# FORM 10-K UNITED STATES SECURITIES AND
EXCHANGE COMMISSION WASHINGTON, D.C. 20549

|[X] | ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF           1934.
|--- | -----------------------------------------------------------------------------------------------

| | For
the fiscal year ended December 31, 2003
| | -------------------------------------------

|[   ] | 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          1-13934
| | ---------------------------------------

|MIDWEST AIR GROUP, INC.                               
|------------------------------------------------------
|(Exact name of registrant as specified in its charter)

|Wisconsin                                     | 39-1828757                          
|--------------------------------------------- | ------------------------------------
|(State or other jurisdiction of incorporation | (I.R.S. Employer Identification No.)
|or organization)                             

|6744 South Howell Avenue                            
|----------------------------------------------------
|Oak Creek, Wisconsin 53154                          
|(Address of Principal executive offices)            
|(Zip code)                                          
|414-570-4000                                        
|(Registrant's telephone number, including area code)

|Securities registered pursuant to Section 12(b) of the Act: |                                        
|----------------------------------------------------------- | ---------------------------------------
|Common Stock, $.01 par value                                | New York Stock Exchange                
|Preferred Stock Purchase Rights                             | New York Stock Exchange                
|                                                            |                                        
|(Title of class)                                            | (Names of exchange on which registered)
|Securities registered pursuant to Section 12(g) of the Act: | None                                   
|                                                            |                                        
|                                                            | (Title of class)                       

| | Indicate
by checkmark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Yes   X   
         No

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

| | Indicate
by checkmark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of
the Exchange Act).
| | --------------------------------------------------------------------------------------------------------------------

Yes   X   
         No

The aggregate market value of the
Common Stock held by non-affiliates of the registrant as of March 5, 2004 was
approximately $45,605,295. For purposes of this calculation only, (i) shares of Common
Stock are deemed to have a market value of $2.62 per share, the closing price of the
Common Stock as reported on the New York Stock Exchange on June 30, 2003, and (ii) each of
the executive officers, directors and persons holding more than 10% of the outstanding
Common Stock as of March 5, 2004 is deemed to be an affiliate.

As of March 5, 2004, there were
17,406,601 shares of Common Stock outstanding.

DOCUMENTS INCORPORATED
BY REFERENCE

Portions of the definitive Proxy
Statement for registrants Annual Meeting of Shareholders to be held on April 22,
2004 are incorporated by reference in Part III Items 10, 11, 12, 13 and 14.

---

# MIDWEST AIR GROUP, INC. FORM 10-K For the fiscal year
ended December 31, 2003

# TABLE OF CONTENTS

|PART I        |                                                                                       | Page
|------------- | ------------------------------------------------------------------------------------- | ----
|ITEM 1        | Business                                                                              | 1   
|ITEM 2        | Properties                                                                            | 14  
|ITEM 3        | Legal Proceedings                                                                     | 16  
|ITEM 4        | Submission of Matters to a Vote of Security Holders                                   | 17  
|PART II      
|ITEM 5        | Market for the Registrant's Common Equity and Related Stockholder Matters             | 18  
|ITEM 6        | Selected Financial Data                                                               | 20  
|ITEM 7        | Management's Discussion and Analysis of Financial Condition and Results of Operations | 22  
|ITEM 7A       | Quantitative and Qualitative Disclosures about Market Risk                            | 37  
|ITEM 8        | Financial Statements and Supplementary Data                                           | 38  
|ITEM 9        | Changes in and Disagreements With Accountants on Accounting and Financial Disclosure  | 67  
|ITEM 9a       | Controls and Procedures                                                               | 67  
|PART III     
|ITEM 10       | Directors and Executive Officers of the Registrant                                    | 68  
|ITEM 11       | Executive Compensation                                                                | 68  
|ITEM 12       | Security Ownership of Certain Beneficial Owners and Management and Related            |     
|              | Stockholder Matters                                                                   | 68  
|ITEM 13       | Certain Relationships and Related Transactions                                        | 69  
|ITEM 14       | Principal Accountant Fees and Services                                                | 69  
|PART IV      
|ITEM 15       | Exhibits, Financial Statement Schedules and Reports on Form 8-K                       | 70  
|SIGNATURES    |                                                                                       | 71  
|EXHIBIT INDEX |                                                                                       | 72  

---

# PART I

# Forward-Looking
Statements

This Annual Report on Form
10-K, particularly the Pending Developments section, contains
forward-looking statements that may state Midwest Air Group, Inc.s (the
Company) or managements intentions, hopes, beliefs, expectations or
predictions for the future. In the following discussion and elsewhere in the report,
statements containing words such as expect, anticipate,
believe, estimate, goal, objective or
similar words are intended to identify forward-looking statements. It is important to note
that the Companys actual results could differ materially from projected results due
to the risk factors described in the Risk Factors section of Item 1 of this Annual
Report on Form 10-K and the following:

| | the
Company's ability to generate sufficient cash flows to meet obligations on a timely basis;
|- | ----------------------------------------------------------------------------------------------

| | uncertainties
concerning ongoing financing for operations, including the ability to finance the
acquisition of new aircraft;
|- | ----------------------------------------------------------------------------------------------------------------------------

| | uncertainties
related to general economic factors;
|- | --------------------------------------------------

| | industry
conditions;
|- | --------------------

| | labor
relations;
|- | ----------------

| | scheduling
developments;
|- | ------------------------

| | government
regulations, including increased costs for compliance with new or enhanced government
regulations;
|- | -------------------------------------------------------------------------------------------------------------

| | increases
in insurance costs;
|- | -----------------------------

| | aircraft
maintenance and refurbishment schedules;
|- | -------------------------------------------------

| | potential
delays related to acquired aircraft;
|- | ----------------------------------------------

| | increases
in fuel costs or the failure of fuel costs to decline;
|- | ----------------------------------------------------------------

| | resolution
of matters relating to a Wisconsin ad valorem property tax exemption;
|- | --------------------------------------------------------------------------------

| | interest
rate fluctuations;
|- | ---------------------------

| | increased
costs for security-related measures;
|- | ----------------------------------------------

| | potential
 aircraft  incidents  and other events  beyond the  Company's  control,  including
 traffic  congestion  and weather      conditions; and
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------

| | terrorist
 attacks or fear of terrorist  attacks and other world  events,  including  U.S.
 military  involvement  in overseas      operations.
|- | -----------------------------------------------------------------------------------------------------------------------------------------------

Additional information concerning
factors that could cause actual results to differ materially from those in the
forward-looking statements is contained from time to time in the Companys Securities
and Exchange Commission filings. The Company assumes no obligation, and disclaims any
obligation, to update information contained in this Annual Report on Form 10-K,
including forward-looking statements, as a result of facts, events or circumstances after
the date of this report.

# ITEM 1. BUSINESS

# Background

The Company, formerly known as
Midwest Express Holdings, Inc., was reincorporated under the laws of the State of
Wisconsin in 1996. It is a holding company and its principal subsidiary is Midwest
Airlines, Inc., (Midwest Airlines), formerly known as Midwest Express
Airlines, Inc. Midwest Airlines currently operates a passenger jet airline that serves
major destinations throughout the United States from Milwaukee, Wisconsin, and Kansas
City, Missouri.

Midwest Airlines evolved out of
Kimberly-Clark Corporations desire to provide a convenient and cost-effective way to
meet its internal transportation needs. Kimberly-Clark began daily, nonstop aircraft
shuttle service in October 1982 for employees traveling between offices in two cities. Key
management personnel from Kimberly-Clark who successfully operated the shuttle service
became the senior management of Midwest Airlines.

1

---

Midwest Airlines began commercial
operations in June 1984 with two DC-9-10 aircraft, serving three destinations from
Milwaukees General Mitchell International Airport. Milwaukee, as Midwest
Airlines original base of operations, has been the main focus of its route
structure. Midwest Airlines established Kansas City as an additional base of operations in
September 2000.

Skyway Airlines, Inc., doing business
as Midwest Connect (Midwest Connect), formerly known as Astral Aviation, Inc.,
is a wholly owned subsidiary of Midwest Airlines, and serves as the regional airline for
the Company. Midwest Connect began operations in early 1994 by taking over routes that
Mesa Airlines, Inc. (Mesa) had operated as a commuter feed system under a
marketing agreement between Mesa and Midwest Airlines. Under the agreement, Mesa operated
the system from 1989 to 1994 as Skyway Airlines, using Midwest Airlines airline
code.

On September 27, 1995, the stock of
Midwest Airlines was transferred to the Company in connection with the initial public
offering (Offering) by Kimberly-Clark of shares of common stock of the
Company. Following the Offering, Kimberly-Clark retained 20% of the shares of outstanding
common stock of the Company, which it subsequently sold in a secondary public offering
consummated on May 23, 1996.

Midwest Airlines and Midwest Connect
constitute the Companys reportable segments. These reportable segments are strategic
units that are managed independently because they provide different services, with
different cost structures and marketing strategies. Additional detail on segment reporting
is included in Note 12 of the Notes to Consolidated Financial Statements as of December
31, 2003 contained in this Annual Report on Form 10-K.

The Company currently has three
principal product offerings. Midwest Airlines Signature Service, which is Midwest
Airlines traditional product, is a single-class, premium service passenger jet
airline that caters to business travelers, and as of December 31, 2003, served 15 major
destinations in the United States from bases of operations in Milwaukee and Kansas City.
In August 2003, the Company introduced low-fare Midwest Airlines Saver Service in
high-volume, leisure-oriented markets from Milwaukee. As of December 31, 2003, Saver
Service operated to eight destinations. Midwest Connect builds feeder traffic and provides
regional scheduled passenger service to cities primarily in the Midwest. The
Companys operating subsidiaries also provide aircraft charter services, transport
air freight and mail, and provide other airline services.

# Name Change

As noted above, the Company changed
its name during 2003; Midwest Express Holdings, Inc. became Midwest Air Group, Inc. as of
January 1, 2004. Effective March 1, 2003, Midwest Airlines, Inc. became the corporate name
for Midwest Airlines, replacing Midwest Express Airlines, Inc. In addition, Skyway
Airlines, Inc. became the corporate name for the regional carrier, replacing Astral
Aviation, Inc. The Companys market research showed substantial lost income outside
core markets due to the word Express in the corporate name, which potential
customers may associate with a small airline. Additionally, research showed that many
travelers did not understand the connection between Midwest Airlines and Midwest Connect.
The Companys ongoing acquisition of 25 Boeing 717 aircraft and planned acquisition
of 20 Embraer regional jets provided an opportune time to make these name changes in a
cost-efficient manner, as the new aircraft arrive from the manufacturers bearing the
updated liveries with the new name. The Company plans to implement the name and corporate
symbol changes over the next several years.

2

---

# Corporate Structure

The Company and Midwest Airlines have
their principal executive offices in Oak Creek, Wisconsin. Both entities are Wisconsin
corporations. As described above, Midwest Airlines has one operating airline subsidiary,
Midwest Connect, a Delaware corporation. In addition to Midwest Connect, Midwest Airlines
has the following subsidiaries:

| | Midwest
Express Services  Omaha, Inc., a Nebraska corporation, was established as a profit
center to better track revenues and costs generated at Midwest Airlines Omaha
station. Revenue is generated from aircraft turn costs charged to Midwest Airlines and
Midwest Connect, and from aircraft ground handling and freight handling contracts for
other airlines in Omaha.
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | YX
Properties, LLC, is a wholly owned subsidiary of Midwest Express Services  Omaha,
Inc. This Nebraska limited liability company owns all of the intellectual and intangible
property of Midwest Airlines and Midwest Connect, such as airport slots, trademarks, and
certain proprietary training material and copyrights. YX Properties licenses this
intellectual and intangible property to Midwest Airlines and Midwest Connect. These
airport slots, trademarks, copyrights and other intellectual property rights are
important to the business, but no single airport slot, trademark, copyright or other
intellectual property right is material to the business as a whole.
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Midwest
Express Services  Kansas City, Inc., a Missouri corporation, was established as a
profit center to better track revenues and costs generated at the Kansas City station.
Revenue is generated from aircraft turn costs charged to Midwest Airlines and Midwest
Connect, and from airport ground handling contracts for other airlines in Kansas City.
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# Route Structure and
Scheduling

Midwest Airlines
OperationsMidwest Airlines currently has two
bases of operations  Milwaukee and Kansas City. As of December 31, 2003, Midwest
Airlines served 23 cities and was the largest carrier in Milwaukee, as measured by
passenger enplanement data provided by the airport authority. Midwest Airlines provides
nonstop service to most of its destinations from Milwaukee. Eleven other jet airlines
serve Milwaukees airport. As of December 31, 2003, Midwest Airlines provided nonstop
service from Kansas City to seven cities, and passengers in Kansas City can travel to most
other cities throughout the route systems of Midwest Airlines and Midwest Connect via
Milwaukee. Ten other jet airlines serve Kansas Citys airport.

Midwest Connect OperationsAlthough Midwest Connects
operation is independent from Midwest Airlines  including separate pilot, flight
attendant, aircraft maintenance and customer service personnel  Midwest Airlines
coordinates Midwest Connects routes and schedules to complement Midwest Airlines
service by providing passengers on short-haul, low-density routes the ability to connect
to Midwest Airlines flights in Milwaukee without switching carrier systems. To enhance
aircraft utilization and profitability, Midwest Connect also seeks to identify short-haul,
low-density, point-to-point routes where there is likely to be consistent demand for air
service even though there is no Milwaukee connection. As of December 31, 2003, Midwest
Connect offered flights in 30 markets.

Codesharing AgreementsIn 2003, Midwest Airlines continued a
one-year renewable codeshare agreement with American Eagle that was originally established
in 1998. Under the agreement, Midwest Airlines provided passengers with jet service to
Boston, Dallas/Ft. Worth and Los Angeles, and American Eagle provided passengers with
connecting service from those cities to select destinations throughout its system.
Effective in February 2004, the codeshare agreement with American Eagle was terminated.
The Company believes that the termination of this agreement will not have a material
impact on the Companys results of operations going forward.

3

---

In 2003, Midwest Airlines continued a
five-year codeshare agreement established in March 2001 with Air Midwest, Inc., a wholly
owned subsidiary of Mesa Air Group, to provide passengers connecting service between
Kansas City and select Midwestern cities. As of December 31, 2003, Midwest Airlines
provided passengers with jet service to Kansas City, and Air Midwest provided passengers
with connecting service from Kansas City to eight Midwestern cities. Both the Midwest
Airlines and Air Midwest segments are designated in computer reservation systems with
Midwest Airlines code.

# Business Environment

The airline industry has undergone
significant change in the last three years. The stagnant economy and the events of
September 11, 2001 began a decline in travel demand, primarily by business travelers who
traditionally have paid higher airline fares, that severely impacted the industry. Since
then, the continued slowdown in the economy, the war with Iraq in early 2003, and high
fuel prices in the latter half of 2003 and the first quarter of 2004 have continued to
depress demand, increase costs and significantly decrease fares. Combined with excess
capacity in the industry and significantly increased competition from legacy and low-fare
carriers, these factors have resulted in substantial declines in passenger revenue, higher
costs and substantial losses at many airlines, including the Company.

Although the Company was profitable
for 14 consecutive years through 2000, the fundamental changes in the industry caused
significant financial losses in 2001, 2002 and 2003 and have required the Company to
implement broad changes to its operations, aimed at returning the Company to profitability
by improving revenue and aggressively reducing costs. These changes are discussed more
fully in Managements Discussion and Analysis of Financial Condition and
Results of Operations contained in this Annual Report on Form 10-K.

# Customer Service

OverallMidwest Airlines has consistently
been recognized as the best U.S. airline by travel publications and frequent flyer
surveys, including Condé Nast Traveler, Travel+Leisure, OAG and the Zagat
Airline Survey. Midwest Airlines caters primarily to business travelers and discerning
leisure travelers by providing a travel experience that includes tangible amenities and a
higher level of customer service at competitive fares. Tangible amenities include a
passenger-friendly cabin and baked-onboard chocolate chip cookies on many flights, while
passenger-pleasing service is provided by Midwest Airlines employees at each phase of the
travel experience.

Saver Service and Signature
Service Midwest Airlines offers two products to meet the varying needs of its
customers:

| | Midwest
Airlines Saver Service provides nonstop, low-fare flights in high-demand leisure markets.
As of December 31, 2003, Saver flights flew between Milwaukee and Denver, Las Vegas, Los
Angeles, Orlando, Phoenix, Ft. Lauderdale, Ft. Myers and Tampa. The latter three cities
are served seasonally.
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Midwest
Airlines Signature Service is featured on all other Midwest routes. Seating on Signature
flights is altered from the standard 2-by-3 coach seating to a roomier 2-by-2
configuration, with wide leather seats for additional passenger comfort. The Boeing 717
aircraft also offer adjustable footrests and head cushions.
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Both Saver and Signature flights
provide passengers with extra legroom for added comfort. Pitch (the distance between
seats) averages 33-34", depending on aircraft type  more than the 30 many
airlines offer in coach class. The interior width of seat cushions on Midwest Airlines
aircraft is generally 18 on Saver flights and 21 on Signature flights,
compared with coach seating that is 17-18" wide on many airlines.

4

---

Saver Service is expected to enhance
the Companys competitive position by enabling it to serve a segment of the market
that is growing more rapidly than the business travel market, expand to destinations that
have not been economically viable to serve with the premium product, and serve some
existing destinations more cost efficiently. In the fourth quarter 2003, Saver Service
exceeded the Companys forecasts regarding passenger volume, but fares were lower
than forecast. It is too soon following the launch of the service for the Company to
determine the full impact of Saver Service until the service has been in place for
additional seasonal periods. As a result of the introduction of Saver Service, the Company
expects that it will compete with other low-fare carriers in ways that are different from
its Signature Service. Among other things, the Company will compete more clearly on the
basis of fare levels. There is no assurance that it will be able to compete successfully
on these bases.

# Fare Pricing and Revenue
Management

Airlines generally offer a range of
fares that are distinguished by restrictions on use, such as time of day and day of the
week, length of stay, and minimum advance booking period. Midwest Airlines and Midwest
Connect generally offer the same range of fares their competitors offer, although there
are exceptions in particular markets, where Midwest Airlines will discount certain
categories of fares or charge a premium compared with its competitors.

The number of seats an airline offers
in each fare category is also an important factor in pricing. Midwest Airlines monitors
the inventory and pricing of available seats with a computer-assisted revenue management
system. The system enables Midwest Airlines revenue management analysts to examine
Midwest Airlines and Midwest Connects historical demand and increases the
analysts opportunity to establish the optimal allocation of the number of seats made
available for sale at various fares. The analysts then monitor each flight to adjust seat
allocations and actual booking levels, with the objective of maximizing revenues by
optimizing the number of passengers and the fares paid on future flights.

Effective December 2002, the Company
revised its service fee structure to lower costs and boost revenues. The Company began
charging a service fee for paper tickets when electronic tickets are available, increased
lost ticket fees, began charging for unaccompanied minors, and standardized excess and
overweight baggage fees. This structure provides choices and options for customers, and
charges an appropriate amount for specialized services. These fees are either consistent
with or less than those charged by most U.S. carriers.

# Marketing

Travel Agency
Relationships and Ticket Sales In 2003, Midwest Airlines sold approximately 50% of its
tickets through travel agents (including online agencies), compared with 54% in 2002.
This decrease in mix represents more ticket sales in 2003 than in 2002 from direct sales
via the Companys reservations center, Web site and ticket counters. Beginning in
February 2003, the Company eliminated standard commissions on tickets sold through
traditional travel agencies.

The Company maintains its own
reservations call center at its headquarters in Milwaukee. Like many travel agencies, the
Companys reservations center provides airline information, makes reservations, and
sells tickets for Midwest Airlines and Midwest Connect flights using a computer
reservation system. The Company currently has an agreement to use SABREs computer
reservation system; this agreement is effective through 2009.

Frequent Flyer Program The Company
operates a frequent flyer program, called Midwest Miles (the frequent flyer program),
under which mileage credits are earned by flying on Midwest Airlines, Midwest Connect or
other participating airlines (Air Jamaica, American Airlines and Frontier Airlines) and
by using the services of participating hotels (Baymont, Hilton, Hyatt, Loews, Radisson,
Raffles, Swissôtel, Wyndham and others), car rental firms (Avis, Hertz and
National), Sprint telecommunications, Midwest Airlines MasterCard, Midwest Airlines
Vacations and other program partners. Members can redeem frequent flyer program miles for
travel on Midwest Airlines or Midwest Connect, or other participating airlines. In
addition to free travel, miles can be redeemed at participating hotels, car rental firms
and other program partners. The program is designed to enhance customer loyalty, and
thereby retain and increase the business of frequent travelers, by offering incentives
for their continued patronage. The frequent flyer program also includes a premier level,
Midwest Miles Executive, for members who fly 25 one-way trips or 20,000 miles annually.
Midwest Miles Executive offers additional benefits to its members, including mileage
bonuses and partner benefits.

5

---

The Company provides two levels of
award tickets for domestic travel on Midwest Airlines or Midwest Connect. The standard
travel award for a roundtrip ticket is 25,000 frequent flyer miles, while a companion
travel award requires 20,000 miles. Choice awards eliminate capacity controls for award
tickets, allowing customers to redeem an additional 25,000 miles for any available seat on
Midwest Airlines or Midwest Connect flights on which the standard frequent flyer award
seats have already been filled, up to the maximum seating capacity of the aircraft.
Standard awards remain subject to capacity controls, which limit seat availability during
peak travel times.

A marketing agreement between Midwest
Airlines and Northwest Airlines, which allowed members of the airlines respective
frequent flyer programs to redeem miles for award travel on the other airline, was
terminated on May 28, 2003. This program was replaced with a new marketing agreement with
American Airlines, which allows the companys frequent flyer program members to earn
Midwest Miles on American, American Eagle and AmericanConnection flights, as well as
redeem Midwest Miles for award travel on these flights. The new program became effective
on June 1, 2003. The agreement provides for economic compensation to American for all
awards issued on American, American Eagle and AmericanConnection flights, and to Midwest
Airlines for all Midwest Miles earned on American, American Eagle and AmericanConnection
flights.

The Company also offers the Midwest
Airlines MasterCard program. The program allows Midwest Airlines to offer a co-branded
credit card to enhance loyalty to the airline and to increase frequent flyer membership.
The Company generates income by selling frequent flyer program miles to Juniper Bank,
which in turn awards the miles to cardholders for purchases made with their credit cards.

