Purchase of equipment		(57,753	)		(28,478	)
Acquisition of FBOs, less cash acquired of $167,329		--			(2,554,818	)
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES		142,247			(2,933,296	)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from the sale of convertible notes		--			20,000
Repayment of notes		(211,869	)		--
Deferred financing costs		--			(514,000	)
Proceeds from the private placement		--			4,488,976
Proceeds from the Co-Investment		--			1,250,000
NET CASH (USED IN) PROVIDED BY
FINANCING ACTIVITIES		(211,869	)		5,244,976
NET CHANGE IN CASH AND CASH EQUIVALENTS		(462,565	)		1,566,950

CASH AND CASH EQUIVALENTS - Beginning		1,330,450			14,117
CASH AND CASH EQUIVALENTS - Ending	$	867,885		$	1,581,097

See notes to condensed consolidated financial statements.

FBO AIR, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS
OF CASH FLOWS, CONTINUED

(Unaudited)


	For the Six Months Ended June 30,
	2006		2005


SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the periods for:

Interest	$	79,926	$	--
Income taxes	$	--	$	--

Non-cash investing and financing activities:

Common stock issued to settle obligations	$	48,125	$	--
Cashless exercise of stock options	$	207	$	--
Redeemable convertible preferred stock converted to common stock	$	650,000	$	400,000
Notes issued for acquisitions	$	--	$	672,948
Purchase of equipment under capital lease	$	37,000	$	--


See notes to condensed consolidated financial statements.

FBO AIR, INC. AND SUBSIDIARIES

Notes To Condensed Consolidated Financial Statements

(Unaudited)

NOTE 1 - Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial statements and with the instructions to Form 10-QSB. Accordingly, they do not include all of the information and disclosures required for annual financial statements. These financial statements should be read in conjunction with the financial statements and related footnotes included in the FBO Air, Inc. and Subsidiaries (the “Company”) Annual Report on Form 10-KSB for the year ended December 31, 2005 filed on April 17, 2006.

In the opinion of the Company’s management, all adjustments (consisting of normal recurring accruals) necessary to make the Company’s financial position as of June 30, 2006 and the results of operations and statements of cash flows for the periods shown not misleading have been included.

The results of operations for the three and six months ended June 30, 2006 are not necessarily indicative of the results to be expected for any full year or any other interim period.

NOTE 2 - Nature of Operations

FBO Air was formed on January 17, 2003 (date of inception) as a proprietorship to acquire and operate fixed base operators. On January 2, 2004, FBO Air, Inc. (“FBO Air”) was incorporated in the State of Arizona. Fixed base operators are the primary providers of services to general aviation aircraft operators. The business strategy of FBO Air and its subsidiaries is to purchase and consolidate fixed base operators in the secondary and tertiary markets located within the United States and to expand its charter aircraft management operations.

From its inception, the Company had been in the development stage and its efforts up to March 31, 2005 had been principally devoted to the organizational activities of raising capital, recruiting and hiring of key personnel, and identifying and screening of potential acquisitions.

On March 31, 2005, FBO Air formed FBO Air-Wilkes-Barre (“FBO Wilkes-Barre”), a wholly-owned subsidiary, and then acquired the Common Stock of Tech Aviation Service, Inc. (“Tech”), a fixed base operator in Avoca, Pennsylvania.

On March 31, 2005, FBO Air formed FBO Air-Garden City, a wholly-owned subsidiary of FBO Air, and then acquired certain operating assets of Central Plains Aviation, Inc., (“CPA”) a fixed base operator located in Garden City, Kansas.

Accordingly, since March 31, 2005, the Company has no longer been considered a development stage entity.

On September 23, 2005, FBO Air acquired the Common Stock of Airborne, Inc. (“Airborne”), a charter and aircraft management company, located in Elmira, New York.

On March 15, 2006, FBO Air formed Margeson & Associates, Inc. (“Margeson”), a wholly owned subsidiary of FBO Air. Margeson, an insurance agency, offers property, casualty and liability insurance targeted to the aviation industry. The operations of Margeson for the three and six months ended June 30, 2006 are deemed immaterial to the financial statements.

During March 2006, the Company completed its consolidation of certain activities under a single Federal Aviation Administration (“FAA”) Part 135 Certificate. In connection with the consolidation, on April 11, 2006 the Company sold Tech, whose sole asset immediately prior to the sale consisted of Tech’s FAA Part 135 Certificate, and recognized other income of approximately $156,000.

FBO AIR, INC. AND SUBSIDIARIES

Notes To Condensed Consolidated Financial Statements

(Unaudited)

NOTE 3 - Going Concern and Management’s Plans

On April 15, 2005, FBO Air closed on a round of financing related to its March and April 2005 private offering, raising gross cash proceeds of approximately $4,490,000. Simultaneously, FBO Air had raised $1,250,000 in a related private offering. On September 23, 2005, FBO Air raised $1,500,000 through the issuance of a 180-day term note, the funds from which were substantially applied to fund the acquisition of the Elmira location. There is no assurance that FBO Air will be able to raise the additional funds sufficient to enable the Company to attain profitable operations or continue as a going concern.

The accompanying condensed consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. As of June 30, 2006, the Company had cash and cash equivalents of approximately $868,000 and had a working capital deficiency of approximately $3,023,000. The Company generated revenues of approximately $8,969,000 and $19,671,000 respectively, for the three and six months ended June 30, 2006. Since inception, the Company has incurred, in the aggregate, net losses and net losses applicable to common stockholders of approximately $3,808,000 and $7,770,000, respectively, for the period from January 17, 2003 (date of inception) through June 30, 2006. These conditions raise substantial doubt about the Company's ability to continue as a going concern. The accompanying condensed consolidated financial statements do not reflect the possible effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty.

As indicated above, management has taken steps to improve the Company’s liquidity. The Company intends to raise additional capital through private debt and equity investors. There is no assurance that these funds, if raised, will be sufficient to enable the Company to attain profitable operations or continue as a going concern.

NOTE 4 - Summary of Significant Accounting Policies

Principles of Consolidation

The consolidated financial statements include the accounts of FBO Air and its wholly-owned subsidiaries, Tech, CPA and Airborne. All significant intercompany accounts and transactions have been eliminated in consolidation.

Net Loss Per Common Share

Basic net loss per common share is computed based on the weighted average number of shares of common stock outstanding during the periods presented. Common stock equivalents, consisting of options, warrants and convertible preferred stock, were not included in the calculation of the diluted loss per share because their inclusion would have had the effect of decreasing the loss per share otherwise computed. The total shares issuable upon the exercise of stock options, warrants and the convertible preferred stock as of June 30, 2006 and 2005 approximated 18,320,000 and 19,957,000, respectively.

Stock Based Compensation/Stock Options

During September 2004, the Board of Directors granted options to purchase an aggregate of 150,000 shares, 25,000 to each of the four independent directors and 50,000 to a consultant/stockholder of FBO Air. These options have an exercise price of $0.01 per share and expire four years from the date of grant. These options vested at the first anniversary of the date of grant. Options granted to non-employees are accounted for under SFAS No. 123, whereby compensation measurement of equity awards is based on their fair value. The fair market value of these options estimated at the date of grant using the Black-Scholes option pricing model was not deemed material.

FBO AIR, INC. AND SUBSIDIARIES

Notes To Condensed Consolidated Financial Statements

(Unaudited)

NOTE 4 - Summary of Significant Accounting Policies, continued

Stock Based Compensation/Stock Options, continued

Effective April 1, 2005, the Board of Directors granted options to purchase an aggregate of 750,000 shares of the Common Stock. An option expiring March 31, 2010 to purchase 250,000 shares of the Common Stock was granted to each of (i) Robert J. Ettinger, who was elected as a Vice Chairman of the Board and the Chief Operating Officer of FBO Air, (ii) Jeffrey M. Trenk, who was elected as a Vice Chairman and Executive Vice President of Business Development of FBO Air, and (iii) Ronald J. Ricciardi, the President and Chief Executive Officer of FBO Air. These options are exercisable at $1.60 per share, the closing sales price on April 1, 2005, and vested immediately upon the grant date.