As of December 31, 2003, the Company
had 1,654,000 members enrolled in its frequent flyer program (compared with 1,553,000 at
year-end 2002). The Company estimates that as of December 31, 2003, the total number of
awards available under the frequent flyer program was 178,000 (compared with 140,000 at
year-end 2002), after eliminating those accounts below the minimum award level. Air travel
awards redeemed were approximately 64,000 during 2003 and 87,000 during 2002,
respectively. Free travel awards accounted for approximately 5% of the Companys
total revenue passenger miles during 2003. Since the Company controls the number of seats
available for free travel on each flight (other than with respect to its choice awards),
it does not believe that the use of frequent flyer program awards results in a significant
displacement of revenue passengers. In addition, the Company does not believe that the use
of the choice awards significantly displaces revenue passengers.

Miles accrued in a members
account expire unless there is qualifying activity in the frequent flyer program account
in a 36-month period. Qualifying activity includes flights on Midwest Airlines and/or
Midwest Connect, or accrued mileage from any program partner activity during the previous
36-month period. If the account does not remain active, the mileage expires and the
account is considered inactive. Mileage in approximately 111,000 accounts expired in 2003.

The Company accounts for its frequent
flyer program obligations for travel miles on the accrual basis using the incremental cost
method. This method requires accrual of the average incremental cost to provide roundtrip
transportation to one additional passenger. The incremental cost includes the cost of
fuel, commissary, reservations and insurance. The incremental cost does not include a
contribution to overhead, aircraft cost or profit. The accrual is based on estimated
redemption percentages applied to actual mileage recorded in members accounts. For
purposes of calculating the frequent flyer program accrual, the Company anticipates that
approximately 76% of outstanding awards will be redeemed.

6

---

A portion of the revenue from the
sale of frequent flyer miles to program partners is deferred and recognized straight-line
over 32 months.

# Related Business

The Company also offers ancillary
airline services directly to customers, including cargo services and aircraft charters.
The cargo business consists of transporting freight, United States mail and
counter-to-counter packages on regular passenger flights.

As of December 31, 2003, Midwest
Airlines operated one DC-9-30 and two MD-80 series jet aircraft configured specifically
for the purpose of providing charter services. The primary customers of aircraft charter
services are athletic teams, business groups and tour operators.

The Company also generates revenue
from inflight liquor sales, providing aircraft ground handling and aircraft maintenance
services for other airlines, and miscellaneous other services.

# Competition

The Company competes with other air
carriers on most routes it serves. Many of the Companys competitors have elaborate
route structures that transport passengers to their hub airports for transfer to many
destinations, including those served by Midwest Airlines and Midwest Connect. Some
competitors offer flights from cities served by Midwest Airlines to more than one of their
hub airports, permitting them to compete in the Companys markets by offering
multiple routings. In some markets, Midwest Airlines and Midwest Connect also compete
against ground transportation.

In July 2003, Northwest Airlines
added one nonstop roundtrip flight in each of the following six markets from Milwaukee:
Boston, Las Vegas, Los Angeles, New York City, Orlando and Washington, D.C. Northwest
Airlines also added seasonal service to Phoenix in February 2004. In addition, Frontier
Airlines and AirTran Airlines added new nonstop service in the Milwaukee market during
2003. This new competition has decreased fares in many of the Companys markets. As
noted above, the Company competes with other carriers in most markets it serves. However,
this new competition is unique because it constitutes the addition of other carriers with
nonstop service in Midwest Airlines Milwaukee base of operations.

The Company competes in its core
businesses by offering what it believes are superior airline services at competitive
fares. To more closely align its offerings with the needs of the markets it serves, the
Company offers three types of service: Midwest Airlines Signature Service, Midwest
Airlines Saver Service and Midwest Connect regional service. Midwest Airlines Signature
Service is designed to compete by 1) careful selection of markets, 2) generation of
premium yields through service-oriented philosophy and rigorous yield management, and 3)
providing superior customer service while operating in a cost-efficient manner. Midwest
Airlines Saver Service, the Companys low-fare product offering, which was launched
in August 2003, better serves markets where value-conscious leisure travelers are
predominant. Midwest Connect regional service provides feed traffic for Midwest Airlines
jet routes and serves select point-to-point markets. Overall, the Company believes its
efforts to identify favorable markets and provide nonstop service enable it to generate a
high degree of loyalty among passengers and attract a larger percentage of business
travelers on its flights than higher volume carriers.

The Company has the largest market
share of passengers in Milwaukee. During December 2003, Midwest Airlines and Midwest
Connect collectively carried 38.7% of the passengers boarded in Milwaukee, while Northwest
Airlines, which has the second-largest share, carried 20.4%. During December 2003, Midwest
Airlines carried 4.8% of the passengers boarded in Kansas City, compared with 31.2%
carried by Southwest Airlines and 13.2% by American  the carriers with the two
largest market shares in Kansas City.

7

---

This increased competition has not
impacted the Company in market share; however, it has impacted the Company most noticeably
in the significant decrease in fares in the Milwaukee market. The Company has successfully
competed with legacy and low-cost carriers in the past and has maintained market share in
these markets. However, there can be no assurance it will be able to successfully compete
with competitors in the future.

# Employees

As of December 31, 2003, Midwest
Airlines had 2,143 employees (442 of whom were part-time and 35 of whom were
intermittents) and Midwest Connect had 724 employees (243 of whom were part-time). The
categories of employees were as indicated in the following table:

|                           | Employees as of December 31, 2003
|-------------------------- | ---------------------------------
|
|Flight Operations          |                                  
|Inflight                   |                                  
|Passenger Services         |                                  
|Maintenance                |                                  
|Reservations and Marketing |                                  
|Accounting and Finance     |                                  
|Administrative             |                                  
|                           |                                  
|Total                      |                                  
|                           |                                  

The Company makes extensive use of
part-time employees to increase operational flexibility. Given the size of Midwest
Airlines and Midwest Connects fleet and flight schedules, the Company does not
have continuous operations at many locations. The use of part-time employees enables the
Company to schedule employees when they are needed. Part-time employees are eligible for
most benefit programs, subject to certain restrictions and co-pay requirements, because
doing so enables the Company to attract quality employees and reinforces the value the
Company places on part-time employees.

# Labor Relations

Midwest Airlines and Midwest Connect
pilots are represented by the Air Line Pilots Association, a labor union, for
representation in collective bargaining. Midwest Airlines flight attendants are
represented by the Association of Flight Attendants, AFL-CIO, a labor union, for
representation in collective bargaining. In August 2003, all represented employee groups
ratified amendments to their collective bargaining agreements; the duration of these
agreements is five years.

# Regulation

GeneralThe Department of Transportation
(DOT) has the authority to regulate economic issues affecting air service
including, among other things, air carrier certification and fitness, insurance, deceptive
and unfair competitive practices, advertising, computer reservation systems
(CRS), and other consumer protection matters such as on-time performance,
denied boarding and baggage liability. It is also authorized to require reports from air
carriers and to inspect a carriers books, records and property. The DOT has
authority to investigate and institute proceedings to enforce its economic regulations,
and may, in certain circumstances, assess civil penalties, revoke operating authority and
seek criminal sanctions.

In response to the terrorist attacks
of September 11, 2001, Congress enacted the Aviation and Transportation Security Act
(ATSA) of November 2001. ATSA created the Transportation Security
Administration (TSA), an agency within the DOT, to oversee, among other
things, aviation and airport security. In 2003, TSA was transferred from the DOT to the
Department of Homeland Security, however the basic mission and authority of TSA remain
unchanged. ATSA provided for the federalization of airport passenger, baggage, cargo,
mail, and employee and vendor screening processes. ATSA also enhanced background checks,
provided federal air marshals aboard flights, improved flight deck security, enhanced
airline crew security training, improved training of security screening personnel and
enhanced airport perimeter access, among other security measures. ATSA also required that
all checked baggage be screened by explosive detection systems beginning December 31,
2002. The Company is actively involved in the industrys efforts to work with TSA to
ensure compliance with ATSA. Compliance with ATSA has resulted in increased costs and can
result in operational delays and service disruptions. ATSA also imposed a $2.50 per
enplanement security fee (subject to a $5.00 one-way trip cap). This fee is collected by
air carriers and remitted to the government for payment for enhanced security.

8

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The Federal Aviation Administration
(FAA) regulates the Companys aircraft maintenance and operations,
including flight operations, flight equipment, aircraft noise, ground facilities,
dispatch, communications, training, security, weather observation, flight and duty time,
crew qualifications, aircraft registration, and other matters affecting air safety. The
FAA has the authority to temporarily suspend or permanently revoke the authority of the
Company or its licensed personnel for failure to comply with regulations promulgated by
the FAA, and to assess civil penalties for such failures.

The Company also is subject to
regulation and/or oversight by federal agencies other than the DOT, TSA and FAA. Antitrust
laws are enforced by the U.S. Department of Justice; labor relations are generally
regulated by the Railway Labor Act, which vests certain regulatory powers in the National
Mediation Board with respect to airlines and labor unions arising under collective
bargaining agreements; the use of radio facilities is regulated by the Federal
Communications Commission. Also, the Company is generally regulated by federal, state and
local laws relating to the protection of the environment and to the discharge of materials
into the environment. In addition, the Immigration and Naturalization Service, the U.S.
Customs Service, and the Animal and Plant Health Inspection Service of the Department of
Agriculture have jurisdiction over inspection of the Companys aircraft, passengers
and cargo to ensure compliance with U.S. immigration, customs and import laws.

MaintenanceIn compliance with FAA regulations,
the Companys aircraft are subject to many levels of maintenance or checks, and
periodically go through complete overhauls. The FAA typically monitors maintenance efforts
with FAA representatives on site.

SlotsFAA regulations currently permit the
buying, selling, trading and leasing of certain airline slots at New Yorks La
Guardia and Kennedy International, and Washington National airports. A slot is an
authorization to schedule a takeoff or landing at the designated airport within a
specified time window. The FAA must be advised of all slot transfers and can disallow any
such transfer.

The FAAs slot regulations
require the use of each slot at least 80% of the time, measured on a bimonthly basis.
Failure to comply with these regulations without a waiver from the FAA (which is granted
only in exceptional cases) subjects the slot to recall by the FAA. In addition, slot
regulations provide that the FAA may withdraw slots at any time and without compensation
to meet the DOTs operational needs (such as providing slots for international or
essential air transportation). The Companys ability to increase its level of
operations at these airports is affected by the number of slots available for takeoffs and
landings. These slots have been pledged as security to holders of the Companys
convertible senior secured notes (as described more fully below).

# Essential Air Service
Program

The Essential Air Service program
(EAS) was created following airline deregulation action in 1978. The EAS
program, which is administered by the DOT, subsidizes and guarantees a minimum level of
air service to small communities that might not otherwise have service. In January 2003,
Midwest Connect commenced service to three such cities: Iron Mountain, Ironwood and
Manistee, Michigan. There is no guarantee the Company will continue to receive subsidies
for serving these cities. If funding were terminated for any reason, the Company would not
continue to operate in these markets and would find alternate routes for the aircraft
currently deployed in these markets.

9

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# Aircraft Fuel

Because fuel costs constitute a
significant portion of the Companys operating costs (approximately 20% as of
December 31, 2003 and 16% as of December 31, 2002), significant changes in fuel costs can
materially affect the Companys operating results. Fuel prices continue to be
susceptible to political events and other factors that affect the supply of fuel, and the
Company cannot predict the effect of changes in near- or long-term fuel prices. In the
event of a fuel supply shortage resulting from a disruption of oil imports or otherwise,
higher fuel prices or curtailment of scheduled service could result. The Company has
periodically entered into short-term option cap agreements in an attempt to reduce its
exposure to jet fuel price fluctuations. As of December 31, 2003, the Company had not
placed any such agreements for the first quarter of 2004 or later periods.

# Insurance

The Company carries types and amounts
of insurance customary in the airline industry, including coverage for general liability,
passenger liability, property damage, product liability, aircraft loss or damage, baggage
and cargo liability, and workers compensation.

As a result of the terrorist attacks
on September 11, 2001, aviation insurers have significantly reduced the amount of
insurance coverage available to commercial air carriers for war risk coverages (which
include terrorism and hijacking). In addition, insurance companies have significantly
increased the cost of this coverage, as well as aviation insurance in general. Under the
Air Transportation Safety and System Stabilization Act, U.S. air carriers may purchase
certain war risk liability insurance from the United States government on an interim basis
at rates that are more favorable than those available from private aviation insurance
carriers. As a result of the Emergency Wartime Supplemental Appropriations Act of 2003,
the Company received an extension of this coverage through August 31, 2004.

Commercial air carriers are required
by the DOT to obtain appropriate aviation insurance coverage. The effects of September 11
insurance losses, additional terrorist attacks or other unanticipated events could result
in aviation insurers further increasing their premiums or a future shortage of available
aviation insurance. Significant increases in insurance premiums or a shortage of available
insurance could result in the curtailment or discontinuation of scheduled service.

# Seasonality

The Companys results of
operations are impacted by the seasonality associated with the airline industry. Any
interim period is not necessarily representative of results for the entire fiscal year.
Generally, quarterly operating income and, to a lesser extent, revenues tend to be lower
in the first and fourth quarters.

10

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# Risks Related to the
Company and to the Commercial Airline Industry

Investors should carefully consider
the following risk factors, as well as other information included or incorporated by
reference in this Annual Report on Form 10-K in connection with any investment in
the Companys common stock. The risks and uncertainties described below are not only
the only ones that the Company faces. Additional risks and uncertainties not presently
known or that the Company currently believes to be immaterial may also adversely affect
the Company.

Business may be harmed if the
Company cannot benefit from premium pricing. The reduction in the demand for air
travel, particularly business travel, and the growing use of travel substitutes such as
audio, video and Web conferencing have affected fares throughout the airline industry.
Greater cost sensitivity on the part of travelers, especially business travelers, and
increasing competition from low-cost carriers have reduced pricing power among airlines.
At the same time, the increase in pricing transparency resulting from the use of the
Internet has enabled cost-conscious customers to more easily obtain the lowest fare on any
given route. In addition, the Company must now compete with carriers that are reorganizing
or have reorganized under the protection of Chapter 11 of the United States Bankruptcy
Code. Historically, air carriers involved in Chapter 11 reorganizations have undertaken
substantial fare discounting to maintain cash flows and enhance customer loyalty. There
can be no assurance that attempts to increase fares will be successful. The Companys
business strategy involves premium pricing on Signature Service routes, and it is possible
that premium pricing in the airline industry will not recover. If premium pricing does not
recover, then the Companys business and financial results would suffer.

Customer loyalty may be affected
due to diminishing product differentiation. The Companys business strategy
includes a premium travel experience at fares that cater to business and leisure
travelers. The Company seeks to differentiate itself through better customer service
throughout the customers travel experience. Due to the current state of the airline
industry in general, and the Companys current state, it has been forced to reduce or
suspend some of the amenities that helped it achieve differentiation. For example,
complimentary inflight meal service has been reduced to beverages, snacks and cookies,
with buy-onboard dining service. Given these changes, there can be no assurance that
customers will perceive any differentiation from other airlines and remain loyal to the
Company. Any loss of customers due to diminishing product differentiation could harm
business.

The September 11, 2001 terrorist
attacks seriously harmed business and may further harm it in the future. The terrorist attacks of September
11, 2001 materially impacted and continue to impact the airline industry. Concerns about
further terrorist attacks have had a negative impact on air travel demand. In addition,
security procedures introduced at airports since the attacks have increased  both in
reality and in customer perception  the inconvenience of air travel, leading to
further reduction in demand.

Increased competition could harm
business. Midwest Airlines competes with other air carriers on all routes that it serves.
Many of Midwest Airlines competitors have elaborate route structures that transport
passengers to their hub airports, permitting them to compete in Midwest Airlines markets
by offering multiple routings. In some markets, Midwest Airlines and Midwest Connect also
compete against ground transportation.

As a result of the introduction of
Saver Service, Midwest Airlines expects it will compete with other low-fare carriers in
ways that are different from its Signature Service. Among other things, it will compete
more clearly on the basis of fare levels. There is no assurance it will be able to compete
successfully on these bases.

11

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There are risks associated with
Midwest Airlines ongoing purchases of Boeing 717 aircraft. Midwest Airlines currently has a firm
purchase order for 25 Boeing 717 aircraft and options to purchase up to 25 additional
Boeing 717s at pre-negotiated prices. Midwest Airlines took delivery of the first Boeing
717 on February 28, 2003, and 10 more through December 2003. It plans to continue taking
delivery of the Boeing 717s at the current rate of one per month through March 2004, when
deliveries will change to approximately one per quarter until concluding in October 2006.
The new Boeing 717s will replace Midwest Airlines fleet of DC-9s. Among other risks, the
acquisition of these aircraft involves the following:

| | The
acquisition will significantly affect cost structure by adding higher fixed costs because
the Boeing 717 aircraft will have higher ownership costs (i.e., purchase costs and lease
payment expenses) than the DC-9 aircraft they are replacing. Midwest Airlines believes
that benefits of Boeing 717 aircraft include greater fuel efficiency, lower maintenance
costs, improved dispatch reliability, increased aircraft utilization and reduced
regulatory compliance costs. Midwest Airlines also believes it will realize higher
revenues through increased utilization and because demand for air travel will increase
because it is using these aircraft. While Midwest Airlines believes the combined effect
of these higher revenues and reduced costs will offset the higher ownership costs, there
can be no guarantee that will be the case. Further, it will be relying on benefits that
are variable in nature to offset fixed costs. To date, the Boeing 717 program has
realized certain benefits, such as higher fuel efficiency. However, it is too early for
the Company to determine the full effect of the program as the aircraft have been in the
fleet less than one year.
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Midwest
Airlines is dependent on Boeing to enable it to acquire the Boeing 717s. Under the terms
of the financing agreement with Boeing, Boeing is able to terminate its financing
commitment if it deems the Company has experienced a material adverse change. If Boeing
exercises this termination right or is otherwise unwilling or unable to perform its
contractual obligations, then Midwest Airlines would have to find another supplier for
aircraft. There can be no assurance Midwest Airlines could purchase aircraft in the same
time frame as it currently expects or at comparable prices. In addition, if Boeing
terminates its relationship with Midwest Airlines, Midwest Airlines would incur
substantial transition costs, such as costs associated with employee retraining.
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Due
to the number of Boeing 717 aircraft Midwest Airlines intends to have in its fleet, it
would be vulnerable if any design defect or mechanical problem becomes associated with
the Boeing 717 aircraft or if there is adverse public perception of these aircraft.
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | If
there are not markets in which the Company can employ its Boeing 717s, it may have excess
aircraft in its fleet.
|- | -------------------------------------------------------------------------------------------------------------------

Increases in fuel costs would harm
business. Fuel costs constitute a significant portion of the Companys total
operating costs (approximately 20% for the quarter ended December 31, 2003). Accordingly,
significant increases in fuel costs would harm its financial condition and results of
operations. For the year ended December 31, 2003, a one-cent increase in the price per
gallon of fuel expense would have increased fuel expenses by $800,000. Historically, fuel
costs have been subject to wide price fluctuations based on geopolitical issues and
changes in supply and demand. Fuel availability is also subject to periods of market
surplus and shortage, and is affected by demand for both home heating oil and gasoline.
Because of the effect of these events on the price and availability of fuel, the cost and
future availability of fuel cannot be predicted with any degree of certainty. In the
event of a fuel supply shortage, higher fuel prices or the curtailment of scheduled
service could result. There can be no assurance that increases in the price of fuel can
be offset with higher fares or surcharges.

In addition, although the Company
periodically manages the price risk of fuel by purchasing commodity options that establish
ceiling prices and partially protect against significant increases in fuel prices, these
options do not protect against ordinary course price increases and are limited in fuel
volume and duration.The Company has periodically hedged fuel prices by entering
into short-term option cap agreements in an attempt to reduce exposure to substantial jet
fuel price fluctuations. There can be no assurance that attempts to manage this risk are
sufficient to protect against increases in the price of fuel due to inadequate fuel
supplies or otherwise. Currently, the Company has no hedges in place for current or future
periods.

12

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Changes in government regulation
imposing additional requirements and restrictions on operations could increase operating
costs and result in service delays and disruptions.Airlines are subject to extensive
regulatory and legal requirements, both domestically and internationally, that involve
significant compliance costs. For example, on November 19, 2001, the President signed into
law the Aviation and Transportation Security Act, which federalizes substantially all
aspects of civil aviation security and requires, among other things, the implementation of
security measures, such as the requirement that all passenger bags be screened for
explosives. Funding for airline and airport security under the law is primarily provided
by a new $2.50 per enplanement ticket tax, with authority granted to the Transportation
Security Administration to impose additional fees on air carriers if necessary to cover
additional federal aviation security costs. Implementation of the requirements of the act
resulted in increased costs for passengers and the Company.

In addition to increased costs, the
security measures required to be implemented under the Aviation Security Act, as well as
additional security measures that the Federal Aviation Administration has implemented,
have resulted in a longer check-in process for passengers and caused delays and
disruptions in airline service, resulting in customer frustration and reducing demand for
airline travel.

Additional laws, regulations, taxes,
and airport rates and charges have been proposed periodically that could significantly
increase the cost of airline operations or reduce demand for air travel. If adopted, these
measures could have the effect of raising ticket prices, reducing revenue and increasing
costs. There can be no assurance that these and other laws or regulations enacted in the
future will not harm business.

An unfavorable resolution of the
Companys exemption from Wisconsin ad valorem property taxes could harm the business.On November 7, 2003, a Dane County, Wisconsin, circuit court, in an action brought by
Northwest Airlines, Inc., declared invalid the Wisconsin statute that provides the hub
airline exemption from Wisconsin ad valorem property taxes. Savings to the Company from
the exemption have been approximately $2.0 million annually. However, the Company
estimates savings could be as high as $7.0 million annually by 2010. The Company is
working with the State of Wisconsin on an appeal or other action to reduce or eliminate
the potential effect of the decision. The Company believes there will be no retroactive
impact of the decision.

The Company may be unable to
compete effectively against airlines with greater financial resources or lower operating
costs.The airline industry is characterized generally by low profit margins and high
fixed costs, primarily for personnel, debt service and rent. The expenses of an aircraft
flight do not vary significantly with the number of passengers carried, and as a result, a
relatively small change in the number of passengers or in pricing could have a
disproportionate effect on an airlines operating and financial results.