Effective September 23, 2005, the Board of Directors granted to John H. Dow, employed as the President of Airborne, an option expiring September 23, 2010 to purchase 250,000 shares of the Common Stock. The option is exercisable at $0.33 per share, the closing sales price on September 22, 2005, and vested immediately upon the grant date.

During December 2005, the Board of Directors approved the 2005 Stock Option Plan (the “Plan”). The Plan is administered by FBO Air’s compensation committee and provides for 7,500,000 shares of Common Stock to be reserved for issuance under the Plan. Directors, officers, employees, and consultants of the Company are eligible to participate. The Plan provides for the awards of incentive and non-statutory stock options. The Committee determined the vesting schedule to be up to five years at the time of grant of any options under the Plan, and unexercised options will expire in ten years. The exercise price is to be equal to at least 100% of the fair market value of a share of Common Stock, as determined by the Committee, on the grant date.

Effective December 13, 2005, four non-employee directors were granted options under the Plan, expiring five years after date of grant to purchase, in the aggregate, 100,000 shares of the Common Stock. These options are exercisable at $0.64 and vest one year from date of the grant.

Effective April 1, 2006, the Board of Directors granted options under the Plan to purchase an aggregate of 750,000 shares of the Common Stock, expiring five years after the date of grant. An option expiring March 31, 2011 to purchase 250,000 shares of the Common Stock was granted to each of (i) Robert J. Ettinger, (ii) Jeffrey M. Trenk, and (iii) Ronald J. Ricciardi, These options are exercisable at $0.50 per share, the closing sales price on April 1, 2006, and vested immediately upon the grant date. These options are valued at $359,464.

Effective May 30, 2006, the Board of Directors granted options under the plan to purchase an aggregate of 160,000 shares of the Common Stock to employees of the Company, expiring three years after the date of grant. These options are exercisable at $0.51 per share, the closing price at May 30, 2006, and options as to 60,000 shares vested immediately upon the grant date and options as to 100,000 shares vest one year from the date of grant. These options are valued at $78,228.

For the three and six months ended June 30, 2006, the Company incurred stock-based compensation expense of $205,094 and $242,094, respectively, related to stock options. In addition, for the three and six months ended June 30, 2006, the Company incurred stock-based compensation expense of $29,375 in connection with stock issued in settlement of a legal dispute.

Prior to January 1, 2006, the Company accounted for employee options under the recognition and measurement provisions of Accounting Principles Board Opinion No. 25 ("APB 25"). Accordingly, the Company would recognize compensation expense only if it granted options with a discounted exercise price. Any resulting compensation expense would then have been recognized ratably over the associated service period. No stock-based employee compensation expense relating to the Company’s stock options were reflected in net loss, as all options granted had an exercise price equal to or greater than the market value of the underlying Common Stock on the date of grant. Prior to January 1, 2006, the Company provided pro-forma disclosure amounts in accordance with SFAS No. 148, "Accounting for Stock-Based Compensation--Transition and Disclosure" ("SFAS 148"), as if the fair value method defined by SFAS 123, “Accounting for Stock-Based Compensation” ("SFAS 123") had been applied to its stock-based compensation.

FBO AIR, INC. AND SUBSIDIARIES

Notes To Condensed Consolidated Financial Statements

(Unaudited)

NOTE 4 - Summary of Significant Accounting Policies, continued

Stock Based Compensation/Stock Options, continued

Effective January 1, 2006, the Company adopted the fair value recognition provisions of SFAS 123R, using the modified prospective transition method and therefore has not restated prior periods' results. Under this transition method, employee stock-based compensation expense for the three and six months ended March 31, 2006 included compensation expense for all stock-based compensation awards granted, but not yet fully vested, prior to January 1, 2006. The fair value of the options granted was determined at the original grant date in accordance with the provisions of SFAS 123. Stock-based compensation expense for all share-based payment awards granted after December 31, 2005 is based on the grant-date fair value estimated in accordance with the provisions of SFAS 123R. The Company recognizes these compensation costs over the requisite service period of the award, which is generally the vesting term of the options associated with the underlying employment agreement, where applicable.

As a result of adopting SFAS 123R, the impact to the consolidated condensed financial statements for the three and six months ended June 30, 2006 was approximately $205,000 and $242,000, respectively, greater than if the Company had continued to account for stock-based compensation under APB 25. The impact of the adoption of FAS123R on both basic and diluted earnings per share for the three and six months ended June 30, 2006 was $0.01 and $0.02 per share, respectively. At June 30, 2006, the unamortized value of employee stock options under SFAS 123R was approximately $529,528. The unamortized portion will be expensed over a weighted average period of approximately 4 years.

The Company accounts for equity instruments issued to non-employees in accordance with the provisions of SFAS 123 and the Emerging Issues Task Force (“EITF”) Issue No. 96-18, “Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or In Conjunction with Selling, Goods or Services” (EITF 96-18) which require that such equity instruments are recorded at their fair value on the measurement date, which date is typically upon the inception of the services that will be performed. For the three and six months ended June 30, 2006, stock based compensation expense for non-employees related to 57,598 shares of the Common Stock issued in connection with the settlement of litigation was $29,375 and was accounted for under EITF 96-18.

Option valuation models require the input of highly subjective assumptions including the expected life of the option. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options.

The fair value of each option grant during the three and six months ended June 30, 2006 was estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions used:

	For the Three Months Ended June 30, 2006	For the Six Months Ended June 30, 2006
Dividend yield	0%	0%
Expected volatility	232%	232%
Risk-free interest rate	4.9%	4.9%
Expected lives	3 years	3 years

The weighted average fair value of the options on the date of grant, using the fair value based methodology for the three and six months ended June 30, 2006 was $0.48.

FBO AIR, INC. AND SUBSIDIARIES

Notes To Condensed Consolidated Financial Statements

(Unaudited)

Note 4 - Summary of Significant Accounting Policies, continued

Stock Based Compensation/Stock Options, continued

A summary of the status of the outstanding options and the changes during the three and six months ended June 30, 2006 is presented in the table below:

	Number of Options			Weighted Average Exercise Price

Balance, January 1, 2006		1,250,000		$	1.08
Granted (weighted average fair value
of $0.48 per share)		910,000			0.50
Exercised		(375,000	)		0.22
Forfeited		-			-

Balance, June 30, 2006		1,785,000		$	0.96

The options exercised aggregating 375,000 were exercised on a cashless basis, and in connection therewith, the Company issued 207,435 shares of the Common Stock.

A summary of the Company’s stock options outstanding and exercisable at June 30, 2006 is presented in the table below:

	Option exercise price										Total		Intrinsic Value

	$	0.01	$	0.50	$	0.51	$	0.64	$	1.60
Outstanding		25,000		750,000		160,000		100,000		750,000		1,785,000	$	10,950

Weighted average remaining contractual life of options outstanding (in years)		2.25		4.75		4.92		2.25		3.75
Exercisable		25,000		750,000		60,000		-		750,000		1,585,000	$	10,250

The Company has determined that shares of Common Stock for future exercises shall be authorized but unissued shares of stock.

A summary of non-vested options at June 30, 2006 is shown below:

	Non-Vested Shares		Fair Value

Non-vested at January 1, 2006		200,000	$	0.57
Granted		-		-
Vested		-		-
Forfeited		-		-
Non-vested at June 30, 2006		200,000	$	0.57

For the three and six months ended June 30, 2005, under APB 25, no stock-based employee compensation expense relating to the Company’s stock options was reflected in net loss, as all options granted under its plan had an exercise price equal to or greater than the market value of the underlying Common Stock on the date of grant.