In addition, the airline industry is
highly competitive and particularly susceptible to price discounting because airlines
incur only nominal costs to provide service to passengers occupying otherwise unsold
seats. The Company currently competes with other airlines on most of its routes. Many of
these airlines are larger and have significantly greater financial resources and name
recognition or lower operating costs.

The airline industry tends to
experience adverse financial results during general economic downturns. Since a substantial portion of air
travel is discretionary, the industry tends to experience adverse financial results during
general economic downturns. The airline industry has been experiencing a decline in
passenger traffic, particularly traffic by business travelers, due to slower general
economic conditions. Soft economic conditions continue to put pressure on the
profitability of the industry. Any general decline in passenger traffic may harm the
Companys business. Any decline in traffic by business travelers may have a greater
impact on the Company than on many of its competitors because it believes a greater
percentage of its passengers are business travelers.

13

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The Companys business is
heavily dependent on the Milwaukee market, and a reduction in demand for air travel in
this market could harm business.A substantial percentage of the Companys
flights have Milwaukee as their origin or destination. As a result, the Company remains
largely dependent on the Milwaukee market, and a reduction in its share of the Milwaukee
market or reduced passenger traffic to or from Milwaukee could have a material adverse
effect on business.

The Companys indebtedness
could adversely affect its financial health.The Companys indebtedness could
have important consequences, including:

| | increasing
its vulnerability to general adverse economic and industry conditions;
|- | ---------------------------------------------------------------------------------

| | requiring
that a portion of cash flow from operations be used for the payment of interest on debt,
thereby reducing the ability to use cash flow to fund working capital, capital
expenditures and general corporate requirements;
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | limiting
the ability to obtain additional financing to fund future working capital, capital
expenditures and general corporate requirements;
|- | --------------------------------------------------------------------------------------------------------------------------------------------

| | limiting
flexibility to plan for or react to changes in business and the airline industry; and
|- | ----------------------------------------------------------------------------------------------

| | placing
the Company at a competitive disadvantage to its competitors who have less indebtedness.
|- | ------------------------------------------------------------------------------------------------

# Available Information

The Company maintains a Web site at
www.midwestairlines.com. On its Web site, the Company makes available, free of
charge, the Annual Report on Form 10-K, quarterly reports on Form 10-Q, current
reports on Form 8-K and amendments to those reports, as soon as reasonably practical after
the reports have been electronically filed or furnished to the Securities and Exchange
Commission. In addition, on or after April 22, 2004, the Company will have available on
its Web site, free of charge, its (a) code of business conduct; (b) code of ethics for its
Chief Executive Officer and financial officers; (c) corporate governance guidelines; and
(d) the charters for the following Committees of the Board of Directors: Audit,
Compensation, and Board Affairs and Governance; all of which are also available in print
upon written request to the Director of Investor Relations of the Company at 6744 South
Howell Avenue, Oak Creek, WI 53154. The Company is not including the information contained
on or available through its Web site as a part of, or incorporating such information by
reference into, this Annual Report on Form 10-K.

# ITEM 2. PROPERTIES

# Aircraft Equipment

As of December 31, 2003, Midwest
Airlines had 11 Boeing 717 and 17 McDonnell Douglas jet aircraft in service, including
four DC-9-30, two MD-88, eight MD-81 and three MD-82 aircraft.

14

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|MIDWEST AIRLINES AIRCRAFT IN SERVICE
|------------------------------------
|
|DC-9-30                             
|MD-88                               
|MD-81/82                            
|Boeing 717                          
|                                    
|Total                               
|                                    

| | *
One aircraft is reconfigured to 60 seats and used primarily for charter flights.
| | ----------------------------------------------------------------------------------

| | **
A portion of the MD-80 series fleet has been reconfigured for Saver Service. As of
December 31, 2003, six of the MD-80 series aircraft have been reconfigured with 147 seats,
and two of the aircraft have been reconfigured with 143 seats. In addition, two of the
MD-81 aircraft have been reconfigured to 74 seats and are used primarily for charter
flights. The remaining three MD-80 series aircraft are configured for Signature Service,
with 116 seats.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

As part of the Companys
restructuring, the Company renegotiated its agreements with aircraft lessors and lenders.
The information in this section reflects the amended agreements.

One MD-88 lease expires in 2007, two
MD-81/82 aircraft leases and one MD-88 aircraft lease expire in 2011, and the remaining
MD-81 lease expires in 2013. The four DC-9 aircraft will be periodically removed from
service through April 2004 and sold or returned to lessors. The Boeing 717 aircraft leases
all have 20-year terms.

As of December 31, 2003, Midwest
Connects fleet consisted of 24 aircraft: 14 Beech 1900D turboprop aircraft and 10
Fairchild 328JET aircraft.

|MIDWEST CONNECT AIRCRAFT IN SERVICE
|-----------------------------------
|
|Beech 1900D                        
|328JET                             
|                                   
|Total                              
|                                   

Midwest Connect acquired 15 new Beech
1900D turboprop aircraft between January 11, 1994 and May 18, 1995. During fourth quarter
2003, the Beech 1900D fleet was reduced to 14 as one aircraft was removed from the fleet
and sold by the lessor. Each of these aircraft has 19 passenger seats. As of December 31,
2003, Midwest Connects 14 turboprop aircraft were financed under operating leases
with lease terms of 12 years and expiration dates of 2008, except for two turboprop leases
that expire in 2009. These leases permit renewal for various periods at rates
approximating fair market value and purchase options at or near the end of the lease term
at fair market value.

In 1999, Midwest Connect acquired
five 32-passenger Fairchild 328JET aircraft. The five aircraft were financed by operating
leases from one financial institution, with expiration dates all occurring in 2016. Four
aircraft were placed in service in late 1999; the fifth was placed in service in 2000.
Five additional 328JET aircraft were acquired and placed in service during January, April
and June 2001, and January and February 2002. These aircraft are currently owned, three of
which are financed with debt.

All owned, otherwise unencumbered
aircraft have been pledged as security to holders of the Companys convertible senior
secured notes (described in Note 5 to the Consolidated Financial Statements contained in
this Annual Report on Form 10-K).

15

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# Facilities

The Company has secured long-term use
of gates and maintenance facilities at General Mitchell International Airport in
Milwaukee. The Company is a signatory to the airport master lease, which expires in 2010,
for 19 gates at the Milwaukee airport, including ticket counters, baggage handling and
operations space. In 1988, the Company completed construction of its maintenance facility
at the Milwaukee airport with a lease of land from the airport for an initial term of five
years ending March 31, 1993, with an option for the Company to extend the lease for 11
successive renewal terms of five years each. To date, the Company has chosen to renew the
lease for three successive renewal terms, and the lease will expire in 2008 if the Company
chooses not to extend such lease for another five years.

In October 1998, Midwest Airlines
completed construction of a 97,000-square-foot maintenance facility that is owned by
Milwaukee County and located at General Mitchell International Airport adjacent to its
other maintenance facility. See Note 5 to the Consolidated Financial Statements contained
in this Annual Report on Form 10-K for further detail regarding the financing of
this facility.

In August 1997, the Company purchased
its Oak Creek, Wisconsin headquarters building, which it had previously leased. In July
2000, the Company opened a new 55,000-square-foot training facility as an addition to its
headquarters. In November 2003, the Company completed a sale/leaseback transaction on the
Companys headquarters facility. The initial term of the lease is 15 years.

Midwest Airlines leases airport
facilities (gates, operations space, ticket counter) at each location it operates. In 10
of the 23 cities Midwest Airlines served as of December 31, 2003, gates at the airport
were leased directly from the airport authority. In 13 cities, Midwest Airlines subleased
gates from other carriers.

Midwest Connect has secured long-term
leases of facilities at General Mitchell International Airport. Midwest Connect currently
operates five gates at General Mitchell International Airport in Milwaukee; all gates are
leased directly from Milwaukee County. Midwest Connect owns its 10,000 square-foot
headquarters building, which is located off airport grounds. This building is pledged as
collateral under the convertible senior secured notes.

Midwest Connect leases airport
facilities at each location it operates unless the airport also has Midwest Airlines
service. Midwest Connect also leases space from Midwest Airlines at three locations that
were originally served by Midwest Airlines. Additionally, Midwest Connect serves markets
where third parties deliver aircraft and passenger handling services. These leases are for
various terms and contain other provisions that are customary in the industry.

In February 2002, the Company
completed construction of a new maintenance facility for Midwest Connect, located at
General Mitchell International Airport. The facility is owned by Milwaukee County. See
Note 5 to the Consolidated Financial Statements contained in this Annual Report on Form
10-K for further detail regarding the financing of this facility.

# ITEM 3. LEGAL PROCEEDINGS

The Company is a party to routine
litigation incidental to its business. Management believes that none of this litigation is
likely to have a material adverse effect on the Companys consolidated financial
position and results of operations.

16

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# ITEM 4. SUBMISSION OF
MATTERS TO A VOTE OF SECURITY HOLDERS

At the Companys Special Meeting
of Shareholders held on November 21, 2003, shareholders approved each of the following
matters:

| | The
issuance of $10,000,000 aggregate principal amount of convertible senior secured notes
and the issuance of common stock of the Company upon conversion of such notes. 10,096,976
shares were voted FOR this issuance; 316,258 shares were voted AGAINST this issuance, and
37,388 shares ABSTAINED, with one broker non-vote.
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
issuance of 1,882,353 shares of common stock of the Company to certain investors.
9,987,158 shares were voted FOR this issuance; 429,726 shares were voted AGAINST this
issuance, and 33,738 shares ABSTAINED, with one broker non-vote.
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Midwest Air Group, Inc. 2003 All-Employee Stock Option Plan. 9,925,890 shares were voted
FOR this plan; 486,671 shares were voted AGAINST this plan, and 38,061 shares ABSTAINED,
with one broker non-vote.
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | A
proposed amendment to Article Four of the Companys Restated Articles of
Incorporation authorizing an increase in the number of authorized shares of the Companys
common stock from 25,000,000 to 50,000,000 with no change in the number of authorized
shares of preferred stock. 9,465,365 shares were voted FOR this amendment; 951,313 shares
were voted AGAINST this amendment, and 33,944 shares ABSTAINED, with one broker non-vote.
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

17

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# PART II

# ITEM 5. MARKET FOR THE
REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

# Market Price of Common Stock

The following table sets forth, for
the periods indicated, the high and low price per share of the Companys common stock
for the two most recent fiscal years. The Companys common stock is traded on the New
York Stock Exchange (Symbol: MEH).

|       | Fiscal 2003 | Fiscal 2002
|------ | ----------- | -----------
|
|First  | $ 5.75      | $ 0.99     
|Second | $ 4.45      | $ 1.32     
|Third  | $ 6.00      | $ 2.15     
|Fourth | $ 5.38      | $ 3.42     

As of December 31, 2003, the Company
had 18,108,959shares issued and 17,401,839 shares outstanding and 919 registered
shareholders. The Company has not paid a dividend on its common stock since its initial
public offering in 1995 and has no intention to pay any dividends on such common stock in
the foreseeable future. The Company is also subject to a dividend restriction under
outstanding indebtedness, which is further discussed in Note 5 of the Notes to the
Consolidated Financial Statements contained in this Annual Report on Form 10-K.

# Recent Sales of
Unregistered Securities

Lease Restructuring On August 19,
2003, the Company reached final agreements on renegotiating its finance agreements with
11 aircraft lessors and lenders to reflect current market conditions. The lessors and
lenders, in return for making the agreed-to amendments to these finance agreements,
received warrants, with certain protection from dilutive issuances of common stock.
Currently, the warrants give the warrant holders the right to purchase, in the aggregate,
1,571,467 shares of the Companys common stock at an exercise price per share of
$4.72. All of the lessors and lenders to whom warrants were issued were accredited
investors (other than one lessor who qualified as a sophisticated investor due to its
knowledge and experience in financial, business and investment matters, including the
airline industry and businesses and operations of companies that operate in lines of
business similar to the Companys) in accordance with and in reliance upon the
exemption from securities registration afforded by Section 4(2) of the Securities Act of
1933, as amended.

2003 Private Placement In 2003, the
Company raised financing of approximately $33 million. The financing included two
components: the sale of $25 million in convertible senior secured notes and the sale of
shares of the Companys common stock for approximately $8 million. The Company sold
the convertible senior secured notes and the common stock in a private placement to
certain qualified institutional investors and accredited investors in accordance with and
in reliance upon the exemption from securities registration afforded by Section 4(2) of
the Securities Act of 1933 and Rule 506 under Regulation D as promulgated by the United
States Securities and Exchange Commission under the Securities Act of 1933.

Debt Transaction On September 29,
2003, pursuant to a Securities Purchase Agreement, the Company sold convertible senior
secured notes (the Notes), with certain subsidiaries of the Company as
co-borrowers (the Co-Borrowers), to certain qualified institutional investors
and accredited investors (each a Debt Investor and, collectively, the Debt
Investors) in an aggregate principal amount of $15.0 million (the First
Closing). In addition, subject to shareholder approval and satisfaction of certain
other conditions, the Company agreed to sell additional Notes to the Debt Investors at a
later date in an aggregate principal amount of $10.0 million (the Second Closing, together
with the First Closing, the Debt Transaction).

18

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On November 25, 2003, subsequent to
receiving the requisite shareholder approval on November 21, 2003 and satisfying certain
other conditions, the Company consummated the Second Closing, which was the second and
final step in the Debt Transaction.

The Notes bear interest at 6.75% and
mature on October 1, 2008. Each share of common stock will be accompanied by four-ninths
of a Preferred Share Purchase Right in accordance with the Rights Agreement, dated
February 14, 1996, as amended, between the Company and American Stock Transfer & Trust
Company (each a Right). The Notes are secured by certain assets of the Company
and the Co-Borrowers in accordance with a Security Agreement and by a Mortgage granted by
one of the Co-Borrowers in favor of the Debt Investors. At any time from and after
October 1, 2006, subject to the Company and the Co-Borrowers satisfying certain
conditions specified in the Notes, the Company and the Co-Borrowers will have the right to
redeem all or part of the Notes.

The Notes are generally convertible
at any time at the option of the note holders into shares of common stock of the Company
at an initial conversion price of $5.00 per share, which is subject to adjustment pursuant
to certain anti-dilution provisions. The note holders may not convert any portion of the
outstanding and unpaid principal of the Notes to the extent that, after giving effect to
such conversion, the note holder (together with such note holders affiliates) would
beneficially own in excess of 4.99% or 9.99%, as the case may be for the respective note
holder, of the number of shares of common stock outstanding immediately after giving
effect to such conversion. A note holder may waive the 4.99% limitation with such waiver
being effective on the 61st calendar day after the Company receives notice of the waiver.

Equity Transaction Contemporaneously
with the Debt Transaction, on November 25, 2003, the Company sold 1,882,353 shares of
Common Stock to certain qualified institutional investors and accredited investors
(collectively, the Equity Investors) at a price of $4.25 per share in a
private placement for an aggregate purchase price of approximately $8.0 million (the
Equity Transaction). Each share of Common Stock was accompanied by a Right.

19

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# ITEM 6. SELECTED
FINANCIAL DATA

# Five-Year Financial
and Operating Data Midwest Air Group, Inc. (Dollars in thousands, except per share
amounts)

|2003                                     
|-----------------------------------------
|Statement of Operations Data:            
|Total operating revenues                 
|Total operating expenses (1)             
|                                         
|Operating (loss) income                  
|Other income (expense), net (2)          
|(Loss) income before cumulative effect   
|of accounting changes                    
|Cumulative effect of accounting changes, 
|net of applicable income taxes           
|Net (loss) income                        
|(Loss) income per common share  basic:  
|(Loss) income before cumulative effect   
|of accounting changes                    
|Cumulative effect of accounting changes, 
|net of applicable income taxes           
|                                         
|Net (loss) income                        
|(Loss) Income per common share  diluted:
|(Loss) Income before cumulative effect   
|of accounting changes                    
|Cumulative effect of accounting changes, 
|net of applicable income taxes           
|                                         
|Net (loss) income                        
|Balance Sheet Data:                      
|Property and equipment, net              
|Total assets                             
|Long-term debt (3)                       
|Shareholders' equity                     

| | (1) | Total
operating expenses for 2003 include $5.0 million associated with the early recognition of
lease expense on seven DC-9s removed       from service during the year, and a $4.0
million loss recorded on the sale/leaseback of one MD-80 aircraft. Total operating
expenses       for 2002 include a $29.9 million impairment charge related to the early
retirement of the Company's DC-9 fleet. Total operating expenses       for 2001 include
an impairment loss of $8.8 million related to the accelerated retirement of eight Midwest
Airlines DC-9-10 aircraft.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (2) | Other
income (expense), net, for 2003 includes $11.4 million associated with the federal
reimbursement of security costs. Other income       (expense), net for 2002 includes
$39.5 million associated with the Fairchild arbitration settlement over the cancellation
of the 428JET       program.  Other income (expense), net for 2001 includes recognition
of $16.3 million related to amounts claimed under the Air       Transportation Safety and
System Stabilization Act for federal grant money received for losses related to the
September 11 terrorist       events.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (3) | Long-term
debt for 2003 and 2002 does not include amounts due for progress payments on the Boeing
717 aircraft program, as these       obligations are offset by purchase deposits.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

20

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# Five-Year Financial
and Operating Data Midwest Air Group, Inc.

|2003                                        
|--------------------------------------------
|Selected Operating and Other Data (1):      
|Midwest Airlines, Inc.                      
|Revenue passenger miles ("RPMs") (000s)     
|Available seat miles ("ASMs") (000s)        
|Passenger load factor                       
|Revenue yield (cents per RPM)               
|Revenue per scheduled service ASM (2)       
|Cost per total ASM (cents per mile)         
|Aircraft in service at year-end (3)         
|Average aircraft utilization (hours per day)
|Number of FTE employees at year-end         
|Skyway Airlines, Inc. d/b/a Midwest Connect 
|Revenue passenger miles (000s)              
|Available seat miles (000s)                 
|Passenger load factor                       
|Revenue yield (cents per RPM)               
|Revenue per scheduled service ASM (2)       
|Cost per total ASM (cents per mile)         
|Aircraft in service at year-end (3)         
|Average aircraft utilization (hours per day)
|Number of FTE employees at year-end         

| | (1) | Revenue
passenger miles, revenue per ASM, available seat miles, passenger load factor and revenue
yield are       for scheduled service operations. The other statistics include charter
operations.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (2) | Passenger,
cargo and other transport-related revenue divided by scheduled service ASM (expressed in
cents).       Charter revenue is excluded from the calculation.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (3) | Aircraft
acquired but not yet placed in service are excluded from the aircraft in service
statistics.
| | --- | -----------------------------------------------------------------------------------------------------

21

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ITEM 7. MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

# RESULTS OF OPERATIONS

# Executive Overview

Beginning with the economic slowdown
that commenced in 2000 and was exacerbated by the events of September 11, 2001, the past
three years have brought unprecedented challenges to the airline industry and to the
Company. The sluggish economy, coupled with the effects of the war in Iraq and increased
security measures, have depressed passenger demand and increased operating costs. These
pressures, along with increased competition from legacy and low-cost carriers that has
depressed fares, resulted in the Company reporting operating losses in 2001, 2002 and
2003.

In 2003, the Company took
comprehensive action to improve its financial performance by increasing revenue, reducing
costs and providing for improved liquidity. The efforts included:

| | The
launch of Midwest Airlines Saver Service in August to better serve high-volume leisure
markets.
|- | ---------------------------------------------------------------------------------------------------

| | Schedule
changes at Midwest Connect to reduce average flight lengths on regional jet routes, and
better align capacity with demand on turboprop routes.
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------

| | Significant
cost restructuring measures in the third quarter, including:
|- | ------------------------------------------------------------------------

| |  | Restructured
labor agreements with five-year terms for represented employee groups.
| | - | -----------------------------------------------------------------------------------

| |  | Productivity
improvements and headcount reductions for non-represented employees.
| | - | ---------------------------------------------------------------------------------

| |  | Adjustment
of the Companys fleet plan, including a change in the Boeing 717 aircraft delivery
schedule beginning in April 2004 to one each quarter from one each month, and a deferral
of the Embraer delivery schedule to 2006.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Renegotiation
of aircraft finance agreements to reduce obligations to market value.
| | - | -----------------------------------------------------------------------------------

| | Transactions
to accomplish a recapitalization of the Company:
|- | -------------------------------------------------------------

| |  | Placement
of $25.0 million of convertible senior secured notes.
| | - | ---------------------------------------------------------------

| |  | A
private equity placement with net proceeds of $7.5 million.
| | - | -------------------------------------------------------------

| |  | Sale/leaseback
of the Companys headquarters facility, resulting in net proceeds of $10.0 million.
| | - | --------------------------------------------------------------------------------------------------

Detailed discussion of each of these
measures is included in Recent Developments.

Looking forward, the Company believes
it will realize the full benefits of its profit improvement initiatives (discussed more
fully below in Recent Developments) in 2004. The Company also expects to realize
additional benefits from Midwest Airlines Saver Service, which the Company will be
offering during some key leisure travel periods for the first time in 2004. If current
trends toward an economic recovery continue, the Company would also expect to see
increased business travel. Key risks to the Company achieving a return to profitability
include the depressed fare environment, increased competition, the economy, world events
and high fuel costs. The Company discusses these and other risks more fully in the Risk
Factors section of Item I, Business contained in this Annual Report on Form 10-K.

# Recent Developments

Restructuring Efforts In February
2003, the Company announced measures aimed at improving cash flow in addition to previous
cost control initiatives and other actions to improve its profitability and liquidity
position, which began in September 2001. Since then, the Company has realigned capacity,
switched to a buy-onboard dining program, discontinued standard travel agency commissions
to match the industry, and implemented service fee increases for nonrefundable tickets.
In addition, the Company implemented an additional workforce reduction, and remaining
non-union employees received temporary across-the-board compensation reductions. In
addition, in August 2003, the Company finalized agreements with labor unions, lessors and
lenders on permanent cost reductions.