Note 4 - Summary of Significant Accounting Policies, continued

Stock Based Compensation/Stock Options, continued

For the Company’s pro forma information for the three and six months ended June 30, 2005, the fair value of each option grant was estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions used:

	For the Three Months Ended June 30, 2005	For the Six Months Ended June 30, 2005
Dividend yield	0%	0%
Expected volatility	55%	55%
Risk-free interest rate	3.9%	3.9%
Expected lives	2 years	2 years

The weighted average fair value of the options on the date of grant, using the fair value based method, for the three and six months ended June 30, 2005 was $- and $0.53.

The following table illustrates the effect on net loss and net loss per share if the Company had applied the fair value recognition method under the provisions of SFAS 123.

(All numbers in 000’s except per share data.)	For the Three Months Ended June 30, 2005			For the Six Months Ended June 30, 2005
Net loss applicable to common stockholders, as reported	$	(1,202	)	$	(1,425	)
Deduct: total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects, if any		20			20
Pro-forma net loss	$	(1,222	)	$	(1,445	)
Net loss per share applicable to common stockholders - basic and diluted:
As reported	$	(0.12	)	$	(0.18	)
Pro forma	$	(0.12	)	$	(0.18	)

Inventory

Inventory consists primarily of aviation fuel and is stated at the lower of cost or market determined by the first-in, first out method.

FBO AIR, INC. AND SUBSIDIARIES

Notes To Condensed Consolidated Financial Statements

(Unaudited)

Note 4 - Summary of Significant Accounting Policies, continued

Recently Issued Accounting Pronouncements

In February 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standard 155 - Accounting for Certain Hybrid Financial Instruments (“SFAS 155”), which eliminates the exemption from applying SFAS 133 (“Accounting for Derivative Instruments and Hedging Activities”) (“SFAS 133”) to interests in securitized financial assets so that similar instruments are accounted for similarly regardless of the form of the instruments. SFAS 155 also allows the election of fair value measurement at acquisition, at issuance, or when a previously recognized financial instrument is subject to a remeasurement event. Adoption is effective for all financial instruments acquired or issued after the beginning of the first fiscal year that begins after September 15, 2006. Early adoption is permitted. The adoption of SFAS 155 is not expected to have a material effect on the Company’s consolidated financial position, results of operations or cash flows.

In March 2006, the FASB issued Statement of Financial Accounting Standard 156 - Accounting for Servicing of Financial Assets (“SFAS 156”), which requires all separately recognized servicing assets and servicing liabilities be initially measured at fair value. SFAS 156 permits, but does not require, the subsequent measurement of servicing assets and servicing liabilities at fair value. Adoption is required as of the beginning of the first fiscal year that begins after September 15, 2006. Early adoption is permitted. The adoption of SFAS 156 is not expected to have a material effect on the Company’s consolidated financial position, results of operations or cash flows.

In July 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109” (“FIN 48”). FIN 48 clarifies the accounting and reporting for uncertainties in income tax law. This interpretation prescribes a comprehensive model for the financial statement recognition, measurement, presentation and disclosure of uncertain tax positions taken or expected to be taken in income tax returns. This interpretation shall be effective for fiscal years beginning after December 15, 2006. Earlier adoption is permitted as of the beginning of an enterprise’s fiscal year, provided the enterprise has not yet issued financial statements, including financial statements for any interim period for that fiscal year. The cumulative effects, if any, of applying this interpretation will be recorded as an adjustment to retained earnings as of the beginning of the period of adoption. The Company is currently evaluating the expected effect of FIN 48 on its consolidated financial statements and is currently not yet in a position to determine such effects.

FBO AIR, INC. AND SUBSIDIARIES

Notes To Condensed Consolidated Financial Statements

(Unaudited)

NOTE 5 - Pro forma Combined Results of Operations

The following table presents the unaudited pro forma combined results of operations of FBO Air, Tech, CPA, and Airborne for the three and six months ended June 30, 2005, as if the three subsidiaries had been acquired at January 1, 2005.

	For the Three Months Ended June 30, 2005			For the Six Months Ended June 30, 2005
Revenues: Net Sales	$	5,590,686		$	10,405,710
Net loss applicable to common stockholders	$	(604,755	)	$	(718,065	)
Basic and diluted net loss per common share	$	(0.05	)	$	(0.07	)
Pro-forma weighted average common shares outstanding - basic and diluted		12,377,731			10,379,644

The pro-forma combined results are not necessarily indicative of the results that actually would have occurred if the acquisitions had been completed as of January 1, 2005, nor are they necessarily indicative of future consolidated results.

NOTE 6 - Property and Equipment

Property and equipment as of June 30, 2006 consisted of the following:

				Estimated Useful Life
Aircraft	$	564,786			7 - 15 years
Vehicles		267,000			5 - 7 years
Office furniture and equipment		182,259			7 years
Tools and shop equipment		285,077			7 - 15 years
Leasehold improvements		36,347			7 - 10 years
Total	$	1,335,469
Less: accumulated depreciation and amortization		(179,325	)
Property and equipment, net	$	1,156,144

Depreciation and amortization expense for the three and six months ended June 30, 2006 and 2005 was approximately $45,000, $91,000 and $21,000 and $21,000, respectively.

NOTE 7 - Note Receivable

On May 26, 2005, the Company loaned $350,000 as a note receivable to a fixed base operator who was a potential acquisition target of the Company ("the Maker"). The note bears interest at 10% per annum and such interest only shall be paid quarterly, starting upon the three-month anniversary of the secured note. The note may be prepaid at any time. The Company was granted a security interest in all tangible property, goods and accounts of the Maker. Further, the Company had been granted an option to purchase the FBO owned by Maker, such option to expire one year from date of grant of option.

FBO AIR, INC. AND SUBSIDIARIES

Notes To Condensed Consolidated Financial Statements

(Unaudited)

NOTE 7 - Note Receivable, continued

On February 1, 2006, the Company declined to pursue the acquisition and negotiated revised repayment terms, whereupon the Company released its security interest in the tangible property, goods and accounts and the Maker made a $200,000 cash payment with the balance of the principal, plus unpaid interest and certain legal fees for a total of about $174,000, to be paid over a twenty-four month period with an annual interest at a rate of six percent (6%) to be paid quarterly and the principal balance due upon maturity. The owner of Maker has provided a personal guarantee of the payment of the remaining obligation under the note receivable.

NOTE 8 - Term Loan Payable - Related Party

The acquisition of Airborne was funded by a term note payable with a face value of $1,500,000 which matured on March 22, 2006 and bore an annual interest rate of 4.25% through the initial maturity date. FBO Air has elected to exercise the option to extend the maturity date to September 23, 2006, whereupon the promissory note bears an interest rate of 9.25% per annum for the duration of the extended period. Airborne granted the holder a security interest in its accounts receivable, all of its deposit accounts, all monies now and hereafter in the possession or under the control of Airborne or the Company and all products and proceeds of the foregoing personal property. FBO Air’s Chairman of the Board and an entity owned by one of its other directors are the members of the holder’s entity.

In conjunction with the issuance of the term note, FBO Air also issued a five-year warrant to purchase a total of 1,200,000 shares of the Common Stock at an exercise price of $0.60 per share. The Company allocated $35,000 of the aggregate proceeds from the term notes to the warrant as an original issuance discount, which represented the relative fair value of the warrant at the date of issuance, and amortizes the discount to interest expense over the life of the term note. The amount amortized to interest expense for the three and six months ended June 30, 2006 was approximately $0 and $14,865, respectively.