22

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The Company is targeting its
financial restructuring initiatives to improve profitability and reduce costs, relative to
what it would have experienced if it had not effected these changes, by approximately $70
million annually going forward. The cost reductions relate to the following areas:

| | Labor
cost savings and productivity improvements from the Companys employee unions. All
three of the Companys represented employee groups  the Midwest Air Line
Pilots Association, the Skyway Air Line Pilots Association and the Midwest Association of
Flight Attendants  ratified agreements. The duration of these agreements is five
years.
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Identification
of opportunities to enhance productivity for non-represented employees. Non-represented
employee groups completed the development of process and productivity improvements in
2003. Implementation of the improvements is expected to continue through 2004.
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Adjustment
of the Companys fleet plan and delivery schedules to provide for more controlled
growth. The Company completed negotiations with aircraft manufacturers to adjust the
delivery schedule of its Boeing 717 aircraft program and defer its acquisition of Embraer
regional jets. Midwest Airlines will continue to accept Boeing 717s at its current rate
of one each month through March 2004, when deliveries will change to approximately
quarterly. Under the new schedule, Midwest will acquire the 25 717s it has ordered by
October 2006. Midwest Connect will defer its acquisition of 20 Embraer regional jets from
January 2004 to July 2006, during which time the availability of long-term aircraft
financing is expected to improve. The Embraer contract has been amended to reflect this
agreement. Midwest Connect will not incur any cost or face claims for breach of contract
from the deferral.
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Renegotiation
of aircraft finance agreements. The Company entered into restructured agreements that
amended existing finance agreements with 11 aircraft lessors and lenders to reflect
current market conditions. These agreements provided for the reduction of the present
value of the prior agreements by $60-70 million, reduced cash requirements by about $1.1
million per month, and converted $24 million of short-term debt into long-term
obligations exceeding 10 years at low interest rates.
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

In connection with the restructuring
efforts, the Company issued warrants to the lessors and lenders. Also, in connection with
the restructuring efforts, the Company agreed to grant options to its employees
(represented and non-represented) to purchase shares of the Companys common stock
pursuant to the Midwest Air Group, Inc. 2003 All-Employee Stock Option Plan. The warrants
and options are further discussed in Note 7 of the Notes to the Consolidated Financial
Statements contained in this Annual Report on Form 10-K.

23

---

A summary of revenue improvement/cost
reduction measures implemented during 2003 is as follows:

|                                                     | Estimated Annual Improvement
|---------------------------------------------------- | ----------------------------
|($ in millions)                                     
|Headcount Reductions                                 |                             
|Dining Services/Amenity Changes                      |                             
|Capacity Reductions/Schedule Changes                 |                             
|Travel Agent Commission Changes                      |                             
|Advertising Reduction                                |                             
|Fuel Management Program                              |                             
|Passenger Fee Changes                                |                             
|Other Programs                                       |                             
|Total of Revenue Improvement/Cost Reduction Measures |                             
|                                                     |                             

|                                                     | Estimated Annual Improvement
|---------------------------------------------------- | ----------------------------
|($ in millions)                                     
|Aircraft Lessor Concessions                          |                             
|Represented Employees' Concessions                   |                             
|Non-represented Employees' Concessions               |                             
|Total of Restructuring Measures                      |                             
|                                                     |                             
|Total of Revenue Improvement/Cost Reduction Measures |                             
|and Restructuring Measures                           |                             
|                                                     |                             

The Company completed a majority of
the items listed above during various times in 2003 and most were reflected in fourth
quarter 2003 financial results. As of December 31, 2003, the Company has not implemented
the advertising cost reduction plan because additional costs were incurred to support the
introduction of Saver Service, respond to increased competition in Milwaukee, and support
expanded service in the Kansas City market. The Company believes approximately 90% of the
cost reduction measures planned for represented employees and 50% of the cost reduction
measures planned for non-represented employees were implemented by year-end, although the
Company did not receive full benefit in 2003. The remaining cost reductions are expected
to be achieved in 2004.

Completion of County Transaction On
October 21, 2003, the Company completed a transaction that resulted in Milwaukee County
becoming the guarantor of principal and interest payments on approximately $14.2 million
of industrial development revenue bonds issued in 1998 and 2001 by the City of Milwaukee
to finance the construction of two airport-based maintenance facilities. Credit support
for the bonds was previously provided by letters of credit issued under the Companys
bank credit facility. The guarantee provided by Milwaukee County enabled the Company to
reduce its bank credit facility exposure from $15.5 million to approximately $1.1
million. The remaining $1.1 million represented letters of credit for which the Company
was required to provide cash as collateral. This enabled the credit facility banks to
release all other collateral previously provided as security. In addition, certain of the
Companys facilities and cash totaling $0.9 million were pledged as security under
the agreement with Milwaukee County. This transaction resulted in the termination of the
senior secured bank credit facility after approximately $1.1 million of letters of credit
were cancelled or transferred to another financial institution, which was completed in
the first quarter of 2004.

Private Placement of Debt and
EquityOn September 29, 2003, the Company entered into agreements under which it
raised financing of approximately $33.0 million (net proceeds of approximately $31.1
million, after commissions and expenses). The financing included two components: the sale
of $25.0 million in convertible senior secured notes and the sale of approximately 1.9
million shares of the Companys common stock for an aggregate purchase price of
approximately $8.0 million. See further discussion of the financings in Note 5 of the
Notes to Consolidated Financial Statements as of December 31, 2003 contained in this Annual
Report on Form 10-K.

24

---

Sale/LeasebackOn November
12, 2003, the Company closed on an agreement to complete a sale/leaseback of its Oak
Creek, Wisconsin headquarters facility. This transaction provided the Company with net
proceeds of approximately $10.0 million after payment of the existing mortgage and
transaction expenses.

CRS Regulations During 2003, the DOT
ruled that most regulations governing the CRS industry were to be lifted on January 31,
2004. Two remaining restrictions are to be phased out in July 2004. One prohibits CRS
firms from favoring one airlines flight listings over another, and the second
restricts the CRS companies from making an airline provide all of its fares. The Company
is currently evaluating the effect of these regulatory changes on its operations.

# 2003 Financial Overview

The Companys 2003 operating
loss was $(30.5) million, which reflects a decrease in operating loss of $23.8 million
from the 2002 operating loss of $(54.3) million. Net loss for the year was $(13.3)
million, which reflects an increase in net loss of $2.7 million from the 2002 net loss of
$(10.6) million. Net loss per diluted share in 2003 was $(0.85), a $0.13 decline from the
2002 net loss per diluted share of $(0.72). 2003 results include income of $11.4 million
(pre-tax) received from the April 2003 Emergency Wartime Supplemental Appropriations Act
for reimbursement of security costs, as well as a charge of $5.0 million (pre-tax) related
to the early recognition of lease expense on seven leased DC-9 aircraft removed from
service during the year. 2002 results include a $29.9 million (pre-tax) impairment charge
related to the early retirement of the Companys DC-9 fleet and other income of $39.5
million (pre-tax) associated with the Fairchild arbitration settlement over the
cancellation of the 428JET program.

Capacity, as measured by scheduled
service available seat miles (ASMs), decreased 6.6% in 2003. Capacity
decreased 7.0% at Midwest Airlines and decreased 3.4% at Midwest Connect. Midwest
Airlines capacity decreased due to a net of four fewer aircraft in the fleet year
over year, as well as a 17.3% decrease in the number of scheduled operations as the
Company attempted to align capacity with lower demand, partially offset by the additional
seats on the Saver Service product during the latter part of the year. Midwest
Connects capacity decrease was due primarily to the implementation of schedule
changes to reduce average flight lengths on regional jet routes and to better align
capacity with demand, particularly on turboprop routes. Traffic, as measured by revenue
passenger miles, increased 0.6%. Load factor increased from 60.2% in 2002 to 64.9% in
2003.

The Companys total revenue in
2003 decreased $43.0 million, or 10.1%, from 2002 to $383.9 million. The decrease in
revenue was due primarily to a decline in revenue yield of 15.0% at Midwest Airlines and
11.3% at Midwest Connect. The decreases in revenue yield were due in large part to a
continued decline in high-yield business travel, heavy industrywide fare discounting
implemented to stimulate travel demand, and increased competition in many markets,
including Midwest Airlines main base of operations in Milwaukee. The introduction of
Saver Service, which began operations in August 2003, also contributed to the decline in
revenue yield as fares are generally lower, by design, for that service.

The Companys operating expenses
decreased by $66.8 million, or 13.9%, in 2003 to $414.4 million. The Company realized
savings from companywide cost reduction efforts, with reduced costs in most expense
categories. 2003 operating costs include a charge of $5.0 million (pre-tax) related to the
early recognition of lease expense on seven leased DC-9 aircraft removed from service
during the year. 2002 operating costs include a $29.9 million (pre-tax) impairment charge
related to the early retirement of the Companys DC-9 fleet. Cost changes are further
explained in the sections that follow.

25

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The following table provides
operating revenues and expenses for the Company expressed as cents per total ASM,
including charter operations, and as a percentage of total operating revenues for 2003,
2002 and 2001.

|                             | 2003
|---------------------------- | ----
|Per Total
ASM                | %   
|Operating revenues:          |     
|Passenger service            |     
|Cargo                        |     
|Other                        |     
|                             |     
|Total operating revenues     |     
|Operating expenses:          |     
|Salaries, wages and benefits |     
|Aircraft fuel and oil        |     
|Commissions                  |     
|Dining services              |     
|Station rental/landing/other |     
|Aircraft maintenance         |     
|Depreciation and             |     
|amortization                 |     
|Aircraft rentals             |     
|Impairment loss              |     
|Other                        |     
|                             |     
|Total operating expenses     |     
|                             |     
|Total ASMs (millions)        |     

Note: Numbers in this table may not
be recalculated due to rounding.

# Year Ended December
31, 2003 Compared With Year Ended December 31,
2002

# Operating Revenues

Company operating revenues totaled
$383.9 million in 2003, a $43.0 million, or 10.1%, decrease from 2002. Passenger revenues
accounted for 85.4% of total revenues and decreased $50.1 million, or 13.3%, from 2002 to
$327.9 million in 2003.

Midwest Airlines passenger revenue
decreased $45.4 million, or 14.9%, from 2002 to $260.1 million in 2003. This decrease was
primarily caused by a 15.0% decrease in revenue yield. Revenue yield decreased due to a
substantial decline in high-yield business travel, the sluggish economy and increased
competition in many markets, including Midwest Airlines main base of operations in
Milwaukee. The introduction of Saver Service during the third and fourth quarters also
contributed to the decrease in revenue yield. Load factor increased from 61.6% in 2002 to
66.3% in 2003.

Midwest Connect passenger revenue
decreased $4.7 million, or 6.5%, from 2002 to $67.8 million in 2003. This decrease was
primarily caused by an 11.3% decrease in revenue yield. Revenue yield decreased due to
decreased business travel and lower fares that were used to stimulate travel demand. The
decrease in revenue yield was partially offset by a 5.4% increase in passenger volume, as
measured by revenue passenger miles. Load factor increased from 48.9% in 2002 to 53.3% in
2003.

Revenue from cargo, charter and other
services increased $7.1 million in 2003. Midwest Airlines benefited from increased revenue
from charter sales as more aircraft time was available for charter service and the Company
had exclusive charter rights for nine professional sports teams as of December 31, 2003.
The increased charter revenue was partially offset by a $1.2 million decrease in cargo
revenue. Most of this decrease was due to lower U.S. Postal Service mail volumes, in large
part the result of security directives and restrictions, as well as a new contract with
the U.S. Postal Service that has resulted in lower initial volumes.

26

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# Operating Expenses

2003 operating expenses decreased
$66.8 million, or 13.9%, from 2002 to $414.4 million in 2003. The Company realized savings
from companywide cost reduction efforts, with reduced costs in many categories, as
detailed below. 2002 operating costs include a $29.9 million (pre-tax) impairment charge
related to the early retirement of the Companys DC-9 fleet. The Companys cost
per total ASM decreased 8.0%, from 13.2¢ in 2002 to 12.1¢ in 2003.

Salaries, Wages and Benefits
Salaries, wages and benefits decreased $16.5 million, or 10.6%, from 2002 to $140.1
million in 2003. The labor cost decrease reflects the reduction of 496 full-time
equivalent employees year over year. The headcount decrease was primarily the result of
furloughing employees to align with reduced capacity and increase employee productivity,
as well as attrition. A $1.6 million reduction in labor rates also contributed to
decreased labor costs. These decreases were partially offset by increased benefit costs,
primarily higher medical insurance costs. On a cost per total ASM basis, labor costs
decreased from 4.3¢ in 2002 to 4.1¢ in 2003.

Aircraft Fuel and Oil Aircraft fuel
and oil and associated taxes increased $2.4 million, or 3.1%, from 2002 to $81.1 million
in 2003. Costs increased 10.1% on a cost per ASM basis. Into-plane fuel prices increased
21.5% in 2003, averaging $1.01 per gallon in 2003 versus $0.83 per gallon in 2002,
resulting in a $14.2 million unfavorable pre-tax price impact. Fuel consumption decreased
15.1% in 2003 because of a decrease in flight operations, as well as lower fuel
consumption rates of the Boeing 717 aircraft compared with the DC-9 fleet. As of December
31, 2003, the Company had no fuel hedges in place for current or later periods.

Commissions Commissions decreased
$7.0 million, or 38.1%, from 2002 to $11.4 million in 2003. This category includes travel
agent commissions and credit card transaction commissions. The decrease was primarily due
to the elimination of standard travel agency commissions beginning March 1, 2003, as well
as a 13.3% decrease in passenger revenue. In addition, savings were realized because of
increased travel booked directly through the Companys reservations center and Web
site, and other travel-related Web sites. Commissions, as a percentage of passenger
revenue, decreased from 4.9% in 2002 to 3.5% in 2003.

Dining Services Dining service costs
decreased $11.6 million, or 59.0%, from 2002 to $8.0 million in 2003. The decrease was
due to the elimination of complimentary onboard meal service in April 2003 as well as a
2.0% decrease in origin and destination passengers at Midwest Airlines. Total dining
service costs per Midwest passenger decreased from $9.47 in 2002 to $3.92 in 2003.

Station Rental, Landing and Other
Fees Station rental, landing and other fees decreased $1.2 million, or 3.2%, from 2002 to
$36.5 million in 2003. On a cost per total ASM basis, these costs increased 3.4%. Costs
per seat mile increased primarily because of fixed costs that were not absorbed as
efficiently following the Companys capacity reductions, as well as a decrease in
flight lengths at Midwest Connect.

27

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Aircraft Maintenance Materials and
Repairs Aircraft maintenance costs decreased $8.9 million, or 21.8%, from 2002 to $32.0
million in 2003. Aircraft maintenance costs decreased 16.5% on a cost per total ASM
basis. The decrease was caused by lower costs at Midwest Airlines due to the phase-out of
the DC-9 aircraft and was partially offset by increased maintenance costs at Midwest
Connect due to higher costs of maintaining the 328JET aircraft.

Depreciation and Amortization
Depreciation and amortization decreased $0.3 million, or 1.2%, from 2002 to $20.9 million
in 2003. Costs in this category were essentially unchanged as the addition of one MD-80
aircraft to the fleet in March 2003 and the acquisition of spare parts to support the
Boeing 717 program were offset by the decrease in depreciation related to the DC-9
aircraft retired from the fleet year over year. On a cost per total ASM basis, these
costs increased 5.5% due to the Companys reduced capacity year over year.

Aircraft Rentals Aircraft rental
costs increased $7.3 million, or 29.1%, from 2002 to $32.6 million in 2003. The increase
was due primarily to the early recognition of $5.0 million (pre-tax) of lease expense on
seven leased DC-9 aircraft removed from service during 2003, as well as the addition of
11 leased Boeing 717 aircraft to the Midwest Airlines fleet year over year. The increase
was partially offset by the lower lease rates negotiated on all other leased aircraft
remaining in service. Lease expense was recorded at the new restructured rates beginning
in the third quarter 2003. On a cost per total ASM basis, these costs increased 37.9%
from 2002.

Impairment Loss During the first
quarter 2002, the Company decided to accelerate the retirement of the Midwest Airlines
DC-9 fleet in anticipation of accelerated deliveries of Boeing 717 aircraft. In
connection with this decision, the Company performed evaluations to determine, in
accordance with SFAS No. 144, Accounting for the Impairment or Disposal on
Long-Lived Assets, whether probability-weighted future cash flows from an asset
(undiscounted and without interest charges) expected to result from the use and eventual
disposition of these aircraft would be less than the aggregate carrying amounts. As a
result of the evaluation, the Company determined that the estimated probability-weighted
future cash flows would be less than the aggregate carrying amounts, resulting in
impairment as defined by SFAS No. 144. Consequently, in first quarter 2002, the cost
bases of these assets were reduced to reflect the fair market value at the date of the
decision, resulting in a $29.9 million (pre-tax) impairment loss, and the remaining
depreciable lives were adjusted for the new retirement schedule. In determining the fair
market value of these assets, the Company considered market trends in aircraft
dispositions, data from third parties and management estimates.

Other Operating Expenses Other
operating expenses decreased $1.2 million, or 2.2%, from 2002 to $51.7 million in 2003.
Other operating expenses consist primarily of advertising and promotion, insurance,
property taxes, flight training, legal fees, crew hotel rooms, reservation fees,
administration and other items. The decrease was primarily due to cost decreases in
insurance, advertising, flight training and crew hotel room expenses. These decreases
were partially offset by increased legal and professional services costs of $2.5 million
associated with the Companys restructuring efforts, increased costs for the
frequent flyer program and a $4.0 million loss recorded on the sale/leaseback of one
MD-80 aircraft. The MD-80 aircraft sale/leaseback transaction was part of the overall
aircraft restructuring transactions. The transaction resulted in the retirement of
approximately $7.0 million of debt related to the aircraft, which had a book value of
approximately $11.0 million on the date of the sale/leaseback. On a cost per total ASM
basis, other operating costs increased 4.4% from 2002.

28

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# Interest Income and
Interest Expense

Interest income reflects interest
earned on the Companys cash and cash equivalents. Interest expense consists of
mortgage interest associated with the Companys headquarters building, as well as
interest on a short-term note payable, interest associated with the borrowings against the
secured bank credit facility, and interest on the Companys long-term debt related to
aircraft and convertible debt.

# Other Income (Expense)

In May 2003, the Company recorded
other income of $11.4 million (pre-tax) received from the April 2003 Emergency Wartime
Supplemental Appropriations Act for reimbursement of security costs.

In 2002, the Company recorded other
income of $39.5 million (pre-tax) associated with the Companys settlement of
arbitration with Fairchild Dornier GmbH (Fairchild) over the cancellation of
its 428JET program.

# Credit for Income Taxes

Income tax credit for 2003 was $(7.1)
million, a $1.4 million increase from the 2002 income tax credit of $(5.7) million. The
effective tax rates for 2003 and 2002 were (35.0)% and (35.0)%, respectively. For purposes
of calculating the Companys income tax expense and effective tax rate, the Company
treats amounts payable to an affiliate of Kimberly-Clark Corporation under a tax
allocation and separation agreement entered into in connection with the Companys
initial public offering as if they were payable to taxing authorities.

# Net Loss

Net loss for 2003 was $(13.3)
million, which reflects a decline of $2.7 million from the 2002 net loss of $(10.6)
million. The net loss margin declined from (2.5)% in 2002 to (3.5)% in 2003.

# Year Ended December
31, 2002 Compared With Year Ended December 31,
2001

# Operating Revenues

Year-over-year comparisons of
financial results and performance data may not be meaningful because the comparisons are
distorted by the impact of the events of September 11, 2001.

Company operating revenues totaled
$427.0 million in 2002, a $30.5 million, or 6.7%, decrease from 2001. Passenger revenues
accounted for 88.6% of total revenues and decreased $36.1 million, or 8.7%, from 2001 to
$378.0 million in 2002.

Midwest Airlines passenger revenue
decreased $41.6 million, or 12.0%, from 2001 to $305.5 million in 2002. Revenue yield
decreased 11.7% due to lower business fares and decreased business travel demand,
increased competition from low-fare airlines, and new pricing structures that enable
business passengers to purchase lower fares. Load factor increased from 61.1% in 2001 to
61.6% in 2002.

Midwest Connect passenger revenue
increased $5.5 million, or 8.2%, from 2001 to $72.5 million in 2002. Traffic, as measured
by revenue passenger miles, increased 28.2%. Load factor increased from 48.3% in 2001 to
48.9% in 2002. Revenue yield decreased 15.6%, from $0.44 in 2001 to $0.38 in 2002, due to
decreased business travel as a result of the slowing economy, a revised mix of longer
flights with lower yields, and lower fares used to stimulate travel demand.

29

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Revenue from cargo, charter and other
services increased $5.6 million in 2002. Revenue from charter sales increased $4.7 million
from 2001 as more aircraft time was available for charter service and the Company acquired
exclusive charter rights for two professional baseball teams and other sports teams. Cargo
revenue decreased $3.2 million, or 36%, with most of the decrease due to lower U.S. Postal
Service mail volumes, in large part the result of new federal security directives and
restrictions.

# Operating Expenses

2002 operating expenses decreased
$14.3 million, or 2.9%, from 2001. The decrease was primarily the result of lower costs in
the following categories: labor, fuel, commissions, dining services and maintenance. These
decreases were partially offset by higher costs in the other category
(insurance costs, advertising and a nonrecurring property tax credit in 2001). Cost per
ASM decreased 4.5% at Midwest Airlines and decreased 13.2% at Midwest Connect in 2002. The
Companys cost per total ASM decreased 4.7%, from 13.8¢ in 2001 to 13.2¢ in
2002.

Salaries, Wages and Benefits
Salaries, wages and benefits decreased $10.6 million, or 6.4%, from 2001 to $156.7
million in 2002. The Company decreased headcount throughout 2001 and 2002 to better align
with slower capacity growth and reduced passenger levels, and to reduce costs given the
revenue environment. The overall headcount decrease was primarily the result of
furloughing employees, which reduced labor costs by $10.5 million. In October 2001, the
Company implemented a salary freeze for all employees except pilots, whose wages are
covered by a collective bargaining agreement. The pay freeze was removed effective
October 1, 2002 and employees became eligible for a pay increase after they had had their
compensation frozen for 12 months. A salary freeze for officers and other members of
senior management has been in effect for a longer period of time and continued as of
year-end. A $1.5 million reduction in overtime also contributed to decreased labor costs.
These decreases were partially offset by higher pilot labor costs, higher medical
insurance costs and less labor capitalized for maintenance projects. On a cost per total
ASM basis, labor costs decreased 8.1% from 4.7¢ in 2001 to 4.3¢ in 2002.