NOTE 9 - Capital Lease Obligations

The Company’s property under capital leases, at June 30, 2006, which is included in property equipment, is summarized as follows:

Vehicles	$	37,000
Less: accumulated depreciation		(3,700	)

	$	33,300

The Company’s capital leases require monthly payments of $750 including effective interest of 8% per annum through December 2011.

FBO AIR, INC. AND SUBSIDIARIES

Notes To Condensed Consolidated Financial Statements

(Unaudited)

NOTE 9 - Capital Lease Obligations

Future minimum lease payments at June 30, 2006 for the next five (5) years and in the aggregate are as follows:

For the Twelve Months Ending June 30, 2006,	Amount
2007	$	9,000
2008		9,000
2009		9,000
2010		9,000
2011		4,500
		40,500
Less: amount representing interest		(6,572	)

Present value of future minimum lease payments		33,928
Less: current maturities		(8,625	)

Total	$	25,303

Depreciation of assets held under capital leases in the amount of $1,850 and $3,700 is included in depreciation expense for the three and six months ended June 30, 2005, respectively.

NOTE 10 - Stockholders’ Equity

Common Stock

On January 5, 2006, the Company issued 25,000 shares of the Common Stock in connection with the settlement of certain accrued expenses valued at $18,750.

During the three and six months ended June 30, 2006, the Company issued no shares and 207,435 shares, respectively, of the Common Stock to directors and a former director in connection with the cashless exercise of 350,000 stock options.

During the three and six months ended June 30, 2006, deferred financing costs of $141,804 and $625,861 and accretion of discount of $327,435 and $1,056,348 were amortized as deemed dividends on the Series A Convertible Preferred Stock.

During the three and six months ended June 30, 2006, dividends of $63,395 and $132,276 were accrued on the Series A Convertible Preferred Stock.

During the three and six months ended June 30, 2006, holders of 10 and 130 shares, respectively, of the Series A Convertible Preferred Stock converted their shares and were issued 166,667 shares and 2,166,668 shares of the Common Stock. Approximately 166,000 and 250,000 shares of the Common Stock will be issued as dividends with respect to the 120 shares of the Convertible Preferred Stock which were converted during the three-month period ended June 30, 2006 and six-month period ended June 30, 2006, respectively, when the Company meets the requirements, as stipulated under the laws of the State of Nevada, for the issuance of these dividends. In addition, at June 30, 2006, approximately 132,000 shares of the Common Stock are reserved for issuance as dividends with respect to the 101 shares of the Convertible Preferred Stock which were converted prior to December 31, 2005 when the Company meets the requirements, as stipulated under the laws of the State of Nevada, for the issuance of these dividends.

FBO AIR, INC. AND SUBSIDIARIES

Notes To Condensed Consolidated Financial Statements

(Unaudited)

NOTE 10 - Stockholders’ Equity, continued

Common Stock, continued

On May 31, 2006, the Company issued 57,598 shares of the Common Stock in connection with the settlement of litigation valued at $29,375.

Stock Options

Under the terms of their respective employment agreements, on May 30, 2006, and effective April 1, 2006, the Company granted three executives stock options to purchase, in the aggregate, 750,000 shares of the Common Stock at $0.50 per share.

On May 30, 2006, the Company granted to a group of employees, stock options to purchase, in the aggregate, 160,000 shares of the common stock at $0.51 per share.

NOTE 11 - Commitments and Related Party

On May 24, 2006, the Company entered into an agreement to lease an aircraft from a company, of which one of its members is John Dow, a Director, and the President of its FirstFlight division. The terms of the lease provide for the payment of rent of $17,000 per month and a charge of $600 for each hour of aircraft use. The lease expires May 31, 2009. This aircraft will be managed by the Company through its FirstFlight division.

The firm of Wachtel & Masyr, LLP is corporate counsel to the Company. Mr. William B. Wachtel, FBO Air’s chairman of the board is a senior partner of the firm. At June 30, 2006 the Company has recorded in accrued expenses an obligation for legal fees of approximately $533,000 related to these legal services.

NOTE 12 - Litigation

In early 2005, FBO Air was served with a complaint which names FBO Air, among others, as a defendant in a suit brought by a broker-dealer, seeking damages of approximately $100,000 arising from Shadows Bend's cancellation of a stock certificate in the year 2002 evidencing shares allegedly sold by the plaintiff for the account of a stockholder of Shadows Bend. Captioned Institutional Capital Management, Inc. vs. Michael W. Sciacchetano, et. al., the suit was pending in the 215^th Judicial District Court, Harris County, Texas. On March 28, 2005, FBO Air filed a general denial. On June 20, 2006 this suit was settled and the Company agreed to pay $29,375 in cash and to issue 57,598 shares of the Common Stock valued at $29,375. The Company has granted piggy-back registration rights, on a best efforts basis, in regard to these shares and has agreed that within one year of issue the Company will repurchase these shares for $29,375 in cash.

On May 19, 2005, New World Aviation, Inc. ("New World") instituted an action in the Supreme Court of the State of New York, County of New York, captioned New World Aviation, Inc., Plaintiff, against Robert J. Ettinger, individually, and FBO Air, Inc., Defendants. Since April 1, 2005, Mr. Ettinger has been an officer of FBO Air and, from March 31, 2005 until July 24, 2006, a director of FBO Air. Until March 25, 2005, when he resigned, Mr. Ettinger had served as President (since October 15, 1998) of New World. In its amended complaint New World is seeking (a) to enjoin the Defendants from soliciting New World's clients and employees allegedly using the confidential information which Mr. Ettinger learned in his "high-level position with New World" and (b) damages in an amount to be determined at trial against Mr. Ettinger for his alleged breach of fiduciary duties to New World. On June 20, 2005, FBO Air answered the complaint, asserting as affirmative defenses that (a) New World had forced Mr. Ettinger's resignation by reneging on its promise to pay him a bonus for 2004, (b) New World is partly responsible for any alleged damages, (c) the identity of actual and potential New World clients is available from publicly available records, (d) any putative damages sustained by New World were caused by New World and third parties and (e) New World's claims are barred by the statute of fraud. Mr. Ettinger also filed a counterclaim against New World for $25,000 relating to the 2004 bonus, to which New World has asserted five affirmative defenses.

On September 6, 2005, the court denied New World's motion for preliminary injunctive relief, which sought to bar FBO Air from soliciting New World's customers or employees. The court also denied FBO Air's motion for summary judgment.

FBO AIR, INC. AND SUBSIDIARIES

Notes To Condensed Consolidated Financial Statements

(Unaudited)

NOTE 12 - Litigation, continued

On August 21, 2006, this matter was settled on the following basis: (1) Mr. Ettinger agreed to pay the plaintiff $7,000 to cover certain costs of plaintiff and to repay the plaintiff certain cash advances while he employed by plaintiff and (2) Mr. Ettinger and FBO Air agreed not to use any written or electronic information or documents obtained while he was employed to advance the business interests of FBO Air and/or to solicit any present or former clients, customers, passengers or employees of the plaintiff. The parties exchanged general releases.

NOTE 13 - Client and Segment Data

The Company’s operations are conducted through two divisions - FirstFlight, which handles the charter management activities, and Tech Aviation, which operates the FBO business. Charter management is the business of providing on-call passenger (and/or cargo) air transportation. The Company implements charter services through a fleet of managed aircraft - owned by another person or entity for which FirstFlight provides regulatory and maintenance oversight while offering charter services. An FBO is the primary provider of services such as the fueling, hangaring, maintenance and repair to private/general aviation aircraft operators. The operations of Margeson, the newly formed insurance unit of the Company for the three and six months ended are deemed immaterial and are not presented within this segment data.

The following table summarizes financial information about the Company’s business segments for the three and six months ended June 30, 2005 (in thousands):

	For Three Months Ended June 30, 2006

	Tech Aviation ”FBO”			FirstFlight “Charter”			Corporate			Consolidated
Revenues	$	1,509		$	7,460		$	-		$	8,969
Income (Loss) from Operations	$	6		$	(85	)	$	(733	)	$	(812	)
Depreciation and Amortization	$	21		$	88			2		$	111
Interest Expense	$	(36	)	$	(161	)	$	-		$	(197	)

	For Three Months Ended June 30, 2005

		Tech Aviation ”FBO”			FirstFlight “Charter”		Corporate			Consolidated
Revenues		$	2,159		$	-	$	-		$	2,159
Loss from Operations		$	48		$	-	$	(511	)	$	(463	)
Depreciation and Amortization		$	21		$	-	$	-		$	21
Interest Expense		$	(146	)	$	-	$	-		$	(146	)

FBO AIR, INC. AND SUBSIDIARIES

Notes To Condensed Consolidated Financial Statements

(Unaudited)

NOTE 13 - Client and Segment Data, continued

	For Six Months Ended June 30, 2006

	Tech Aviation ”FBO”			FirstFlight “Charter”			Corporate			Consolidated
Revenues	$	3,079		$	16,592		$	-		$	19,671
Income (Loss) from Operations	$	(15	)	$	326		$	(1,319	)	$	(1,008	)
Depreciation and Amortization	$	69			135		$	2		$	206
Interest Expense	$	(94	)	$	(279	)	$	-		$	(373	)
Capital Expenditures	$	58		$	-		$	-		$	58

	For Six Months Ended June 30, 2005

	Tech Aviation ”FBO”			FirstFlight “Charter”		Corporate			Consolidated
Revenues	$	2,159		$	-	$	-		$	2,159
Income (Loss) from Operations	$	48		$	-	$	(726	)	$	(678	)
Depreciation and Amortization	$	21		$	-	$	-		$	21
Interest Expense	$	(154	)	$	-	$	-		$	(154	)
Capital Expenditures	$	28		$	-	$	-		$	28

NOTE 14 - Subsequent Event

On July 28, 2006, holders of 10 shares of the Series A Convertible Preferred Stock converted their shares and were issued 166,667 shares of the Common Stock.

Item 2 - Management’s Discussion and Analysis or Plan of Operation

Please read the following discussion together with the condensed financial statements and related notes appearing elsewhere in this Report. This Item 2 contains forward-looking statements that involve risks and uncertainties. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this Report. Actual results may differ materially from those included in such forward-looking statements. Factors which could cause actual results to differ materially include those set forth at the end of this Item 2 of Part I under the heading "Cautionary Statement For Forward Looking Statements", as well as those discussed elsewhere in this Report.

OVERVIEW

FBO Air, Inc. (“FBO Air”) is a Nevada corporation, the Common Stock, $.001 par value (the “Common Stock”), of which is publicly traded, and acts as a holding company for its operational subsidiaries (FBO Air and its subsidiaries collectively the "Company" or "we"). We are an aviation services company with operations in the aircraft charter management and fixed base operations (an “FBO”) segments of the general aviation industry. We have grown principally through merger/acquisition activity, a strategy that we expect to continue for the foreseeable future and which will be supplemented by internal growth strategies, particularly in the charter management segment.

Our operations are conducted through two segments - our FirstFlight (“FirstFlight”) division, which handles the aircraft charter management activities, and Tech Aviation (“Tech Aviation”), which operates the FBO business. Charter management is the business of providing on-call passenger (and/or cargo) air transportation. We implement charter services through a fleet of managed aircraft - owned by another person or entity for which FirstFlight provides regulatory and maintenance oversight while offering charter services. An FBO is the primary provider of services such as the fueling, hangaring, maintenance and repair to private/general aviation aircraft operators.

The FirstFlight segment has its main facility in Elmira, New York and became part of FBO Air through the acquisition on September 23, 2005 of Airborne, Inc. (“Airborne”).

Tech Aviation has a facility in Wilkes-Barre/Scranton, Pennsylvania as a result of the acquisition on March 31, 2005 of Tech Aviation Service, Inc. (“Tech”) and a facility in Garden City, Kansas as a result of the acquisition on March 31, 2005 of Central Plains Aviation, Inc. (“CPA”). Tech Aviation also manages an FBO facility in Niagara Falls, New York.

On March 15, 2006, the Company formed Margeson and Associates, Inc. (“Margeson”) an insurance brokerage company that will represent and sell aviation oriented insurance. Margeson results for the six months ended June 30, 2006 are deemed immaterial.

FBO Air was formed on January 17, 2003 (date of inception) as a proprietorship to acquire and operate FBOs. On January 2, 2004, FBO Air, Inc. was incorporated under the laws of the State of Arizona. FBO Air completed a reverse merger transaction on August 20, 2004 (the “Reverse Merger”) with Shadows Bend Development, Inc. ("Shadows Bend"), an inactive Nevada corporation. Since October 2000, Shadows Bend had been pursuing a business plan to acquire, develop and operate "specialty care" facilities designed to help people diagnosed with Alzheimer's or other related illnesses. This business model was effectively abandoned in December 2002. The directors and management of FBO Air, upon consummation of the merger, became the directors and management of Shadows Bend.

On August 20, 2004, FBO Air changed its corporate name to FBO Air, Inc. pursuant to the Agreement and Plan of Merger dated as of July 26, 2004 between Shadows Bend and FBO Air. As of December 21, 2004, the Common Stock became eligible for quotation on the NASD Bulletin Board. FBO Air files periodic reports with the SEC pursuant to Section 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).

On April 15, 2005, FBO Air closed on a round of financing related to its March and April 2005 private offering, raising gross cash proceeds of approximately $4,490,000. On March 31, 2005, FBO Air had raised $1,250,000 in a related private offering. On September 23, 2005, FBO Air raised $1,500,000 through the issuance of a 180-day term note, the proceeds from which were substantially applied to fund the acquisition of the Elmira location.

Going Concern

The accompanying condensed consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. As of June 30, 2006, the Company had cash and cash equivalents of approximately $868,000 and had a working capital deficiency of approximately $3,023,000. The Company generated revenues of approximately $8,969,000 and $19,671,000 for the three and six months ended June 30, 2006. Since inception, the Company has incurred, in the aggregate, net losses and net losses applicable to common stockholders of approximately $3,808,000 and $7,770,000, respectively, for the period from January 17, 2003 (date of inception) through June 30, 2006. These conditions raise substantial doubt about the Company's ability to continue as a going concern. The accompanying condensed consolidated financial statements do not reflect the possible effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty.

RESULTS OF OPERATIONS

Comparison of the three months ended June 30, 2006 and 2005.

On March 31, 2005, we completed the acquisition of our first two operating companies, Tech and CPA. On September 23, 2005, we completed the acquisition of the stock of Airborne, our third operating company. The Company commenced its planned business operations on April 1, 2005. Prior to March 31, 2005, the Company was in the development stage and its operations consisted solely of the administrative costs of organizing, raising capital and seeking and qualifying acquisition targets consistent with the Company's growth strategy.

Revenues

We had overall revenues of approximately $8,969,000 for the three months ended June 30, 2006 as compared to revenues of about $2,159,000 for the three months ended June 30, 2005. During the three months ended June 30, 2006, the FirstFlight segment generated approximately $7,460,000 of this revenue while the Tech Aviation segment generated approximately $1,509,000.

FirstFlight Segment

The FirstFlight segment has its main facility in Elmira, New York, and became a part of FBO Air through the acquisition of Airborne on September 23, 2005. This segment of FBO Air is engaged in charter management activities, providing on-call passenger (and/or cargo) air transportation. Charter services are provided through a fleet of managed aircraft, or other aircraft. FirstFlight provides regulatory and maintenance oversight for the managed aircraft, while also offering charter services.