Aircraft Fuel and Oil Aircraft fuel
and oil and associated taxes decreased $8.3 million, or 9.5%, in 2002. Costs decreased
11.2% on a cost per ASM basis. Into-plane fuel prices decreased 8.9% per gallon,
averaging 83.4¢ per gallon in 2002 versus 91.5¢ per gallon in 2001, resulting
in a $7.8 million favorable pre-tax price variance. Fuel consumption decreased 0.7% in
2002. As of December 31, 2002, the Company had options in place for approximately 20% and
15% of its projected aircraft fuel purchases in the first and second quarters of 2003.

Commissions Commissions decreased
$5.1 million, or 21.7%, from 2001 to $18.5 million in 2002. This category includes travel
agent commissions and credit card commissions. The decrease was due primarily to an 8.7%
decrease in passenger revenue and to savings resulting from an increase in travel booked
directly through the Companys reservations centers and Web site, and other
travel-related Web sites. Commissions, as a percentage of passenger revenue, decreased
from 5.7% in 2001 to 4.9% in 2002. In December 2002, Midwest Airlines changed its travel
agent commission cap to a maximum of $10 per roundtrip or one-way ticket from $20 per
roundtrip.

30

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Dining Services Dining service costs
decreased $6.3 million, or 24.3%, from 2001 to $19.6 million in 2002. The decrease was
due to the implementation of roundtrip catering on most flights, a 1.7% decrease in
origin and destination passengers at Midwest Airlines, and lower food prices. Roundtrip
catering provides for meals to be loaded at the origin city of a roundtrip route, rather
than loading the aircraft with meals at both cities on the route. Also, effective
November 1, 2002, the Company began limiting its meal service to traditional meal times
and offering passengers one of three levels of meal service based on flight duration and
market segment. Total dining service costs per Midwest Airlines passenger (including
food, beverage, linen, catering equipment and supplies) decreased from $12.47 in 2001 to
$9.47 in 2002.

Regional jet flights longer than 30
minutes generally offer onboard inflight services ranging from snacks to light meals, full
beverage service and complimentary champagne. Baked-onboard chocolate chip cookies and hot
towel service are featured on select flights. Total dining service cost per regional jet
passenger (including food, beverage, catering equipment and supplies) was $3.47 in 2002,
compared with $3.89 in 2001.

Station Rental, Landing and Other
Fees Station rental, landing and other fees increased $1.2 million, or 3.4%, from 2001 to
$37.7 million in 2002. The increase was caused by 22.1% higher costs at Midwest Connect,
partially offset by 2.4% lower costs at Midwest Airlines, due to fewer flight segments
being operated. Passenger screening-related security costs increased $0.6 million
year-over-year. Airport costs were favorably impacted in 2001 by nonrecurring credits
received from Milwaukee County. On a cost per total ASM basis, these costs increased
1.4%.

Aircraft Maintenance Materials and
Repairs Aircraft maintenance costs decreased by $9.1 million, or 18.2%, from 2001 to
$41.0 million in 2002. Aircraft maintenance costs decreased 19.7% on a cost per total ASM
basis. Costs at Midwest Airlines decreased $10.8 million, or 27.1%, in 2002 while costs
at Midwest Connect increased $1.8 million, or 17.4%. The decrease at Midwest Airlines was
caused by lower costs in almost all maintenance categories, including lower DC-9 engine
overhaul costs, lower long-term maintenance costs on the DC-9 fleet due to the near-term
phase-out of the DC-9-10 series, lower purchased maintenance costs, and lower maintenance
materials and cost savings realized through the MSG-3 aircraft maintenance program that
was fully implemented in June 2001. The MSG-3 program is designed such that major
airframe maintenance events are divided into smaller, more frequent events that result in
fewer duplicate tasks, and airframe maintenance costs are expensed as they are incurred.
Costs at Midwest Connect increased as a result of two additional regional jets entering
scheduled service during 2002, the expiration of the warranty period on 328JETs, and
several heavy maintenance checks on the Beech 1900Ds. On a cost per total ASM basis,
Midwest Airlines costs decreased 26.8% and Midwest Airlines Connects costs
decreased 7.4%.

Depreciation and Amortization
Depreciation and amortization increased $0.2 million, or 1.1%, from 2001 to $21.2 million
in 2002. On a cost per total ASM basis, these costs decreased 0.9%.

Aircraft Rentals Aircraft rental
costs increased $0.5 million, or 2.0%, from 2001 to $25.3 million in 2002. On a cost per
total ASM basis, these costs increased 0.1%.

Impairment Loss A $29.9 million
(pre-tax) impairment charge was recorded in 2002. The Company accelerated the retirement
of the Midwest Airlines DC-9 fleet in anticipation of accelerated deliveries of Boeing
717 aircraft. In connection with this decision, the Company performed evaluations to
determine, in accordance with Statement on Financial Accounting Standards (SFAS)
No. 144, whether probability-weighted future cash flows (undiscounted and without
interest charges) expected to result from the use and eventual disposition of these
aircraft would be less than the aggregate carrying amounts. As a result of the
evaluation, the Company determined that the estimated probability-weighted future cash
flow would be less than the carrying amount of the aircraft, resulting in impairment as
defined by SFAS No. 144. Consequently, the cost bases of these assets were reduced to
reflect the fair market value at the date of the decision, resulting in a $29.9 million
(pre-tax) impairment loss, and the remaining depreciable lives were adjusted for the new
retirement schedule. In determining the fair market value of these assets, the Company
considered market trends in aircraft dispositions, data from third parties and management
estimates.

31

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An $8.8 million (pre-tax) impairment
charge was recorded in 2001 for eight company-owned DC-9-10 aircraft. During 2001, the
Company accelerated the retirement of these aircraft beginning in 2003. In connection with
this decision, the Company performed an evaluation, in accordance with SFAS No. 121, to
determine whether future cash flows (undiscounted and without interest charges) expected
to result from the use and eventual disposition of these aircraft would be less than the
aggregate carrying amount of these aircraft. As a result of the evaluation, the Company
determined that the estimated future cash flows expected to be generated by these aircraft
would be less than their carrying amounts, resulting in impairment, as defined SFAS No.
121. Consequently, the original cost bases of these aircraft were reduced to reflect the
fair market value at the date of the decision, resulting in an $8.8 million (pre-tax)
impairment charge.

Other Operating Expenses Other
operating expenses increased $2.2 million, or 4.3%, from 2001 to $52.8 million in 2002.
Other operating expenses consist of advertising and promotion, insurance, legal fees,
property taxes, consulting services, crew hotel rooms, reservation booking fees,
administration and other items. The increase was primarily due to a $4.8 million increase
in hull and liability insurance, $1.0 million in increased flight training costs and $0.8
million in increased advertising, offset by a decrease in frequent flyer costs, crew
hotel rooms, communications, mail handling costs, air cargo, software costs, reservation
fees and other items. 2001 expenses were favorably impacted by a $1.0 million property
tax refund resulting from legislation in Wisconsin that exempted hub airlines from
property tax. On a cost per total ASM basis, other operating costs increased 2.3%.

# Interest Income and
Interest Expense

Interest income reflects interest
earned on the Companys cash and cash equivalents. Interest expense consists of
mortgage interest associated with the Companys headquarters building, as well as
interest on the short-term note payable, interest associated with the borrowings against
the secured bank credit facility, and interest on the Companys long-term debt.

# Other Income (Expense)

In 2002, the Company recorded other
income of $39.5 million (pre-tax) associated with the Companys settlement of
arbitration with Fairchild over the cancellation of its 428JET program. Following
Fairchilds filing of insolvency in 2002, the previously disclosed gain of $46
million was reduced primarily due to a decrease in the estimated fair market value of two
Fairchild 328JET regional jets that the Company received in January and February 2002. The
Company does not expect to receive any additional benefits from the settlement. Midwest
Connect currently operates 10 32-passenger 328JET regional jets.

In 2001, to support the airline
industry, the federal government implemented the Air Transportation Safety and System
Stabilization Act. This legislation included support to passenger airlines in the form of
a $4.5 billion grant, $10 billion in loan guarantees and assistance with increased
insurance costs. The Company recorded non-operating income of $16.3 million in 2001
associated with federal government grant support. Of the amount claimed, the Company
received $13.9 million as of December 31, 2001 with the balance of $2.4 million received
in 2002. In addition, a remaining amount of $0.3 million was recorded and received in
2002. Total incurred losses were in excess of amounts claimed and recorded.

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# Credit for Income Taxes

Income tax credit for 2002 was $(5.7)
million, a $3.1 million decrease from the 2001 income tax credit of $(8.8) million. The
effective tax rates for 2002 and 2001 were (35.0)% and (37.0)%, respectively. The 2002
rate decreased due to the uncertainty of realization of state net operating losses.

# Net Loss

Net loss for 2002 was $(10.6)
million, which reflects an improvement of $4.4 million from the 2001 net loss of $(14.9)
million. The net loss margin improved from (3.3)% in 2001 to (2.5)% in 2002.

# Critical Accounting
Policies and Estimates

The preparation of the Companys
financial statements in conformity with accounting principles generally accepted in the
United States of America requires the Company to make estimates, assumptions and judgments
that affect amounts of assets and liabilities reported in the consolidated financial
statements, the disclosure of contingent assets and liabilities as of the date of the
financial statements, and reported amounts or revenues and expenses during the year. The
Company believes its estimates and assumptions are reasonable, however future results
could differ from those estimates under different assumptions or conditions.

Critical accounting policies are
policies that reflect material judgment and uncertainty and may result in materially
different results using different assumptions or conditions. The Company considers the
following as its critical accounting policies and estimates: frequent flyer revenue,
impairment of long-lived assets and warrant valuation. For a detailed discussion of
accounting policies, refer to the Notes to the Consolidated Financial Statements as of
December 31, 2003 contained in this Annual Report on Form 10-K.

Frequent Flyer Revenue A portion of
the revenue from the sale of frequent flyer mileage credits is deferred and recognized as
passenger revenue when transportation is likely to be provided, based on estimates of the
fair value of tickets to be redeemed, straight-line over 32 months, which is the Companys
estimate of when travel will occur. The estimated incremental cost of providing future
transportation in conjunction with travel miles under the Companys frequent flyer
program is accrued based on an estimated redemption percentage of 76% applied to actual
mileage recorded in members accounts over the standard award level. As part of
estimating incremental costs, the Company includes the additional costs related to
transportation of passengers, over and above costs to transport vacant seats, such as
fuel, meals, insurance and ticketing. A change to these cost estimates and the estimated
redemption percentage could have a significant impact on the Companys liability in
the period the change is made, as well as in future periods. The ultimate cost will
depend on the actual redemption of frequent flyer miles, and may be greater or less than
amounts accrued at December 31, 2003.

Impairment of Long-Lived Assets The
Company records impairment charges on long-lived assets used in operations when events
and circumstances indicate the assets may be impaired and the undiscounted cash flows
estimated to be generated by those assets are less than their carrying amount. The
Company uses judgment when applying the impairment rules to determine when an impairment
test is necessary. Factors the Company considers that could trigger an impairment review
include significant underperformance relative to historical or forecasted operating
results, a significant decrease in the market value of an asset, and significant negative
industry or economic trends.

33

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Impairment losses are measured as the
amount by which the carrying value of an asset exceeds its estimated fair value. The
Company is required to make estimates of its future cash flows related to the asset
subject to review. These estimates require assumptions about demand for the Companys
service, future market conditions and industry competition. Other assumptions include
determining the discount rule and future growth rates.

During 2003, the Company performed an
analysis to determine if there was potential impairment of the MD-80 fleet. Based on the
estimated useful lives of these assets of approximately 15 years, no impairment was
determined. This determination would not change with a 10% change in the assumptions and
estimates used in the calculation of the impairment.

Warrant Valuation In connection with
the final restructuring agreements with the aircraft lessors and lenders, the Company
issued warrants to certain lessors and lenders that currently give the holders the right
to purchase, in the aggregate, 1,571,467 shares of the Companys stock at an
exercise price per share of $4.72. The Company used the Black-Scholes model to value the
liability to the Company as of the date of issuance. The Black-Scholes model uses a
number of estimates, such as expected volatility, risk-free interest rate, forfeiture
rate and expected life in years. The estimation techniques used are consistent with those
used in Note 7 of the Notes to the Consolidated Financial Statements contained in this Annual
Report on Form 10-K.

# Off-Balance Sheet
Arrangements

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

The Company has no arrangements of
the types described in any of the categories that may have a material current or future
effect on the Companys financial condition, liquidity or results of operations. See
Note 4 to the Consolidated Financial Statements contained in this Annual Report on Form
10-K.

# Liquidity and Capital
Resources

The Companys unrestricted cash
and cash equivalents totaled $88.3 million at December 31, 2003, compared with $41.5
million at December 31, 2002. At December 31, 2003, the restricted cash balance was $26.1
million, compared with $15.1 million on December 31, 2002. The change in restricted cash
is primarily attributable to an increase in the cash holdback amount related to credit
card processing agreements that are discussed in more detail in Note 5 to the Consolidated
Financial Statements. Cash collateral used to support outstanding letters of credit also
contributed to the increase in restricted cash.

The unrestricted cash balance at
December 31, 2003 reflects the effects of the significant restructuring of lease and debt
payments and other cost reduction measures completed in third and fourth quarters 2003, as
well as the debt financing, equity financing and sale/leaseback of the Companys
headquarters. These transactions are discussed in more detail in Note 5 to the
Consolidated Financial Statements contained in this Annual Report on Form 10-K. As
part of the restructuring efforts, the Company suspended lease and debt payments on most
of its aircraft from March 2003 to August 2003. The aggregate amount of the payments that
the Company had not made as a result of the lease and debt payment moratorium was
approximately $11.7 million. In July 2003, the Company made payments totaling $4.8 million
to the lessors and lenders in conjunction with the signing of tentative agreements to
restructure the aircraft financings. In August 2003, the agreements were finalized and the
Company paid an additional $2.3 million to the lessors and lenders. For the remainder of
the year, the Company made lease payments at revised, lower lease rates. The
Companys subsidiaries also delivered subordinated promissory notes to the lessors
and lenders, the aggregate principal amount of which is $7.5 million.

34

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As of December 31, 2003, the Company
had a working capital surplus of $39.3 million compared with a $45.2 million deficit on
December 31, 2002. The improvement in working capital as of December 31, 2003 is primarily
related to an increase in cash associated with the proceeds from the private placement of
convertible debt and equity and the sale/leaseback of the Companys headquarters. A
reduction in notes payable related to the bank credit facility and a reduction in current
maturities of long-term debt related to the aircraft debt restructuring finalized in
August 2003 also contributed to the improvement in working capital.

Operating Activities Net cash
provided by operations for the year ended December 31, 2003 totaled $15.7 million. Cash
provided by operations at December 31, 2003 primarily reflects the effects of credits
used related to the acquisition of Boeing 717 aircraft. Midwest Airlines has used credit
memos from certain suppliers associated with the delivery of each Boeing 717 aircraft for
the acquisition of aircraft spare parts and maintenance tooling, employee training,
flight simulator rental, aircraft lease payments and engine maintenance agreements, and
accordingly there was no cash outlay for these expenses. As of December 31, 2003, the
amount of unused credit memos totaled $10.1 million and is recorded as Other Assets.
Midwest Airlines will receive additional credit memos on the delivery of each subsequent
Boeing 717 aircraft, and will continue to use the credits as needed to pay for applicable
services. The benefit of these credit memos is being recognized over the term of the
leases. Credits available for aircraft lease payments will, for the most part, be used up
during the first quarter of 2004.

Investing Activities Net cash
provided by investing activities totaled $3.0 million compared to $55.3 million used by
investing activities for the year ended December 31, 2002. The change from 2002 primarily
relates to increases in aircraft purchase deposits and pre-delivery progress payments
related to future deliveries of Boeing 717 aircraft that were more than offset by
purchase deposits that had been returned for the 11 Boeing 717 deliveries in 2003.
Capital spending totaled $13.6 million for the year ended December 31, 2003. Capital
expenditures consisted primarily of costs associated with the start-up of the Boeing 717
program, with the majority of that spending related to the acquisition of spare parts for
the program. In addition, spending was incurred to convert some of the MD-80 fleet to the
Saver Service configuration.

Financing Activities Net cash
provided by financing activities during 2003 totaled $28.1 million. During the third and
fourth quarter of 2003, the Company netted approximately $31.1 million from the issuance
of private placement convertible debt and equity. In addition, the sale/leaseback of the
Company headquarters facility generated approximately $10.0 million in new capital.

In the second quarter 2002, Midwest
Airlines entered into a loan agreement to fund pre-delivery progress payments to The
Boeing Company for new Boeing 717 aircraft. Midwest Airlines also entered into a loan
agreement with Kreditanstalt fur Wiederaufbau Bank (KfW) with the assistance
of Rolls-Royce Deutschland Ltd. & Co. KG (Rolls-Royce). Rolls-Royce agreed
to guarantee this loan agreement on behalf of Midwest Airlines. This agreement is
discussed in more detail in Note 5 to the Consolidated Financial Statements. As of
December 31, 2003, the Company owed $26.5 million under the loan agreement. The Company
expects that the debt associated with this financing transaction will continue to trend
downward, as the firm aircraft delivery schedule is more than half completed.

35

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With the loan agreement with KfW and
the BCC commitment, the Company believes it has requisite financing for the Boeing 717
program. Although BCC is able to terminate its financing commitment if it deems the
Company has experienced a material adverse change and the commitment is subject to other
conditions, the Company does not anticipate that the financing commitment will be
terminated or that the Company will be unable to meet the conditions.

The Company maintains a qualified
defined benefit plan, the Pilots Supplemental Pension Plan (the Qualified
Plan), which provides supplemental retirement benefits to Midwest Airlines pilots,
and an unfunded nonqualified defined benefit plan to provide Midwest Airlines pilots with
annuity benefits for salary in excess of amounts permitted to be paid under the provisions
of the tax law to participants in the Qualified Plan. The method used to determine the
market-related value of plan assets is the prior years market-related value of
assets, adjusted by contributions, disbursements, expected return on investments and 20%
of investment gains (losses) during the five prior years. As of December 31, 2003, the
Qualified Plan assets are invested primarily in equities and fixed income instruments.
Additional discussion of Plan investment strategy is at Note 11 of the Notes to
Consolidated Financial Statements contained in this Annual Report on Form 10-K.
2003 funding requirements for the Qualified Plan were $1.7 million. As of December 31,
2003, funding requirements for 2003 had been fulfilled. Estimated 2004 funding
requirements for the Qualified Plan are $1.6 million.

As discussed in Note 5 to the
Consolidated Financial Statements contained in this Annual Report on Form 10-K, the
Company issued promissory notes to the lessors and lenders as part of the restructuring
agreements. The aggregate principal amount of these notes is $7.5 million. Principal and
interest on the Basic Moratorium Notes are payable, in arrears, in 36 monthly installments
commencing in July 2004.

As a result of the restructuring of
lease and debt agreements described in Recent Developments, the Company has significantly
lowered its obligations compared with the obligations under the previous lease and debt
agreements. Included in the restructured agreements are clauses that would make the
Companys obligations, under certain default situations, increase to the amounts
under the previous agreements. Such defaults include the Company filing for reorganization
under Chapter 11 of the U.S. Bankruptcy Code. The amount of such contingent obligation of
the Company is approximately $23.2 million as of December 31, 2003.

Other Factors Affecting Liquidity In
second quarter 2003, the Company received a grant of $11.4 million (pre-tax) for
reimbursement of security costs as a result of the April 2003 Emergency Wartime
Supplemental Appropriations Act. In addition, the Company received $0.5 million in third
quarter 2003 related to the reimbursement of cockpit door reinforcement costs. The
Company does not expect to receive any additional reimbursement under the Act.

The Company has not paid federal
income taxes in the last three years. As of December 31, 2003, the Company had a
non-current deferred tax liability of $13.4 million and deferred tax assets aggregating
$8.7 million. These amounts included $9.6 million related to net operating losses
(NOLs) and a valuation allowance of $5.4 million.

At December 31, 2003, the Company had
estimated tax NOLs of $11.0 million for federal income tax purposes that will expire
through 2023. The Company had also previously recorded estimated state NOLs of $125
million, as well as alternative minimum tax carryforward of $2.4 million. Due to the
uncertainty of realizing the state NOLs, the Company recorded an additional valuation
allowance of $2.7 million in the year ended December 31, 2003.

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Contractual Obligations The
following table of material debt and lease commitments at December 31, 2003, summarizes
the effect these obligations are expected to have on the Companys cash flow in the
future periods set forth below (in thousands):

|                              | Related Cash Outflows
|----------------------------- | ---------------------
|Total                         | 2004                 
|Long-term debt                |                      
|Aircraft operating leases     |                      
|Non-aircraft operating leases |                      
|Commitments                   |                      
|All capital leases            |                      
|                              |                      
|Total                         |                      
|                              |                      

| | Note:
Regarding the Companys commitments to acquire Boeing 717 and Embraer aircraft, the
above table reflects, under Commitments, the estimated lease payments the
Company expects to pay after delivery of aircraft (which the Company has estimated based
on assumptions regarding lease terms, interest rates and other factors), rather than
reflecting the purchase price for the aircraft, including the related obligation to make
progress payments. Similarly, long-term debt in the above table does not include debt for
progress payments related to the acquisition of Boeing 717 aircraft. The Embraer regional
jet program will require long-term financing on or after delivery, which the Company has
not yet arranged. The Companys aircraft financing is discussed in more detail in
Note 5 to the Consolidated Financial Statements contained in this Annual Report on Form
10-K.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

2004 and Beyond The current weak
revenue environment and volatile nature of fuel prices make it difficult to accurately
project cash flow from operations for 2004 and beyond. Absent adverse factors outside the
control of the Company such as events similar to September 11, 2001, further substantial
deterioration in the current industry revenue environment or significant increases in
fuel prices from fourth quarter 2003 prices, the Company believes current liquidity and
cash flow from operations will be sufficient to fund current operations through 2004.
Some key cash flow items for 2004 and beyond include:

| | Capital
spending is anticipated to range between $8 and $10 million annually for the next few
years, excluding aircraft acquisitions, which are expected to be leased. Most of the
spending is expected to be for spare parts for the Boeing 717 program and continued
maintenance support of Midwest Airlines MD-80 fleet.
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Net
interest expense is estimated at $2 million in 2004, with declining amounts in following
years.
|- | ---------------------------------------------------------------------------------------------------

| | Non-cash
addbacks primarily related to book depreciation will provide $15-17 million of annual
cash flow.
|- | ---------------------------------------------------------------------------------------------------------

| | Defined
benefit pension plan contributions will amount to approximately $1.6 million in 2004.
|- | ---------------------------------------------------------------------------------------------

| | An
estimated $4.8 million income tax payment is anticipated in 2004.
|- | --------------------------------------------------------------------

| | Payment
of the lender and lessor moratorium note will begin in the third quarter 2004, with the
principal portion of the payment totaling approximately $1.1 million for the year.
Principal due under the note for 2005 and 2006 will total approximately $2.4 million and
$2.6 million, respectively, ending with principal payments totaling $1.4 million in 2007.
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# ITEM 7A. QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Companys primary market
risk exposures include commodity price risk (i.e. aircraft fuel prices) and interest rate
risk. The Companys operating results are significantly impacted by changes in the
price and availability of aircraft fuel. The Company periodically manages the price risk
of fuel primarily by purchasing commodity options that establish ceiling prices. Those
options are recorded at their fair market value, and the changes in fair market value are
recorded in the consolidated statement of operations in accordance with Statement of
Financial Accounting Standards (SFAS), No. 133, Accounting for
Derivative Instruments and Hedging Activities and the corresponding amendments under
SFAS No. 138 Accounting for Certain Derivative Instruments and Certain Hedging
Activities. For 2003, aircraft fuel and oil and associated taxes (including the
effect of any of the Companys options) represented 20% of the Companys total
operating expenses. Based on the Companys fiscal 2004 fuel consumption estimate of
86 million gallons, a one-cent change in the average annual price per gallon of aircraft
fuel would increase the Companys fuel expense by approximately $0.9 million. As of
December 31, 2003, the Company had no options in place for any current or later periods.