Of the approximately $7,460,000 in FirstFlight segment revenues, $4,886,000 (65.5%) were generated directly through the charter of aircraft. Approximately $1,586,000 (21.3%) of revenues was generated by aircraft management services, $563,000 (7.5%) is related to aircraft maintenance, and $425,000 (5.7%) is from the sale of fuel.

FirstFlight Segment, continued

FirstFlight managed 16 aircraft for owners at June 30, 2006. These aircraft were offered for charter when not in use by their owners. FirstFlight generates fee revenue from the management of aircraft - ensuring that the aircraft meets compliance with manufacturer and FAA regulations in addition to earning a commission on charter activity.

Tech Aviation Segment

The Tech Aviation segment has its main facility in Wilkes-Barre, PA, and became part of FBO Air through the acquisitions of Tech and CPA on March 31, 2005. Tech Aviation operates the FBO business, providing services such as fueling, hangaring, maintenance and repair for private and general aviation aircraft operators.

Of the approximately $1,509,000 in Tech Aviation segment revenues, $1,278,000 (84.7%) were generated by the sale of jet fuel, aviation gasoline (“avgas”), and related items, $112,000 (7.4%) relates to aircraft maintenance activities, $95,000 (6.3%) is related to flight training, and $24,000 (1.6%) was generated by our contract management of non-owned FBO facilities and miscellaneous items.

Cost of Revenues and Gross Profit

FirstFlight Segment

FirstFlight’s cost of revenues for the three months ended June 30, 2006 was $6,219,000, or 83.4% of revenue, for a gross profit of $1,241,000, or 16.6% of revenue. The largest dollar contributor to gross profit was the charter of aircraft under our management (63.8%), followed by management services (20.8%), fuel (8.4 %), and maintenance activity (7.0%).

Tech Aviation Segment

Tech Aviation’s cost of revenues for the three months ended June 30, 2006 was $957,000, or 63.4% of revenue, for a gross profit of $552,000, or 36.6% of revenue. The largest dollar contributor to gross profit was the sale of jet fuel, avgas, and related items (80.0%), maintenance activities (9.6%), the operation of the flight school (6.1%), followed by the contract management of non-owned FBO facilities and miscellaneous items (4.3%)

The cost of fuel has been a major focus in this division. We closely monitored the marketplace in conjunction with our fuel provider. In many cases we were able to buy-in prior to anticipated increases, thereby maintaining and, in some cases, maximizing margins. During the three months ended June 30, 2006, the Company sold to a third party an FAA 135 Certification, realizing net other income of approximately $156,000.

Operating Expenses

We had overall operating expenses of approximately $2,605,000 for the three months ended June 30, 2006 as compared to approximately $1,191,000 for the three months ended June 30, 2005. The increases were driven by operating costs incurred as a result of the acquisition of three operating companies. The FirstFlight segment, which is a function of the September 23, 2005 acquisition of Airborne, represented approximately $1,326,000 in operating expenses and the Tech Aviation segment, which is a function of the March 31, 2005 acquisitions of Tech and CPA, represented approximately $546,000 in operating expenses.

The remainder of operating expenses was attributable to the corporate operations and amounted to approximately $733,000 for the three months ended June 30, 2006 as compared to $215,000 for the three months ended June 30, 2005. These increased expenses were primarily comprised of legal and accounting expenses incurred in connection with being an operating company for the full three months along with increased payroll and benefit expenses related to a larger infrastructure.

Interest Expense

Interest expense for the three months ended June 30, 2006 and 2005 was approximately $197,000 and $146,000, respectively. The increase in interest expense for the three months ended June 30, 2006 was primarily attributable to approximately $35,000 of interest incurred on the $1,500,000 term loan, as well as the amortization of warrants related to the term loan of approximately $15,000.

Comparison of the six months ended June 30, 2006 and 2005.

Revenues

We had overall revenues of approximately $19,671,000 for the six months ended June 30, 2006 as compared to revenues of $2,159,000 for the six months ended June 30, 2005. The FirstFlight segment generated approximately $16,592,000 of this revenue while the Tech Aviation segment generated approximately $3,079,000.

FirstFlight Segment

Of the approximately $16,592,000 in FirstFlight segment revenues in the six months ended June 30, 2006, $11,273,000 (68.0%) were generated directly through the charter of aircraft. Approximately $3,347,000 (20.2%) of revenues was generated by aircraft management services, $1,081,000 (6.5%) is related to aircraft maintenance, $703,000 (4.2%) is from the sale of fuel, and about $188,000 (1.1%) is related to commissions on the sale of aircraft and the sale of other miscellaneous items.

Tech Aviation Segment

Of the approximately $3,079,000 in Tech Aviation segment revenues in the six months ended June 30, 2006, $2,515,000 (81.7%) were generated by the sale of jet fuel, aviation gasoline (“avgas”), and related items, $323,000 (10.5%) relates to aircraft maintenance activities, $186,000 (6.0%) is related to flight training and $55,000 (1.8%) is from the contract management of non-owned FBO facilities and miscellaneous items.

Cost of Revenues and Gross Profit

FirstFlight Segment

FirstFlight’s cost of revenues for the six months ended June 30, 2006 was $14,295,000, or 86.2% of revenue, for a gross profit of $2,297,000, or 13.8% of revenue. The largest dollar contributor to gross profit was the charter of aircraft under our management (62.1%), followed by management services (20.9%), maintenance activity (9.3%), fuel sales (7.7%), and aircraft sales commissions and miscellaneous items (0.0%).

Tech Aviation Segment

Tech Aviation’s cost of revenues for the six months ended June 30, 2006 was $1,814,000, or 58.9% of revenue, for a gross profit of $1,265,000, or 41.1% of revenue. The largest contributor to gross profit was the sale of jet fuel, avgas, and related items, with a gross profit of $1,021,000 (80.7%), followed by maintenance activities ($128,000/10.1%), the operation of the flight school $62,000 (4.9%) and the contract management of non-owned FBO facilities and miscellaneous items $54,000 (4.3%).

Operating Expenses

We had overall operating expenses of approximately $4,570,000 for the six months ended June 30, 2006 as compared to approximately $1,406,000 for the six months ended June 30, 2005. The increases were driven by operating costs incurred as a result of the acquisition of three operating companies. The FirstFlight segment, which is a function of the September 23, 2005 acquisition of Airborne, represented approximately $1,971,000 in operating expenses and the Tech Aviation segment, which is a function of the June 30, 2005 acquisitions of Tech and CPA, represented approximately $1,280,000 in operating expenses.

The remainder of operating expenses was attributable to the corporate operations and amounted to approximately $1,319,000 for the six months ended June 30, 2006 as compared to $726,000 for the six months ended June 30, 2005. These increased expenses were primarily comprised of legal and accounting expenses incurred in connection with being an operating company for the full six months along with increased payroll and benefit expenses related to a larger infrastructure.

Interest Expense

Interest expense for the six months ended June 30, 2006 and 2005 was approximately $373,000 and $154,000, respectively. The increase in interest expense for the six months ended June 30, 2006 was primarily attributable to the interest incurred for the full six-month period for the Senior Secured Notes, issued in March and April 2005 and the $1,500,000 term loan, issued in September 2005.

LIQUIDITY AND CAPITAL RESOURCES

We are currently reviewing alternatives for the next stage of capitalization for the Company. In all likelihood, some combination of equity and debt securities will be issued in order to address the short- and long-term capital needs of the Company. The history of our capitalization includes successive, successful private issuances of equity and debt securities that have facilitated the development of the Company from inception to this point.