As of December 31, 2003, the Company
had no short- or long-term debt obligations that were subject to variable interest rates.
The Companys fixed rate debt was adjusted to market rates during the restructuring
that was completed in August 2003; the convertible notes were priced at fixed rates during
third quarter 2003 and therefore all debt reflects the current fair value at December 31,
2003.

37

---

# ITEM 8. FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA

# Consolidated Financial
Statements

|Page 39 | Independent Auditors' Report                   
|------- | -----------------------------------------------
|Page 40 | Consolidated Statements of Operations          
|Page 41 | Consolidated Balance Sheets                    
|Page 42 | Consolidated Statements of Cash Flows          
|Page 43 | Consolidated Statements of Shareholders' Equity
|Page 44 | Notes to Consolidated Financial Statements     

All schedules for which provision is
made in the applicable accounting regulations of the Securities and Exchange Commission
have been omitted because they are not applicable, not required or the information has
been furnished elsewhere.

38

---

# INDEPENDENT
AUDITORS REPORT

To the Shareholders and Board of
Directors of Midwest Air Group, Inc.:

We have audited the accompanying consolidated
balance sheets of Midwest Air Group, Inc. (formerly known as Midwest Express Holdings,
Inc.,) and subsidiary (the Company) as of December 31, 2003 and 2002, and the
related consolidated statements of operations, shareholders equity and cash flows
for each of the three years in the period ended December 31, 2003. These financial
statements are the responsibility of the Companys management. Our responsibility is
to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance
with auditing standards generally accepted in the United States of America. Those
standards require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis for our
opinion.

In our opinion, such financial
statements present fairly, in all material respects, the financial position of Midwest Air
Group, Inc. and subsidiary as of December 31, 2003 and 2002, and the results of their
operations and their cash flows for each of the three years in the period ended December
31, 2003, in conformity with accounting principles generally accepted in the United States
of America.

/s/ Deloitte & Touche LLP

Milwaukee, WisconsinFebruary
17, 2004

39

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# CONSOLIDATED
STATEMENTS OF OPERATIONS

MIDWEST AIR GROUP, INC.
YEARS ENDED DECEMBER 31, 2003, 2002, AND 2001 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS)

|                                           | 2003
|------------------------------------------ | ----
|Operating revenues:                        |     
|Passenger service                          |     
|Cargo                                      |     
|Other                                      |     
|                                           |     
|Total operating revenues                   |     
|                                           |     
|                                           |     
|Operating expenses:                        |     
|Salaries, wages and benefits               |     
|Aircraft fuel and oil                      |     
|Commissions                                |     
|Dining services                            |     
|Station rental, landing and other fees     |     
|Aircraft maintenance materials and repairs |     
|Depreciation and amortization              |     
|Aircraft rentals                           |     
|Impairment loss                            |     
|Other                                      |     
|                                           |     
|Total operating expenses                   |     
|                                           |     
|Operating loss                             |     
|                                           |     
|                                           |     
|Other income (expense):                    |     
|Interest income                            |     
|Interest expense                           |     
|Other, net                                 |     
|                                           |     
|Total other income                         |     
|                                           |     
|                                           |     
|Loss before income tax credit              |     
|Income tax credit                          |     
|                                           |     
|Net loss                                   |     
|                                           |     
|Loss per common share  basic:             |     
|Loss per common share  diluted:           |     

See notes to consolidated
financial statements.

40

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# CONSOLIDATED BALANCE
SHEETS

MIDWEST AIR GROUP, INC.
AS OF DECEMBER 31, 2003 AND 2002 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

|ASSETS                                                                     | 2003
|-------------------------------------------------------------------------- | ----
|Current assets:                                                            |     
|Cash and cash equivalents                                                  |     
|Accounts receivable, less allowance for                                    |     
|doubtful accounts of $100 in 2003 and $133 in 2002                         |     
|Inventories                                                                |     
|Prepaid expenses                                                           |     
|Restricted cash                                                            |     
|Deferred income taxes                                                      |     
|                                                                           |     
|Total current assets                                                       |     
|                                                                           |     
|Property and equipment, net                                                |     
|Aircraft purchase deposits and pre-delivery progress payments              |     
|Other assets, net                                                          |     
|                                                                           |     
|Total assets                                                               |     
|                                                                           |     
|LIABILITIES AND SHAREHOLDERS' EQUITY                                       |     
|Current liabilities:                                                       |     
|Accounts payable                                                           |     
|Income taxes payable                                                       |     
|Notes payable                                                              |     
|Current maturities of long-term debt                                       |     
|Air traffic liability                                                      |     
|Unearned revenue                                                           |     
|Accrued liabilities:                                                       |     
|Vacation pay                                                               |     
|Scheduled maintenance expense                                              |     
|Frequent flyer awards                                                      |     
|Other                                                                      |     
|                                                                           |     
|Total current liabilities                                                  |     
|                                                                           |     
|Long-term debt                                                             |     
|Long-term debt on pre-delivery progress payments                           |     
|Deferred income taxes                                                      |     
|Noncurrent scheduled maintenance expense                                   |     
|Accrued pension and other postretirement benefits                          |     
|Deferred frequent flyer partner revenue                                    |     
|Deferred revenue                                                           |     
|Other noncurrent liabilities                                               |     
|                                                                           |     
|Total liabilities                                                          |     
|                                                                           |     
|Commitments  and contingencies (Notes 2, 5 and 9)                          |     
|Shareholders' equity:                                                      |     
|Preferred stock, without par value; 5,000,000 shares authorized,           |     
|no shares issued and outstanding                                           |     
|Common stock, $.01 par value; 50,000,000 shares authorized,                |     
|18,108,959 shares issued in 2003 and 16,224,531 shares issued in 2002      |     
|Additional paid-in capital                                                 |     
|Treasury stock, at cost; 707,120 shares in 2003 and 712,682 shares in 2002 |     
|Retained earnings                                                          |     
|Cumulative other comprehensive (loss) income                               |     
|                                                                           |     
|Total shareholders' equity                                                 |     
|                                                                           |     
|Total liabilities and shareholders' equity                                 |     
|                                                                           |     

See notes to consolidated
financial statements.

41

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# CONSOLIDATED
STATEMENTS OF CASH FLOWS

MIDWEST AIR GROUP, INC.
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001 (DOLLARS IN THOUSANDS)

|                                                                | 2003
|--------------------------------------------------------------- | ----
|Operating activities:                                           |     
|Net loss                                                        |     
|Items not involving the use of cash:                            |     
|Depreciation and amortization                                   |     
|Deferred income taxes                                           |     
|Impairment loss                                                 |     
|Other, net                                                      |     
|                                                                |     
|Changes in operating assets and liabilities:                    |     
|Accounts receivable                                             |     
|Inventories                                                     |     
|Prepaid expenses                                                |     
|Restricted cash                                                 |     
|Accounts payable                                                |     
|Deferred frequent flyer partner revenue                         |     
|Accrued liabilities                                             |     
|Unearned revenue                                                |     
|Accrued pension                                                 |     
|Air traffic liability                                           |     
|                                                                |     
|Net cash provided by operating activities                       |     
|                                                                |     
|                                                                |     
|Investing activities:                                           |     
|Capital expenditures                                            |     
|Aircraft purchase deposits and pre-delivery progress pa(21,528) |     
|Aircraft purchase deposits returned                             |     
|Proceeds from sale of property and equipment                    |     
|Other, net                                                      |     
|                                                                |     
|Net cash provided by (used in) investing activities             |     
|                                                                |     
|                                                                |     
|Financing activities:                                           |     
|Proceeds from debt issuance, net                                |     
|Funding of pre-delivery progress payments                       |     
|Proceeds from sale/leaseback transaction, net                   |     
|Funds received from private equity placement                    |     
|Proceeds from aircraft financing                                |     
|Return of pre-delivery progress payments                        |     
|Note payable, net                                               |     
|Other, net                                                      |     
|                                                                |     
|Net cash provided by financing activities                       |     
|                                                                |     
|                                                                |     
|Net increase (decrease) in cash and cash equivalents            |     
|Cash and cash equivalents, beginning of period                  |     
|                                                                |     
|Cash and cash equivalents, end of period                        |     
|                                                                |     
|                                                                |     
|Supplemental non-cash activities:                               |     
|Non-cash incentives                                             |     
|Aircraft sale/leaseback                                         |     
|Moratorium note payable to lenders                              |     
|Stock warrants to lenders                                       |     
|Supplemental cash flow information:                             |     
|Cash (received) paid for:                                       |     
|Income taxes*                                                   |     
|Interest                                                        |     
|Supplemental schedule of investing activities:                  |     
|Accrued capital expenditures                                    |     

* Included in taxes paid are amounts
paid to Kimberly-Clark in accordance with the Tax Agreement totaling $0 in 2003, $0 in
2002 and $1,689

See notes to consolidated
financial statements.

42

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# CONSOLIDATED
STATEMENTS OF SHAREHOLDERS' EQUITY

MIDWEST AIR GROUP, INC.
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001 (DOLLARS IN THOUSANDS)

|                                                   
|---------------------------------------------------
|Balances at December 31, 2000                      
|Net loss                                           
|Issuance of common stock upon exercise             
|of stock options and related tax benefits          
|Other                                              
|                                                   
|Balances at December 31, 2001                      
|Comprehensive loss:                                
|Net loss                                           
|Other comprehensive income  fuel hedges           
|                                                   
|Total comprehensive loss                           
|Issuance of 1,675,000 shares of common stock       
|for private equity placement (net of issuance costs
|of $1,456)                                         
|Other                                              
|                                                   
|Balances at December 31, 2002                      
|Comprehensive loss:                                
|Net loss                                           
|Other comprehensive loss:                          
|Fuel hedge                                         
|Additional minimum pension liability               
|                                                   
|Total comprehensive loss                           
|Issuance of common stock upon exercise             
|of stock options and related tax benefits          
|Issuance of 965,318 stock options                  
|Issuance of 1,571,467 stock warrants               
|Issuance of 1,882,353 shares of common stock       
|for private equity placement (net of issuance costs
|of $468)                                           
|Other                                              
|                                                   
|Balances at December 31, 2003                      
|                                                   

43

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# NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS

# MIDWEST AIR GROUP, INC. YEARS ENDED DECEMBER
31, 2003, 2002 AND 2001

# NOTE 1. BASIS OF
PRESENTATION AND BUSINESS

Basis of Presentation The
accompanying consolidated financial statements include the accounts of Midwest Air Group,
Inc. (the Company), formerly known as Midwest Express Holdings, Inc., and its
subsidiary, which is wholly owned. All significant intercompany accounts and transactions
have been eliminated in consolidation.

Nature of Operations Midwest Air
Group, Inc. has two separate operating entities, Midwest Airlines, Inc. (Midwest
Airlines), formerly known as Midwest Express Airlines, Inc., and Skyway Airlines,
Inc., a wholly owned subsidiary of Midwest Airlines, doing business as Midwest Connect (Midwest
Connect), formerly known as Astral Aviation, Inc. Midwest Airlines, a wholly owned
subsidiary of the Company, is a U.S. air carrier providing scheduled passenger service to
destinations in the United States. Midwest Airlines also provides aircraft charter, air
cargo and other airline services. Midwest Connect provides regional scheduled passenger
service to cities primarily in the Midwest.

# NOTE 2. ACCOUNTING
POLICIES

The accounting policies of the
Company conform to accounting principles generally accepted in the United States of
America. Significant policies are described below.

Cash and Cash Equivalents The
Company considers all highly liquid investments with purchased maturities of three months
or less to be cash equivalents. They are carried at cost, which approximates market. Cash
is primarily held at three financial institutions.

Inventories Inventories consist primarily of
aircraft maintenance parts, maintenance supplies and fuel stated at the lower of cost on
the first-in, first-out (FIFO) method (for Midwest Airlines), average cost (for Midwest
Connect) or market, and are expensed when used in operations.

Property and Equipment Property and
equipment are stated at cost and are depreciated on the straight-line method applied to
each unit of property for financial reporting purposes and by use of accelerated methods
for income tax purposes. Aircraft are depreciated to estimated residual values, and any
gain or loss on disposal is reflected in income.

The depreciable lives for the
principal asset categories are as follows:

|Asset Category                      | Depreciable Life               
|----------------------------------- | -------------------------------
|Aircraft and related equipment      | 10 to 20 years                 
|Other equipment                     | 5 to 8 years                   
|Office furniture and equipment      | 5 to 20 years                  
|Buildings                           | 40 years                       
|Building and leasehold improvements | Lesser of 20 years or remaining
|                                    | life of building or lease      

44

---

Restricted Cash Restricted cash
pertains primarily to cash that is due the Company for advance credit card ticket
purchases, which under the terms of the agreement with the credit card processor is held
by the credit card processor until travel takes place; this restricted cash earns a
market rate of interest and is held primarily at one financial institution. Other
restricted cash pertains to deposits related to, among other things, workers
compensation policies and the Milwaukee County guarantee.

Other Assets Other assets primarily
consist of airport leasehold rights, capitalized software and credits from aircraft
manufacturers.

Impairment of Long-Lived Assets The
Company records impairment charges on long-lived assets used in operations when events
and circumstances indicate the assets may be impaired and the undiscounted cash flows
estimated to be generated by those assets are less than their carrying amount. The amount
of any impairment is based upon the fair market value of the related asset.

During second quarter 2001, the
Company decided to accelerate the retirement of eight Midwest DC-9-10 aircraft. In
connection with this decision, the Company performed evaluations to determine whether
future cash flows (undiscounted and without interest charges) expected to result from the
use and eventual disposition of these aircraft would be less than the aggregate carrying
amounts. As a result of the evaluation, the Company determined that the estimated future
cash flows expected to be generated by these aircraft would be less than their carrying
amount, resulting in impairment. Consequently, the original cost bases of these assets
were reduced to reflect the fair market value at the date of the decision, resulting in an
$8.8 million (pre-tax) impairment loss, and the remaining depreciable lives were adjusted
for the new retirement schedule. In determining the fair market value of these assets, the
Company considered market trends in aircraft dispositions, data from third parties and
management estimates.

During first quarter 2002, the
Company decided to accelerate the retirement of the DC-9 fleet of Midwest Airlines in
anticipation of accelerated deliveries of Boeing 717 aircraft. In connection with this
decision, the Company again performed evaluations to determine whether
probability-weighted future cash flows from an asset (undiscounted and without interest
charges) expected to result from the use and eventual disposition of these aircraft would
be less than the aggregate carrying amounts. As a result of the evaluation, the Company
determined that the estimated probability-weighted future cash flows would be less than
the aggregate carrying amounts, resulting in an additional impairment. Consequently, in
the first quarter 2002, the cost bases of these assets were reduced to reflect the fair
market value at the date of the decision, resulting in a $29.9 million (pre-tax)
impairment loss, and the remaining depreciable lives of such assets were adjusted for the
new retirement schedule. In determining the fair market value of these assets, the Company
considered market trends in aircraft dispositions, data from third parties and management
estimates.

Revenue Recognition Passenger
revenue, related commissions (if any) and cargo revenues are recognized in the period
when the service is provided. A portion of the revenue from the sale of frequent flyer
miles is deferred and recognized straight-line over 32 months. Contract maintenance
revenue is recognized when work is completed and invoiced. The estimated liability for
sold, but unused, tickets is included in current liabilities as air traffic liability.
The amount of commissions associated with unearned revenue is included in current assets
as prepaid commissions. After 13 months, any sold, but unused, tickets are recognized in
revenue and any related commission expense is recorded.

45

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Advertising Expense Advertising
costs are charged to expense when incurred. Advertising expense for the years ended
December 31, 2003, 2002 and 2001 was $5.7 million, $7.6 million and $6.9 million,
respectively.

Concentrations of Risk Certain of
the Companys employees are covered under various collective bargaining agreements.
The Midwest Airlines pilot, Midwest Connect pilot and Midwest Airlines flight attendant
groups all ratified five-year contracts in August 2003. These contracts represent 8%, 12%
and 12%, respectively, of the Companys employees at December 31, 2003. The Company
operates approximately 88% of its flights and earns approximately 82% of its passenger
revenue based on Milwaukee-originating or Milwaukee-arriving flights; thus, the Company
is impacted by the economy of the Milwaukee area.

Fair Value of Financial Instruments
The Company believes the carrying value of its financial instruments (cash and cash
equivalents, accounts receivable and accounts payable) is a reasonable estimate of the
fair value of these instruments due to their short-term nature or variable interest rate.
The carrying value of derivative instruments has been marked to market based on the fair
value of similar instruments as of the balance sheet date. As of December 31, 2003, the
Company had no short- or long-term debt obligations that were subject to variable
interest rates. The Companys fixed rate debt was adjusted to market rates during
the restructuring that was completed in August 2003; the convertible notes were priced at
fixed rates during third quarter 2003 and therefore all debt reflects the current fair
value at December 31, 2003.

Maintenance and Repair Costs Routine
maintenance and repair costs for owned and leased aircraft are charged to expense when
incurred. Midwest Airlines expenses airframe maintenance costs as they are incurred.
Midwest Connect accrues for major airframe maintenance events for the regional jet fleet
by flight hour on a monthly basis. Airframe maintenance events for the Midwest Connect
turboprop fleet are expensed as incurred.

Substantially all of Midwest
Airlines and Midwest Connects engines are under fleet hour agreements and
therefore engine maintenance is expensed as incurred.

Frequent Flyer Program A portion of
the revenue from the sale of frequent flyer mileage credits is deferred and recognized
straight-line over 32 months. The Company believes the method appropriately matches
revenues with the period in which services are provided.

The estimated incremental cost of
providing future transportation in conjunction with miles earned by travel under the
Companys frequent flyer program is accrued based on an estimated redemption
percentage of 76% applied to actual mileage recorded in members accounts that have
accumulated miles equal to or greater than the standard travel award. The ultimate cost
will depend on the actual redemption of frequent flyer miles and may be greater or less
than amounts accrued at December 31, 2003.

Postretirement Health Care and Life
Insurance Benefits The costs of health care and life insurance benefit plans for retired
employees are accrued over the working lives of employees in accordance with Statement of
Financial Accounting Standards (SFAS) No. 106, Employers Accounting
for Postretirement Benefits Other Than Pensions.

Income Taxes The Company accounts
for income taxes in accordance with SFAS No. 109, Accounting for Income Taxes (SFAS
109). SFAS No. 109 requires that deferred income taxes be determined under
the asset and liability method. Deferred income taxes have been recognized for the future
tax consequences of temporary differences by applying enacted statutory tax rates
applicable to differences between the financial reporting and the tax bases of assets and
liabilities.

46

---

Leases Rental obligations under
operating leases for aircraft, facilities and equipment are charged to expense on the
straight-line method over the term of the lease.

Derivative Instruments and Hedging
Activities The Company periodically utilizes option contracts to mitigate the exposure to
the fluctuation in aircraft fuel prices in accordance with the Companys financial
risk management policy. This policy was adopted by the Company to document the Companys
philosophy toward financial risk and outline acceptable use of derivatives to mitigate
that financial risk. The options establish ceiling prices for anticipated jet fuel
purchases and serve as hedges of those purchases. The Company does not hold or issue
derivative instruments for trading purposes. At December 31, 2002, the Company had
options in place to hedge approximately 20% and 15% of its projected fuel purchases in
the first quarter and second quarter of 2003, respectively. These contracts expired at
various dates through June 30, 2003. At December 31, 2002, the options were valued at
$1.0 million and are included in other prepaid expense in the consolidated balance sheet.
The value of any options is determined using estimates of fair market value provided by
major financial institutions. At December 31, 2003, the Company had no options for
current or future periods.

The Company accounts for its fuel
hedge derivative instruments as cash flow hedges, as defined in SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities and the
corresponding amendments under SFAS No. 138, Accounting for Certain Derivative
Instruments and Certain Hedging Activities. Therefore, all changes in the fair value
of the derivative instruments that are considered effective are recorded in other
comprehensive income until the underlying hedged fuel is consumed, when they are
reclassified to the income statement as an offset of fuel expense. The Company
reclassified $1.1 million and $1.5 million to the income statement in 2003 and 2002,
respectively, as an offset to fuel expense when the hedges expired.

Stock Options As permitted by SFAS
No. 123, Accounting for Stock-Based Compensation, the Company has elected to
follow APB No. 25, Accounting for Stock Issued to Employees and related
interpretations in accounting for stock options issued to employees.

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

New Accounting Pronouncements In May
2003, the Financial Accounting Standards Board (FASB) issued SFAS No. 150,
Accounting for Certain Financial Instruments with Characteristics of Both
Liabilities and Equity, which requires issuers to classify as liabilities certain
classes of freestanding financial instruments (instruments that are entered into
separately from other instruments or transactions, or are legally detachable and
separately exercisable) that represent obligations of the issuer. SFAS No. 150 is
effective for all public company freestanding financial instruments entered into or
modified after May 31, 2003. The adoption of SFAS No. 150, which was effective for the
Company on July 1, 2003, did not have a material impact on the Companys
consolidated financial statements.

47

---

In January 2003, the FASB issued
Interpretation No. 46, Consolidation of Variable Interest Entities (FIN
46). FIN 46 requires the consolidation of certain types of entities in which a
company absorbs a majority of another entitys expected losses, receives a majority
of the other entitys expected residual returns, or both, as a result of ownership,
contractual or other financial interests in the other entity. These entities are called
variable interest entities.

If an entity is determined to be a
variable interest entity, the entity must be consolidated by the primary
beneficiary. The primary beneficiary is the holder of the variable interests that
absorbs a majority of the variable interest entitys expected losses or receives a
majority of the entitys residual returns in the event no holder has a majority of
the expected losses. There is no primary beneficiary in cases where no single holder
absorbs the majority of the expected losses or receives a majority of the residual
returns.

FIN 46 initially applied to variable
interest entities created after January 31, 2003 and to variable interest entities in
which a company obtained an interest after that date. In October 2003, the FASB deferred
the effective date of FIN 46 to December 31, 2003 for all interests in variable interest
entities existing prior to January 31, 2003. In December 2003, the FASB issued a revised
interpretation to clarify provisions of the original interpretation and to exempt certain
entities from its requirements. The Company has evaluated the impact of FIN 46 as it
relates to its operations, and believes the adoption did not have a material impact on its
financial statements.

On December 8, 2003, the Medicare
Prescription Drug, Improvement and Modernization Act of 2003 (the Act) was
signed into law. The Act introduced a prescription drug benefit program under Medicare as
well as a federal subsidy to sponsors of retiree health care benefit plans. Certain
accounting issues raised by the Act, such as how to account for the federal subsidy, are
not explicitly addressed by FASB Statement No. 106, Employers Accounting for
Postretirement Benefits Other Than Pensions. The FASB issued FASB Staff Position
(FSP) No. FAS 106-1, Accounting and Disclosure Requirements Related to
the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (FSP
No. 106-1), that allows sponsors to elect to defer recognition of the effects of the
Act to await guidance from various governmental and regulatory agencies concerning the
requirements that must be met to obtain these cost reductions, as well as the manner in
which such savings should be measured. In accordance with FSP No. 106-1, the Company has
elected to defer recognition of the effects of the Act. When guidance is issued, it could
require a change in previously reported information. Accordingly, the financial statements
do not reflect the effects of the Act.

# NOTE 3. PROPERTY AND
EQUIPMENT

As of December 31, 2003 and 2002,
property and equipment consisted of the following (in thousands):

|                               | 2003
|------------------------------ | ----
|Flight equipment               |     
|Other equipment                |     
|Buildings and improvements     |     
|Office furniture and equipment |     
|Construction in progress       |     
|                               |     
|                               |     
|Less accumulated depreciation  |     
|                               |     
|Property and equipment, net    |     
|                               |     

The Company has recorded capitalized
interest of $1.1 million and $0.9 million for the years ended December 31, 2003 and 2002,
respectively.

48

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# NOTE 4. LEASES

The Company leases aircraft, terminal
space, office space and warehouse space. Future minimum lease payments required under
operating leases having initial or remaining noncancellable lease terms in excess of one
year as of December 31, 2003 were as follows (in thousands):

|                        |          
|----------------------- | ---------
|Year ended December 31, |          
|2004                    | $  43,248
|2005                    | 40,331   
|2006                    | 38,989   
|2007                    | 36,931   
|2008                    | 35,341   
|2009 and thereafter     | 413,071  

As of December 31, 2003, Midwest had
19 jet aircraft in service financed by operating leases. These leases have expiration
dates ranging from 2004 through 2023 and can generally be renewed, based on the fair
market value at the end of the lease term, for one to four years. Most of the leases
include purchase options at or near the end of the lease term at fair market value.

Midwest Airlines has received credit
memos from certain suppliers associated with the delivery of each Boeing 717 aircraft to
be used for the acquisition of aircraft spare parts and maintenance tooling, employee
training, flight simulator rental, aircraft lease payments and engine maintenance
agreements. As of December 31, 2003, the amount of unused credit memos totaled $10.1
million and is recorded as Other Assets. Midwest Airlines will receive additional credit
memos on the delivery of each subsequent Boeing 717 aircraft, and will continue to use the
credits as needed to pay for applicable services. The benefit of these credit memos is
being recognized over the term of the leases.

As of December 31, 2003, Midwest
Connects 14 turboprop aircraft were financed under operating leases with a lease
term of 12 years and an expiration date of 2008. These leases permit renewal for various
periods at rates approximating fair market value and purchase options at or near the end
of the lease term at fair market value.

In the fourth quarter 1999, the
Company entered into lease agreements to finance the acquisition of five Fairchild
328JETs. The leases run for a term of 16.5 years, with expiration of all leases occurring
in 2016. These leases permit renewal for various periods at rates approximating fair
market value and purchase options at or near the end of the lease term at fair market
value.

On April 23, 2001, the Company
completed a $6.3 million financing of a new maintenance facility for Midwest Connect
located at General Mitchell International Airport. Occupancy of the new maintenance
facility began in February 2002. The facility is financed by 32-year, tax-exempt,
variable-rate demand industrial development revenue bonds issued by the City of Milwaukee.
To ensure the tax-exempt status, Milwaukee County is the owner of the facility and
guarantor of principal and interest payments. Interest payments made to bondholders and
amortization of principal are recorded as rent expense.

In October 1998, Midwest moved into a
newly constructed maintenance facility that is owned by Milwaukee County and located at
General Mitchell International Airport. To finance the $7.9 million project, the City of
Milwaukee issued variable-rate demand industrial development revenue bonds. The
Companys variable rent payments are based on the current interest rate of the City
of Milwaukees outstanding tax-exempt bonds over the 32-year lease term. Milwaukee
County is the owner and guarantor of principal and interest payments.

Rent expense for all operating
leases, excluding landing fees, was $47,889,000, $40,723,000 and $39,021,000 for 2003,
2002 and 2001, respectively.

49

---

During 2003, the Company recorded
$5.0 million (pre-tax) of aircraft lease expense for seven leased DC-9 aircraft removed
from Midwest Airlines service during the year. These non-cash expenses were included in
the aircraft rentals line of the Companys statements of operations. The expense
reflects future obligations for these aircraft following their out-of-service dates. The
Company has three additional DC-9 leased aircraft that it plans to remove from service by
April 2004. The Company expects to record an additional non-cash charge of $1.6 million
(pre-tax) in accordance with SFAS No. 146 in relation to these aircraft. The remaining
lease payments on these aircraft are reflected in the lease payment table above.

# NOTE 5. FINANCING
AGREEMENTS

Credit Card Holdback The
Company has agreements with organizations that process credit card transactions arising
from purchases of air travel tickets by customers of the Company. The Company has one
such agreement with an organization that processes MasterCard/Visa transactions. Credit
card processors have financial risk associated with tickets purchased for travel because
although the processor generally forwards the cash related to the purchase to the Company
soon after the purchase is completed, the air travel generally occurs after that time and
the processor would have liability if the Company does not ultimately deliver the travel.
The agreement with the organization that processes MasterCard/Visa transactions was
amended in January 2002 to allow the credit card processor to create and maintain a
reserve account that is funded by retaining cash that it otherwise would deliver to the
Company (i.e., restricted cash). As of December 31, 2003, the retained cash
amount was 100% of the credit card processors risk exposure, or approximately $20.9
million. This became effective in conjunction with an agreement, executed August 29,
2003, to extend the credit card processing agreement to February 28, 2004. (Subsequently,
the Company and the credit card processor agreed to a two-week extension to complete a
new agreement. The Company expects that it will be able to renew the agreement with the
current processor by the expiration of the two-week extension.) The August 2003 extension
included an increase in processing fees and release of a second priority lien that exists
on substantially all non-aircraft personal property of the Company and certain aircraft,
and of a third priority lien on the Companys headquarters facility. The Company
also has agreements with American Express, Diners Club and Discover. As of December 31,
2003, American Express had retained cash related to credit card processing totaling $1.0
million. If current industry conditions persist, other credit card processors may require
holdbacks as well. The aggregate amount of the risk exposure of the processors (other
than amounts under holdback) as of February 2004 was approximately $6.4 million.

Credit Facility On August 29, 2003,
the Company amended the agreement relating to its bank credit facility to extend the
existing credit facility to November 26, 2003. In addition to the extension, the
amendment to the credit facility waived certain defaults that occurred prior to the
amendment, removed certain financial covenants, and modified a requirement that the
Company maintain a minimum amount of unrestricted cash. The amendment gave the Company
additional time to seek long-term financing while maintaining its existing letters of
credit issued under the credit facility. As of December 31, 2003, the Company had repaid
all borrowings under the bank credit facility. As of December 31, 2002, the Company had
outstanding borrowings under the facility of $5.5 million.

In October 2003, the Company
completed a transaction with Milwaukee County, Racine County and the State of Wisconsin
that reduced the amount of letters of credit outstanding under the credit facility to
approximately $1.1 million.

AircraftThree 328JETs were
originally financed for a 32-month period beginning in 2001 at fixed rates of interest
ranging from 5.58% to 5.92% for the first 26 to 28 months. The interest rates revert to a
variable rate for the last few months of the financing agreement. The loans were
scheduled to come due in August and November 2003 and January 2004, respectively. As part
of the aircraft lease and loan restructuring that occurred in third quarter 2003, the
loans were extended to July 2013 at a fixed rate of interest of 4.0%.

50

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In June 2001, one MD-80 series
aircraft was debt-financed for approximately $8.1 million for seven years at a fixed
interest rate of 7.39%. As part of the aircraft lease and loan restructuring that occurred
in third quarter 2003, a sale and leaseback was completed that resulted in the Company
leasing the aircraft through February 2013.

In the second quarter 2002, Midwest
Airlines entered into a loan agreement to fund pre-delivery progress payments to The
Boeing Company for new Boeing 717 aircraft. Midwest Airlines entered into the loan
agreement with Kreditanstalt fur Wiederaufbau Bank (KfW) with the assistance
of Rolls-Royce Deutschland Ltd. & Co. KG (Rolls-Royce). Rolls-Royce agreed
to guarantee this loan agreement on behalf of Midwest Airlines. The loan agreement
provides up to $45.0 million in pre-delivery progress payment financing. To date, Midwest
Airlines has made pre-delivery progress payments of $37.4 million for the Boeing 717
aircraft program. As of December 31, 2003, Midwest Airlines owed $26.5 million under the
loan agreement. Under a financing commitment between Midwest Airlines and Boeing Capital
Corporation (BCC), at each aircraft delivery BCC acquires and pays for the
aircraft delivered, including interest accrued on the debt owed KfW, and then leases the
aircraft to Midwest Airlines. At that time, BCC reimburses Midwest Airlines in full for
the pre-delivery progress payments Midwest Airlines has made. To the extent Midwest
Airlines originally funded such payments through KfW, Midwest Airlines uses the amounts
reimbursed to repay the related debt to KfW. To the extent Midwest Airlines originally
funded such payments with operating cash, the amounts reimbursed represent available cash.
The loan balance above reflects the net effect of pre-delivery progress payments and
delivery reimbursements as of December 31, 2003. Interest accrues from the date of
borrowing to the aircraft delivery date, and is included in the final purchase price as
capitalized interest. The interest rate on borrowings under the agreement is LIBOR plus
195 basis points. This debt has been classified as long-term in the accompanying condensed
consolidated balance sheet. There are no financial covenants associated with this debt
obligation.

With the loan agreement with KfW and
the BCC commitment, the Company believes it has requisite financing for the Boeing 717
program. Although BCC is able to terminate its financing commitment if it deems the
Company has experienced a material adverse change and the commitment is subject to other
conditions, the Company does not anticipate that the financing commitment will be
terminated or that the Company will be unable to meet the conditions.

In connection with the final
restructuring agreements with the aircraft lessors and lenders, the Companys
subsidiaries delivered subordinated promissory notes (the Basic Moratorium
Notes) to the lessors and lenders. Each of the Basic Moratorium Notes was delivered
pursuant to an agreement to amend the existing lease or financing agreements. Each of the
Basic Moratorium Notes constitutes payment in full for regularly scheduled amounts due
under such lease and financing agreements that Midwest Airlines or Skyway Airlines failed
to pay to the lessor(s) or lender(s) during the Companys payment moratorium from
February 28, 2003 through August 30, 2003. The aggregate principal amount of the Basic
Moratorium Notes is $7,533,000. Principal and interest on the Basic Moratorium Notes are
payable, in arrears, in 36 monthly installments commencing in July 2004. The Basic
Moratorium Notes bear interest at 10% per annum beginning June 30, 2004.

Headquarters In August 1997,
the Company purchased its headquarters building, which it had previously leased. As part
of the transaction, the Company assumed $3.5 million of long-term debt. The mortgage had
an interest rate of 8.25% and was payable in monthly installments through April 2011. In
November 2003, the Company completed a sale and leaseback of the headquarters buildings.
The initial lease term is 15 years with options to renew the lease for four successive
five-year periods at fair market value lease rates. Monthly payments increase by
approximately 5.6% for years 6-10 and another 7.0% for years 11-15; however, the payments
are recorded on the straight-line basis over the life of the lease. A portion of the
proceeds was used to pay off the outstanding mortgage.

51

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Convertible Debt On September
29, 2003, the Company entered into agreements under which it raised financing of
approximately $33 million (net proceeds approximated $31.1 million, after commissions and
expenses). The financing included two components: the sale of $25 million in convertible
senior secured notes and the sale of 1,882,353 shares of the Companys common stock
for an aggregate purchase price of approximately $8 million. The equity transaction is
discussed more fully in Note 7. Most of the Companys assets, including aircraft,
spare parts and landing slots, were pledged as security to the convertible note holders.
The Company sold the convertible senior secured notes and the common stock in private
placements to certain qualified institutional investors and accredited investors.

The convertible senior secured notes
bear interest at 6.75% and mature on October 1, 2008. The notes are secured by certain
assets of the Company and its subsidiaries in accordance with a Security Agreement and by
a Mortgage granted by Midwest Connect. The notes are generally convertible at any time at
the option of the note holders into shares of common stock of the Company at an initial
conversion price of $5.00 per share, which is subject to adjustment pursuant to certain
anti-dilution provisions. The note holders may not convert any portion of the outstanding
and unpaid principal of the notes to the extent that, after giving effect to such
conversion, the note holder (together with such note holders affiliates) would
beneficially own in excess of 4.99% or 9.99%, as the case may be for the respective note
holder, of the number of shares of common stock outstanding immediately after giving
effect to such conversion. A note holder may waive the 4.99% limitation with such waiver
being effective on the 61st calendar day after the Company receives notice of the waiver.

The terms of the agreements specify
that the Company is subject to certain operating restrictions that, among other things,
limit the Companys ability to sell assets and make loans. In addition, the Company
may not, except as required under certain contracts, plans or arrangements, redeem,
declare or pay any cash dividends or distributions on common stock without the consent of
the note holders. The agreements require the Company to maintain a minimum monthly
unrestricted cash balance of $37.5 million. In addition, the agreements also specify
customary events of default for debt securities of this type, including, among others,
failure to make payments when due, breaches of covenant, breaches of representations and
warranties, cross-default to other indebtedness, bankruptcy and insolvency defaults, and
unsatisfied judgment defaults. If the Company breaches a covenant, some or all of the
convertible notes may be subject to redemption.

Future maturities of long-term debt
on all debt obligations, including the Basic Moratorium Note, debt related to the 328JET
aircraft and the convertible notes for the next five years are as follows (in thousands):

|Year ended December 31, |         
|----------------------- | --------
|2004                    | $  1,369
|2005                    | 3,055   
|2006                    | 3,342   
|2007                    | 2,168   
|2008                    | 793     
|2009 and thereafter     | 44,658  

52

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# NOTE 6. NET LOSS PER
SHARE

Reconciliations of the numerator and
denominator of the basic and diluted net loss per share computations are summarized as
follows (in thousands, except per share amounts):

|                                                  | 2003
|------------------------------------------------- | ----
|Net Loss Per Share - Basic:                       |     
|Net loss (numerator)                              |     
|                                                  |     
|Weighted average shares outstanding (denominator) |     
|                                                  |     
|Net loss per share - basic                        |     
|                                                  |     
|Net Loss Per Share - Diluted: (3)                 |     
|Net loss (numerator)                              |     
|                                                  |     
|Weighted average shares outstanding (denominator) |     
|Effect of dilutive securities:                    |     
|Stock options (1)                                 |     
|Shares issuable under the 1995 Stock Plan         |     
|for Outside Directors (2)                         |     
|                                                  |     
|Weighted average shares outstanding assuming      |     
|dilution (denominator)                            |     
|                                                  |     
|Net loss per share - diluted                      |     
|                                                  |     

| | (1) | Stock
options outstanding under the 1995 Stock Option Plan and 2003 All-Employee
               Stock Option Plan of 37 and 30, respectively, were excluded from the 2003
and                2002 calculation as their effect was anti-dilutive.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (2) | Shares
issuable under the 1995 Stock Plan for Outside Directors of 22 and 15,
               respectively, were excluded from the 2003 and 2002 calculation as their
effect                was anti-dilutive.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (3) | Shares
issuable of 0 and 0 under the warrant and convertible debt agreements                were
not included in the above calculation as their effect was anti-dilutive.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------

In connection with the final
restructuring agreements with the aircraft lessors and lenders, the Company issued
warrants to certain lessors and lenders that currently give the holders the right to
purchase in the aggregate 1,571,467 shares of the Companys common stock at an
exercise price per share of $4.72. The warrants expire in August 2013. None of the
warrants had been exercised as of December 31, 2003.

# NOTE 7.
SHAREHOLDERS EQUITY

During second quarter 2002, the
Company generated gross proceeds of $21.9 million through the private placement of
1,675,000 shares of the Companys common stock to qualified institutional investors
at $13.09 per share. Net proceeds, after commissions and expenses, of $20.5 million were
used to reduce indebtedness and provide general working capital.

During fourth quarter 2003, the
Company generated gross proceeds of $8.0 million through the private placement of
1,883,353 shares of the Companys common stock to qualified institutional investors
at $4.25 per share. Net proceeds, after commissions and expenses, of $7.5 million were
used to reduce indebtedness and provide general working capital.

In 1996, the Board of Directors
adopted a shareholder rights plan and made a dividend distribution of one Preferred Share
Purchase Right (Right) on each outstanding share of the Companys common
stock. As a result of the 3-for-2 stock splits effected in May 1997 and 1998, four-ninths
of a Right is now associated with each share of common stock. The Rights are exercisable
only if a person or entity acquires 15% or more of the common stock of the Company or
announces a tender offer for 15% or more of the common stock. Each Right initially
entitles its holder to purchase one one-hundredth share of the Companys Series A
Preferred Stock at an exercise price of $100, subject to adjustment. If a person or entity
acquires 15% or more of the Companys common stock, then each Right will entitle the
holder to purchase, at the Rights then-current exercise price, Company common stock
valued at twice the exercise price. The Board of Directors is also authorized to reduce
the 15% threshold to not less than 10%. The Rights expire in 2006.

53

---

In connection with the final
restructuring agreements with the aircraft lessors and lenders, the Company issued
warrants to certain lessors and lenders that currently give the holders the right to
purchase in the aggregate 1,571,467 shares of the Companys common stock at an
exercise price per share of $4.72. The weighted average fair value of the warrants at the
grant date was $2.89. The warrants expire in August 2013. None of the warrants had been
exercised as of December 31, 2003. The assumptions used to calculate the fair value of the
warrants were comparable to the weighted average assumptions used to calculate the fair
value of options issued under the Companys stock option plans under SFAS No 123,
Accounting for Stock-Based Compensation (SFAS 123).

Under the Companys 1995 Stock
Option Plan, the Compensation Committee of the Board of Directors may grant options, at
its discretion, to certain employees to purchase shares of common stock. An aggregate of
2,548,900 shares of common stock is reserved for issuance under the Plan, of which 347,003
shares are available for future grants at December 31, 2003. Under the Plan, options
granted have an exercise price equal to 100% of the fair market value of the underlying
stock at the date of grant. Granted options become exercisable at the rate of 30% after
the first year, 30% after the second year and the remaining 40% after the third year,
unless otherwise determined, and have a maximum term of 10 years.

Under the Companys 2003
All-Employee Stock Option Plan, the Compensation Committee of the Board of Directors may
grant options, at its discretion, to certain non-represented employees and each union may
grant options, at its discretion, to certain represented employees to purchase shares of
common stock. An aggregate of 1,551,741 shares of common stock is reserved for issuance
under the Plan, of which 586,423 shares are available for future grants at December 31,
2003. Granted options for non-represented employees become exercisable at the rate of 33?%
immediately upon the date of grant, 33?% after the first year and the remaining 33?% after
the second year. Options for represented employees become exercisable in varying
increments as determined by each union, such that no more than 33?% of the options
allocated to a represented group become exercisable immediately upon the date of grant.
All options granted under this Plan will expire no later than August 21, 2013.

Transactions with respect to the
Plans where the exercise price was equal to the market price on the date of grant have
been adjusted to reflect the effect of the two stock splits and are summarized as follows:

|                                         | Shares | Weighted Average
Price
|---------------------------------------- | ------ | ----------------------
|Options outstanding at December 31, 2000 |        |                       
|Granted                                  |        |                       
|Exercised                                |        |                       
|Forfeited                                |        |                       
|                                         |        |                       
|Options outstanding at December 31, 2001 |        |                       
|Granted                                  |        |                       
|Exercised                                |        |                       
|Forfeited                                |        |                       
|                                         |        |                       
|Options outstanding at December 31, 2002 |        |                       
|Granted                                  |        |                       
|Exercised                                |        |                       
|Forfeited                                |        |                       
|                                         |        |                       
|Options outstanding at December 31, 2003 |        |                       
|                                         |        |                       

54

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Transactions with respect to the
Plans where the exercise price was less than the market price on the date of grant are
summarized as follows:

|                                         | Shares | Weighted Average
Price
|---------------------------------------- | ------ | ----------------------
|Options outstanding at December 31, 2000 |        |                       
|Options outstanding at December 31, 2001 |        |                       
|Options outstanding at December 31, 2002 |        |                       
|Granted                                  |        |                       
|Exercised                                |        |                       
|Forfeited                                |        |                       
|                                         |        |                       
|Options outstanding at December 31, 2003 |        |                       
|                                         |        |                       

Options exercisable with their
weighted average exercise price as of December 31, 2003, 2002 and 2001 for options where
the exercise price was equal to the market price on the date of grant were: 1,309,985
options at $21.58, 1,025,027 options at $22.08, and 769,055 options at $21.71,
respectively.