During the six months ended June 30, 2006, the Company had a net decrease in cash and cash equivalents of approximately $463,000. The Company's sources and uses of funds during this period were as follows:

Cash Used in Operating Activities

For the six months ended June 30, 2006, net cash used in operating activities was approximately $393,000. This was primarily driven by a net loss, after adding back non-cash items of $498,000 (net loss of $1,216,000, less $718,000 of non-cash items) and an increase in accounts receivable of $619,000. Net cash used in operations was reduced by the effect of an increase in accrued expenses of $285,000 and an increase in customer deposits of $272,000. These changes in cash used in operating activities were primarily attributable to expenditures and working capital requirements associated with the expansion of our businesses.

For the six months ended June 30, 2005, net cash used in operating activities was $745,000. This was attributable to a net loss after adding back non-cash items of $708,000 (net loss of $829,000 less $121,000 of non-cash items), an increase of accounts receivable of $646,000, offset by an increase of $556,000 in accounts payable.

Cash Used in Investing Activities

For the six months ended June 30, 2006, net cash provided by investing activities was approximately $142,000. This was primarily attributable to the receipt of a $200,000 partial repayment of a note receivable, offset by $58,000 for the purchase of equipment.

For the six months ended June 30, 2005, net cash used in investing activities was $2,933,000 of which $350,000 was attributable to the issuance of a note receivable and $2,555,000 was attributable to the purchase of two fixed base operating companies on March 31, 2005.

Cash Provided by Financing Activities

For the six months ended June 30, 2006, net cash used in financing activities was approximately $212,000, representing the principal repayments on certain notes payable associated with the March 31, 2005 acquisitions. For the six months ended June 30, 2005, net cash provided by financing activities was $5,245,000, principally consisting of the funds that we received through private placements of $4,489,000 consisting of the issuance of $1,496,000 of Senior Secured Notes and the issuance of $2,993,000 of Series A Preferred Stock and $1,250,000 for a co-investment of Series A Preferred Stock. Warrants for the purchase of 3,618,000 shares of the Common Stock were issued in connection with the private placement and the co-investment. Issuance expenses of $514,000 were paid in cash at closing .

As of June 30, 2006, the Company had a working capital deficiency of approximately $3,023,000. On the basis of the foregoing, and the risk factors as outlined below, we believe that, based upon the cash on hand and resources available, the Company will require additional debt or equity capital to fund operations past the remainder of this calendar year. There is no assurance that FBO Air will be able to raise the additional funds required, or that if raised, these funds will be sufficient to enable the Company to attain profitable operations or continue as a going concern.

SIGNIFICANT ACCOUNTING POLICIES

Stock Based Compensation

Effective April 1, 2005, the Board of Directors granted options to purchase an aggregate of 750,000 shares of the Common Stock. An option expiring March 31, 2010 to purchase 250,000 shares of the Common Stock was granted to each of (i) Robert J. Ettinger, who was elected as a Vice Chairman of the Board and the Chief Operating Officer of FBO Air, (ii) Jeffrey M. Trenk, was elected as a Vice Chairman and Executive Vice President of Business Development of FBO Air, and (iii) Ronald J. Ricciardi, the President and Chief Executive Officer of FBO Air. These options are exercisable at $1.60 per share, the closing sales price on April 1, 2005, and vested immediately upon the grant date.

Effective May 30, 2006, the Board of Directors granted options under the Plan to purchase an aggregate of 160,000 shares of the Common Stock to employees of the Company, expiring three years after the date of grant. These options are exercisable at $0.51 per share, the closing price at May 30, 2006, and vested immediately upon the grant date. These options are valued at $78,228.

Effective January 1, 2006, the Company adopted the fair value recognition provisions of SFAS 123R, using the modified prospective transition method and therefore has not restated prior periods' results. Under this transition method, employee stock-based compensation expense for the three and six months ended June 30, 2006 included compensation expense for all stock-based compensation awards granted, but not yet fully vested, prior to January 1, 2006. The fair value of the options granted was determined at the original grant date in accordance with the provisions of SFAS 123. Stock-based compensation expense for all share-based payment awards granted after December 31, 2005 is based on the grant-date fair value estimated in accordance with the provisions of SFAS 123R. The Company recognizes these compensation costs over the requisite service period of the award, which is generally the vesting term of the options associated with the underlying employment agreement, where applicable.

As a result of adopting SFAS 123R, the impact to the consolidated condensed financial statements for the three and six months ended June 30, 2006 was approximately $205,000 and $242,000, respectively, greater than if the Company had continued to account for stock-based compensation under APB 25. The impact of the adoption of FAS123R on both basic and diluted earnings per share for the three and six months ended June 30, 2006 was $0.01 and $0.02 per share, respectively. At June 30, 2006, the unamortized value of employee stock options under SFAS 123R was $529,778. The unamortized portion will be expensed over a weighted average period of approximately 4 years.

The weighted average fair value of the options on the date of grant, using the fair value based methodology for the three and six months ended June 30, 2006 was $0.48.

A summary of the status of the outstanding options and the changes during the three and six months ended June 30, 2006 is presented in the table below:

	Number of Options			Weighted Average Exercise Price

Balance, January 1, 2006		1,250,000		$	1.08
Granted (weighted average fair value
of $0.48 per share)		910,000			0.50
Exercised		(375,000	)		0.22
Forfeited		-			-
Balance, June 30, 2006		1,785,000		$	0.96

The options exercised aggregating 375,000 were exercised on a cashless basis, and in connection therewith, the Company issued 207,435 shares of the Common Stock.

A summary of the Company’s stock options outstanding and exercisable at June 30, 2006 is presented in the table below:

	Option exercise price										Total		Intrinsic Value
	Option exercise price										Total		Intrinsic Value

	$	0.01	$	0.50	$	0.51	$	0.64	$	1.60
Outstanding		25,000		750,000		160,000		100,000		750,000		1,785,000	$	10,950

Weighted average remaining contractual life of options outstanding (in years)		2.25		4.75		4.92		2.25		3.75
Exercisable		25,000		750,000		60,000		-		750,000		1,585,000	$	10,250

The Company has determined that shares of Common Stock for future exercises shall be authorized but unissued shares of stock.

A summary of non-vested options at June 30, 2006 is shown below:

	Non-Vested Shares		Fair Value

Non-vested at January 1, 2006		200,000	$	0.57
Granted		-		-
Vested		-		-
Forfeited		-		-
Non-vested at June 30, 2006		200,000	$	0.57

The weighted average fair value of the options on the date of grant, using the fair value based method, for the three and six months ended June 30, 2005 was $- and $0.53.

The following table illustrates the effect on net loss and net loss per share if the Company had applied the fair value recognition method under the provisions of SFAS 123.

(All numbers in 000’s except per share data.)	For the Three Months Ended June 30, 2005			For the Six Months Ended June 30, 2005
Net loss applicable to common stockholders, as reported	$	(1,202	)	$	(1,425	)
Deduct: total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects, if any		20			20
Pro-forma net loss	$	(1,222	)	$	(1,445	)
Net loss per share applicable to common stockholders - basic and diluted:
As reported	$	(0.12	)	$	(0.18	)
Pro forma	$	(0.12	)	$	(0.18	)

CAUTIONARY STATEMENT FOR FORWARD-LOOKING STATEMENTS

Statements contained in this "Management's Discussion and Analysis or Plan of Operation" may contain information that includes or is based upon certain "forward-looking statements" relating to our business. These forward-looking statements represent management's current judgment and assumptions, and can be identified by the fact that they do not relate strictly to historical or current facts. Forward-looking statements are frequently accompanied by the use of such words as "anticipates," "plans," "believes," "expects," "projects," "intends," and similar expressions. Such forward-looking statements involve known and unknown risks, uncertainties, and other factors, including, while it is not possible to predict or identify all such risks, uncertainties, and other factors, those relating to:

our ability to secure the additional financing adequate to execute our business plan;

our ability to identify, negotiate and complete the acquisition of targeted operations, consistent with our business plan;

existing or new competitors consolidating operators ahead of the Company;

we may be unable to attract new personnel, which would adversely affect implementation of our overall business strategy.

the success of our investor relations program to create and sustain interest and liquidity in our stock, which is currently thinly traded on the OTCBB;

Any one of these or other risks, uncertainties, other factors, or any inaccurate assumptions may cause actual results to be materially different from those described herein or elsewhere by us. We caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date they were made. Certain of these risks, uncertainties, and other factors may be described in greater detail in our filings from time to time with the Securities and Exchange Commission, which we strongly urge you to read and consider. Subsequent written and oral forward-looking statements attributable to us or to persons acting on our behalf are expressly qualified in their entirety by the cautionary statements set forth above and elsewhere in our reports filed with the Securities and Exchange Commission. We expressly disclaim any intent or obligation to update any forward-looking statements.

Item 3 - Controls and Procedures

The Company's principal executive officer, who is also the acting principal financial officer, has evaluated the effectiveness of the Company's "disclosure controls and procedures," as such term is defined in Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended, as of the end of the period covered by this Annual Report on Form 10-KSB. The evaluation process, including the inherent limitations on the effectiveness of such controls and procedures is more fully discussed below. Based upon his evaluation, the principal executive officer, who is also the acting principal financial officer, has concluded that the Company's disclosure controls and procedures were not effective.

These controls were deemed not effective on account of a material weakness related to the lack of the necessary corporate accounting resources. On March 31, 2005, the Company completed the first two acquisitions of its business plan and on September 23, 2005, we completed the third acquisition. The Company has limited accounting personnel and is currently building its accounting infrastructure. In the meantime, the Company employs a financial consultant who works closely with the Company's Chief Executive Officer and other senior managers of the organization to gather the required information and to prepare the periodic financial statement and public filings. Reliance on these limited resources impairs our ability to provide for segregation of duties and the ability to ensure consistently complete and accurate financial reporting, as well as disclosure controls and procedures. Our Company's Chief Executive Officer has concluded that the disclosure controls and procedures are not effective, given the foregoing material weakness. The Company is currently seeking to hire a qualified full time Chief Financial Officer. In addition, as the Company grows, and as resources permit, we project that the new Chief Financial Officer will hire such additional competent financial personnel to assist in the segregation of duties with respect to financial reporting and Sarbanes-Oxley Section 404 compliance.

We believe that, for the reasons described above, we will be able to improve our financial reporting and disclosure controls and procedures and remedy the material weakness identified above. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, will be or have been detected.

Except as described above, there were no significant changes in our internal controls over financial reporting that occurred during the three months ended June 30, 2006 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Limitations on the Effectiveness of Controls

We believe that a control system, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the control system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected. Our disclosure controls and procedures are designed to provide a reasonable assurance of achieving their objectives and our Chief Executive Officer has concluded that such controls and procedures are effective at the "reasonable assurance" level.

PART II

OTHER INFORMATION

Item 1. Legal Proceedings

Reference is made to Item 1 of the Quarterly Report on Form 10-QSB for the quarter ended March 31, 2006 (the “March Form 10-QSB”) of FBO Air, Inc. (“FBO Air”), the registrant, for a description of a then pending proceeding captioned Institutional Capital Management, Inc. vs. Michael W. Sciacchetano, et., al. in which FBO Air was one of the defendants. As reported in FBO Air’s Current Report on Form 8-K filed on June 5, 2006, this action has been settled by FBO Air with the defendant.

Reference is made to Item 1 of the March Form 10-QSB for a description of a still pending proceeding captioned New World Aviation, Inc., Plaintiff, against Robert J. Ettinger, individually, and FBO Air, Inc., Defendants.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

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

None.

Item 5. Other Information

There were none.

Item 6. Exhibits

Exhibit No.		Description of Exhibit

2		Agreement and Plan of Merger dated as of July 26, 2004 by and between the Company (then named Shadows Bend Development, Inc.) and FBO Air, Inc, an Arizona Corporation (without schedules). (1)

3(i)		Certificate of Amendment to the Company’s Certificate of Incorporation filed on July 30, 2004. (1)

3(i)(1)		Copy of the Certificate of Designations. (2)

4.1		Form of 10% Senior Secured Promissory Note due March 31, 2008 or April 8, 2008. (3)

4.2		Form of Investor Warrant. (3)

4.3		Copy of General Security Agreement dated as of June 30, 2005. (3)

4.4		Form of Investor Warrant. (3)

4.5		Copy of Warrant expiring September 22, 2010. (4)

10.1		Copy of Employment Agreement dated as of April 1, 2005 by and between Robert J. Ettinger and the Company. (3)

10.3		Copy of Employment Agreement dated as of April 1, 2005 between Jeffrey M. Trenk and the Company. (3)

10.4		Copy of Employment Agreement dated as of January 2, 2004 by and between Ronald J. Ricciardi and the Company (as the successor by merger to FBO Air, Inc., an Arizona corporation). (5)

10.5		Copy of First Amendment effective April 1, 2005 to the Ricciardi Employment Agreement, a copy of which is filed as Exhibit 10.4. (3)

10.6		Copy of Asset Purchase Agreement dated March 31, 2005 among FBO Air - Garden City and John A. Crotts. (3)

Item 6. Exhibits, continued

Exhibit No.		Description of Exhibit

10.7		Copy of Stock Purchase Agreement dated March 31, 2005 between Tech Aviation Source, Ronald D. Ertley, Frank E. Paczewski, and FBO Air Wilkes-Barre, Inc. (3)

10.8		Copy of Stock Purchase Agreement Dated as of September 22, 2005 by and among Airborne, Inc., John H. Dow, Daphne Dow and the Company (without a schedule or exhibit). (7)

10.9		Copy of Employment Agreement dated as of September 23, 2005 among John Dow, Airborne, Inc. and the Company. (7)

10.10		Copy of Lease dated as of September 23, 2005 between John H. Dow and Daphne Dow, as the Landlord, and Airborne, Inc., as the Tenant. (7)

10.11		Copy of Term Loan Agreement dated as of September 23, 2005 by and among the Company, Airborne, Inc., and Airport Capital, LLC. (7)

31.1		Officer’s Certification Pursuant to Rule 13a-14(a) under the Securities Exchange Act. (8)

32.1		Certification Pursuant to Section 906 of Sarbanes-Oxley Act of 2002. (8)

________________________

Footnotes:

(1)	Incorporated by reference to the Company’s Current Report on Form 8-K filed on August 27, 2004.

(2)	Incorporated by reference to the Company’s Annual Report on Form 10-KSB for the year ended December 31, 2004 filed on March 29, 2005.

(3)	Incorporated by reference to the Company’s Current Report on Form 8-K filed on April 6, 2005.

(4)	Incorporated by reference to the Company’s Current Report on Form 8-K/A filed on November 3, 2005.

(5)	Incorporated by reference to the Company’s Current Report on Form 8-K filed on October 5, 2004.

(6)	Incorporated by reference to the Company’s Current Report on Form 8-K/A filed on November 4, 2004.

(7)	Incorporated by reference to the Company’s Current Report on Form 8-K filed on September 28, 2005.

(8)	Filed herewith.

SIGNATURES

In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.


Dated: August 21, 2006	FBO AIR, INC.

	By:	/s/ Ronald J. Ricciardi
		Ronald J. Ricciardi Chief Executive Officer (acting principal financial officer)

Saker Aviation Services (SKAS) 10QSB2006 Q2 Quarterly report (small business)