Options exercisable with their
weighted average exercise price as of December 31, 2003, 2002 and 2001 for options where
the exercise price was less than the market price on the date of grant were: 491,364
options at $2.89 and not applicable for 2002 and 2001.

Options exercisable at December 31,
2003 consisted of:

|Exercise Price | Number of Options
|-------------- | -----------------
|               | $2.89            
|               | 5.49             
|               | 8.00             
|               | 8.55             
|               | 12.18            
|               | 14.00            
|               | 14.84            
|               | 15.14            
|               | 15.43            
|               | 15.65            
|               | 15.98            
|               | 16.11            
|               | 17.19            
|               | 17.28            
|               | 18.28            
|               | 18.31            
|               | 18.52            
|               | 19.28            
|               | 19.51            
|               | 21.84            
|               | 23.66            
|               | 24.25            
|               | 24.50            
|               | 25.00            
|               | 26.78            
|               | 29.22            
|               | 30.28            
|               | 30.52            
|               | 31.00            
|               |                  
|               |                  
|               |                  

55

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The following table summarizes
information concerning options outstanding at December 31, 2003:

|Range of Exercise Prices | Number
Outstanding | Weighted
Average
Remaining
Contractual
Life | Weighted
Average
Exercise Price
|------------------------ | ------------------ | ------------------------------------------- | -------------------------------
|$0.00-$4.99              |                    |                                             |                                
|$5.00-$9.99              |                    |                                             |                                
|$10.00-$14.99            |                    |                                             |                                
|$15.00-$19.99            |                    |                                             |                                
|$20.00-$24.99            |                    |                                             |                                
|$25.00-$29.99            |                    |                                             |                                
|$30.00-$34.99            |                    |                                             |                                
|                         |                    |                                             |                                
|Options outstanding at   |                    |                                            
|December 31, 2003        |                    |                                             |                                
|                         |                    |                                             |                                

The Company has adopted the
disclosure requirements of SFAS 123 as amended by SFAS No. 148. The Company has elected to
continue to follow the provisions of Accounting Principles Board No. 25, Accounting
for Stock Issued to Employees and its related interpretations; accordingly, no
compensation cost has been reflected for the 1995 stock option plan in the consolidated
financial statements. Compensation expense was recognized for the difference between the
fair value and exercise price as of grant date for shares issued under the 2003
All-Employee Stock Option Plan.

Had compensation costs for the
Companys stock option plan been determined based on their fair value at the grant
dates for awards under those plans consistent with the method of SFAS 123, the
Companys net loss and net loss per share would have been reduced to the pro forma
amounts indicated below (in thousands, except per share amounts):

|                                   | 2003
|---------------------------------- | ----
|Net loss:                          |     
|As reported                        |     
|Add: Total stock-based employee    |     
|compensation expense recognized,   |     
|net of related tax effect          |     
|Deduct: Total stock-based employee |     
|compensation expense determined    |     
|under fair value based methods,    |     
|net of related tax effect          |     
|                                   |     
|Pro forma                          |     
|                                   |     
|Net loss per share - basic:        |     
|As reported                        |     
|Pro forma                          |     
|Net loss per share - diluted:      |     
|As reported                        |     
|Pro forma                          |     

For purposes of these disclosures,
the fair value of each option granted was estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted average assumptions:

|                        | 2003
|----------------------- | ----
|Expected volatility     |     
|Risk-free interest rate |     
|Forfeiture rate         |     
|Dividend rate           |     
|Expected life in years  |     

Based on these assumptions, the
weighted average fair value of options granted in each of the last three years where the
exercise price was equal to the fair market value of the stock on the grant date are:
$2.11 in 2003, $9.32 in 2002, and $9.14 in 2001.

56

---

Based on these assumptions, the
weighted average fair value of options granted in each of the last three years where the
exercise price was less than the fair market value of the stock on the grant date are:
$2.89 in 2003 and not applicable in 2002 and 2001.

# NOTE 8. INCOME TAXES

The income tax credit for the years
ended December 31, 2003, 2002 and 2001 consisted of the following (in thousands):

|                            | 2003
|--------------------------- | ----
|Current provision (credit): |     
|Federal                     |     
|State                       |     
|                            |     
|                            |     
|                            |     
|Deferred provision:         |     
|Federal                     |     
|State                       |     
|                            |     
|                            |     
|                            |     
|Income tax credit           |     
|                            |     

A reconciliation of income taxes at the
U.S. federal statutory tax rate to the effective tax rate follows:

|                                   | 2003
|---------------------------------- | ----
|Credit at statutory U.S. tax rates |     
|State income taxes, net of federal |     
|benefit                            |     
|Valuation allowance                |     
|Other, net                         |     
|                                   |     
|Income tax credit                  |     
|                                   |     

Deferred tax assets and liabilities
resulting from temporary differences comprise the following at December 31 (in thousands):

|                                        | 2003
|--------------------------------------- | ----
|Current deferred income tax assets      |     
|(liabilities) attributable to:          |     
|Frequent flyer                          |     
|Accrued liabilities                     |     
|Maintenance expense liability           |     
|Other                                   |     
|                                        |     
|Net current deferred tax assets         |     
|                                        |     
|Noncurrent deferred income tax          |     
|(liabilities) assets attributable to:   |     
|Excess book basis over tax basis of     |     
|property                                |     
|Maintenance expense liability           |     
|Frequent flyer                          |     
|Pension liability                       |     
|Deferred revenue - new aircraft program |     
|Federal net operating losses            |     
|State net operating losses              |     
|AMT carryforwards                       |     
|Valuation allowance                     |     
|Other                                   |     
|                                        |     
|Net noncurrent deferred tax liabilities |     
|                                        |     

As of December 31, 2003, the Company
has state net operating losses of approximately $125 million, which will begin to expire
in the year ending December 31, 2005. In 2003 and 2002, the Company recorded a valuation
allowance on the state net operating losses of $2.7 million and $0.7 million,
respectively, based on the Companys best estimates. As of December 31, 2003, the
Company has recorded federal net operating losses of $11.0 million, which begin to expire
in 2023.

57

---

Income taxes have been settled with
the Internal Revenue Service (IRS) for all years through 1996, and IRS
examinations have been completed through 2002. As a result of the completion of the
examinations, the Company will make payments of approximately $3.9 million in 2004. The
Company believes adequate provision for all outstanding issues has been made for all open
years.

In connection with the Companys
initial public offering in 1995 (the Offering), the Company, Midwest, Midwest
Connect and Kimberly-Clark entered into a Tax Allocation and Separation Agreement
(Tax Agreement). Pursuant to the Tax Agreement, the Company is treated for tax
purposes as if it purchased all of Midwests assets at the time of the Offering, and
as a result, the tax bases of Midwests assets were increased to the deemed purchase
price of the assets. The tax on the amount of the gain on the deemed asset purchase was
paid by Kimberly-Clark. This additional basis is expected to result in increased income
tax deductions and, accordingly, may reduce income taxes otherwise payable by the Company.
Pursuant to the Tax Agreement, the Company will pay to Kimberly-Clark the amount of the
tax benefit associated with this additional basis (retaining 10% of the tax benefit), as
realized on a quarterly basis, calculated by comparing the Companys actual taxes to
the taxes that it would have owed had the increase in basis not occurred. In the event of
certain business combinations or other acquisitions involving the Company, tax benefit
amounts thereafter will not take into account, under certain circumstances, income,
losses, credits or carryovers of businesses other than those historically conducted by
Midwest or the Company. Except for the 10% benefit, the effect of the Tax Agreement is to
put the Company in the same financial position it would have been in had there been no
increase in the tax bases of Midwests assets. The effect of the retained 10% benefit
is reflected in the consolidated financial statements as a reduction in the Companys
provision for income taxes.

# NOTE 9. COMMITMENTS AND
CONTINGENCIES

In February 1997, Midwest Airlines
agreed to pay $9.25 million over 15 years for the naming rights to the Midwest Airlines
Center, an 800,000-square-foot convention center in Milwaukee that opened in July 1998. As
of December 31, 2003, the Company had remaining cash payments on this commitment of $4.7
million.

In April 2002, the Company announced
that it had amended its Boeing 717 aircraft order. The Company placed a firm order for 25
new Boeing 717 aircraft, with purchase rights for an additional 25 aircraft. The firm
order is valued at $940 million, with a remaining value of approximately $526 million
relating to undelivered aircraft as of December 31, 2003. Under an amended purchase
agreement, delivery of the aircraft began in February 2003 and was to continue into 2005
at a rate of one aircraft every month. In July 2003, Midwest Airlines announced that it
was further amending the delivery schedule for the Boeing 717 aircraft. Midwest Airlines
will now receive one aircraft per month through March 2004; subsequent deliveries will
take place approximately one aircraft per quarter until all 25 aircraft on order are
delivered by October 2006.

In April 2001, Midwest Connect signed
a memorandum of understanding placing firm orders for 20 new Embraer regional jets, with
options to purchase 20 additional aircraft. The firm order is valued at $400 million. In
August 2001, the parties signed a purchase agreement related to this order. Under this
purchase agreement, delivery of the 20 aircraft was scheduled to begin in January 2002. In
October 2001, due to ramifications of the events of September 11, Midwest Connect reached
an agreement with Embraer to delay deliveries of the first aircraft to January 2003. For
similar reasons, Midwest Connect reached further agreement with Embraer in March 2002 to
delay delivery of the first aircraft until January 2004. This delay was intended to allow
the Company to concentrate on the introduction of Boeing 717 aircraft to the Midwest
Airlines fleet and provide additional time for Midwest Connect to evaluate financing
alternatives. Midwest Connect plans to use the new Embraer regional jets to expand service
in existing and new markets. Because the regional jets are produced in three sizes, they
are expected to provide Midwest Connect with flexibility to serve markets with differing
capacity demands. The Embraer regional jet program requires less significant pre-delivery
payments than the Boeing 717 program but will require long-term financing on or after
delivery. Midwest Connect believes long-term financing will be difficult to obtain given
current industry conditions and Company financial results, and for these reasons, Midwest
Connect reached agreement with Embraer in July 2003 to defer acquisition of these aircraft
until July 2006. The contract has been amended to reflect this agreement. Midwest Connect
will not incur any cost or face claims for breach of contract in relation to the deferral.

58

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As a result of the restructuring of
lease and debt agreements described in Note 5, the Company has significantly lowered its
obligations compared with the obligations under the previous lease and debt agreements.
Included in the restructured agreements are clauses that would make the Companys
obligations, under certain default situations, increase to the amounts under the previous
agreements. The amount of such contingent obligation of the Company is approximately $23.2
million as of December 31, 2003.

The Company is party to routine
litigation incidental to its business. Management believes that none of this litigation is
likely to have a material adverse effect on the Companys consolidated financial
statements.

# NOTE 10. SETTLEMENT OF
ARBITRATION

Midwest Connect currently operates 10
32-passenger Fairchild 328JET regional jets. In September 2001, Midwest Connect settled
its arbitration with Fairchild Dornier GmbH (Fairchild) over the cancellation
of the 428JET program. In the first quarter 2002, the Company recorded as other income
$39.5 million (pre-tax) associated with the settlement.

# NOTE 11. RETIREMENT AND
BENEFIT PLANS

The Company uses a December 31
measurement date for purposes of calculations of plan assets and obligations and all other
related measurements.

Qualified Defined Benefit Plan In
2003 and 2002, Midwest Airlines had one qualified defined benefit plan: the Pilots
Supplemental Pension Plan. This plan provides retirement benefits to Midwest Airlines
pilots represented by their collective bargaining agreement.

Nonqualified Defined Benefit Plans
Nonqualified defined benefit plans consist of an Executive Supplemental Plan and
a Pilots Nonqualified Supplemental Pension Plan. The Executive Supplemental
Plan provides annuity benefits for salary in excess of IRS salary limits that could not
be applied in the qualified Salaried Employees Retirement Plan. The Executive
Supplemental Plan was terminated as of March 31, 2000, however benefits remain frozen in
this account while the Company evaluates alternatives. The other Midwest Airlines
nonqualified defined benefit plan is the Pilots Nonqualified Supplemental Pension
Plan. This plan provides Midwest Airlines pilots with annuity benefits for salary in
excess of IRS salary limits that cannot be covered by the qualified Pilots Supplemental
Pension Plan.

59

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The following table sets forth the
funded status of the plans as of December 31 (in thousands):

|                                            | Midwest
Qualified Defined
Benefit Plans | Midwest
Nonqualified Defined
Benefit Plans
|------------------------------------------- | --------------------------------------- | ------------------------------------------
|2002                                        | 2002                                   
|Change in Benefit Obligation                |                                         |                                           
|Net benefit obligation at beginning of year |                                         |                                           
|Service cost                                |                                         |                                           
|Interest cost                               |                                         |                                           
|Plan amendments                             |                                         |                                           
|Actuarial loss                              |                                         |                                           
|Benefits paid                               |                                         |                                           
|                                            |                                         |                                           
|Net benefit obligation at end of year       |                                         |                                           
|                                           
|
|2002                                        | 2002                                   
|Change in Plan Assets                       |                                         |                                           
|Fair value of assets at beginning of year   |                                         |                                           
|Actual return on plan assets                |                                         |                                           
|Employer contributions                      |                                         |                                           
|Gross benefits paid                         |                                         |                                           
|                                            |                                         |                                           
|Fair value of plan assets at end of year    |                                         |                                           
|                                            |                                         |                                           
|Funded status at end of year                |                                         |                                           
|Unrecognized net actuarial loss             |                                         |                                           
|Unrecognized prior service cost             |                                         |                                           
|                                            |                                         |                                           
|Accrued benefit liability                   |                                         |                                           
|                                            |                                         |                                           
|Weighted-average assumptions                |                                         |                                           
|Discount rate                               |                                         |                                           
|Expected return on plan assets              |                                         |                                           
|Rate of compensation increase               |                                         |                                           

Amounts recognized in the balance
sheet consist of:

|                                        | Midwest
Qualified Defined
Benefit Plans | Midwest
Nonqualified Defined
Benefit Plans
|--------------------------------------- | --------------------------------------- | ------------------------------------------
|2002                                    | 2002                                   
|Amounts recognized in the balance sheet |                                         |                                           
|Accrued benefit liability               |                                         |                                           
|Additional minimum liability            |                                         |                                           
|Intangible asset                        |                                         |                                           
|Accumulated other comprehensive income  |                                         |                                           
|                                        |                                         |                                           
|Net amount recognized at end of year    |                                         |                                           
|                                        |                                         |                                           

The accumulated benefit obligation
for all defined benefit pension plans was $5.5 million and $3.9 million at December 31,
2003 and 2002, respectively.

|                               | December 31
|------------------------------ | -----------
|2002                          
|Projected benefit obligation   |            
|Accumulated benefit obligation |            
|Fair value of plan assets      |            

60

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The net periodic benefit cost of
benefit pension plans for the years ending December 31, 2003, 2002 and 2001, respectively,
includes the following (in thousands):

|                                        | Midwest
Qualified Defined
Benefit Plans | Midwest
Nonqualified Defined
Benefit Plans
|--------------------------------------- | --------------------------------------- | ------------------------------------------
|2002                                    | 2001                                    | 2002                                      
|Components of Net Periodic Benefit Cost |                                         |                                           
|Service cost                            |                                         |                                           
|Interest cost                           |                                         |                                           
|Expected return on assets               |                                         |                                           
|Amortization of:                        |                                         |                                           
|Prior service cost                      |                                         |                                           
|Actuarial loss (gain)                   |                                         |                                           
|                                        |                                         |                                           
|Total net periodic benefit cost         |                                         |                                           

Assumptions for the above table
include a discount rate of 6.00%, 6.75% and 7.75% for 2003, 2002 and 2001, respectively.
The rate of compensation increase for all qualified defined benefit plans was 5.44% for
2003, 2002 and 2001. The rate of compensation increase for all nonqualified defined
benefit plans was 4.38% for 2003, 2002 and 2001. The expected return on plan assets for
all defined benefit plans was 9.00% for 2003, 2002 and 2001.

The Company offers severance
arrangements to certain Midwest Airlines pilots. The liability under this plan at December
31, 2003 was $4.5 million.

Postretirement Health
Care and Life Insurance Benefits

Midwest Airlines allows retirees to
participate in unfunded health care and life insurance benefit plans. Benefits are based
on years of service and age at retirement. The plans are principally non-contributory for
current retirees, and are contributory for most future retirees.

The following table sets forth the
status of the plans as of December 31, 2003 and 2002 respectively (in thousands):

|                                            | 2003
|------------------------------------------- | ----
|Change in Benefit Obligation                |     
|Net benefit obligation at beginning of year |     
|Service cost                                |     
|Interest cost                               |     
|Plan amendments                             |     
|Actuarial loss                              |     
|Gross benefits paid                         |     
|                                            |     
|Net benefit obligation at end of year       |     
|                                            |     
|Change in Plan Assets                       |     
|Fair value of assets at beginning of year   |     
|Employer contributions                      |     
|Gross benefits paid                         |     
|                                            |     
|Fair value of plan assets at end of year    |     
|                                            |     
|Funded status at end of year                |     
|Unrecognized net actuarial loss             |     
|Unrecognized prior service credit           |     
|                                            |     
|Accrued  benefit  liability  recognized  at |     
|end of year                                 |     
|                                            |     
|Weighted-average assumptions                |     
|Discount rate                               |     
|Rate of compensation increase               |     

61

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The net periodic benefit cost of
postretirement health care and life insurance benefits for the years ending December 31,
2003, 2002 and 2001, respectively includes the following (in thousands):

|                                        | 2003
|--------------------------------------- | ----
|Components of Net Periodic Benefit Cost |     
|Service cost                            |     
|Interest cost                           |     
|Amortization of:                        |     
|Prior service costs                     |     
|Actuarial loss                          |     
|                                        |     
|Total net periodic benefit cost         |     
|                                        |     

Assumptions for the above table
include a discount rate of 6.75%, 7.25% and 7.75% for 2003, 2002 and 2001, respectively.
The rate of compensation increase was 4.38% for 2003, 2002 and 2001. As the Company is in
an unfunded position for this plan, there is no expected return on plan assets. A 10.00%
annual rate of increase in the per capita cost of covered health care benefits was assumed
for 2004. The rate was assumed to decrease 1% per year to 5.00% for 2009 and remain at
that level thereafter. A one-percentage-point change in assumed health care cost trend
rates would not have a material effect to the financial statements.

The preset limit on the
Companys annual payment toward retiree healthcare has been reached; all costs above
this preset cap are paid by retirees.

# Plan Assets

The asset allocation for the
Companys U.S. pension plans at the end of 2003 and 2002, and the target allocation
for 2004, by asset category, follows. The fair value of plan assets for these plans is
$3,383,134 and $1,680,382 at the end of 2003 and 2002, respectively. The expected
long-term rate of return on these plan assets was 9.00% in 2003 and 9.00% in 2002. On a
go-forward basis, the expected rate of return will be 8%.

The return on plan assets reflects
the weighted-average of the expected long-term rates of return for the broad categories of
investments held in the plan. The expected long-term rate of return is adjusted when there
are fundamental changes in expected returns on the plan investments; this adjustment takes
into account consideration from the actuary regarding long-term market conditions and
investment management performance.

|                          |  | Percentage of Plan Assets
at Year End
|------------------------- |  | -------------------------------------
|
|Equity securities         |  |                                      
|Fixed income              |  |                                      
|Cash and cash equivalents |  |                                      
|Other                     |  |                                      
|                          |  |                                      
|Total                     |  |                                      
|                          |  |                                      

# Plan Investment Strategy

The Qualified Plan has a Fiduciary
Committee that oversees the investment of the assets of the Plan. The Fiduciary Committee
has created an investment policy for the assets of the Plan. The basic investment strategy
for plan assets provide that over the investment horizon established in the policy, it is
expected that the aggregate Plan assets will meet or exceed:

| | An
absolute annual rate of return of 8%, based on the blended weighted-average return on
equity and fixed income securities based on the target allocation.
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------

| | An
absolute real return (excess of inflation) of 5%.
|- | ----------------------------------------------------

| | The
return of a balanced market index comprised of 75% S&P 500 Stock Index and 25% Lehman
Brothers Intermediate Government/Credit Bond Index.
|- | ---------------------------------------------------------------------------------------------------------------------------------------------

62

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The investment goals above are the
objectives of the aggregate Plan, and are not meant to be imposed on each investment
account (if more than one account is used). The goal of each investment manager, over the
investment horizon, shall be to:

| | Meet
or exceed the market index, or blended market index, selected and agreed upon by the Plan
Fiduciary Committee that most closely corresponds to the style of investment management.
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Display
an overall level of risk in the portfolio that is consistent with the risk associated
with the benchmark specified above. Risk will be measured by the standard deviation of
quarterly returns.
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Specific investment goals and
constraints for each investment manager are incorporated as part of the investment policy.

# Expected Cash Flows

Information about expected cash flows
for the pension and postretirement benefit plans follows:

|Employer Contributions
(in thousands) | Pension
Benefits | Other
Benefits
|------------------------------------- | ---------------- | --------------
|2004 (expected) to plan trusts        | 1,565            | --            
|2004 (expected) to plan participants  | --               | 72            

Qualified Defined Contribution Plans
Midwest Airlines makes monthly contributions to substantially all employees accounts
under the Retirement Account Plan. Company contributions vary based on the age of the
employee. In addition, under the Retirement Account Plan, some employees who were
participants in the terminated Midwest Airlines Pension Plan on March 31, 2000 may
receive additional transition benefits each year.

Company contributions under the
Retirement Account Plan are limited to the extent required by tax provisions. To the
extent contributions to the Retirement Account Plan are limited under tax law, any excess
will be paid pursuant to supplemental retirement arrangements. The amounts expensed and
reflected in the accompanying consolidated statements of operations were $3.8 million,
$4.2 million and $4.6 million, in 2003, 2002 and 2001, respectively.

The Company has two voluntary defined
contribution investment plans covering substantially all employees. Under these plans, the
Company matches a portion of an employees contributions if certain thresholds are
met. Amounts expensed and reflected in the accompanying consolidated statements of
operations were $0.1 million, $0.2 million and $2.0 million in 2003, 2002 and 2001,
respectively. Effective October 1, 2001, Midwest Airlines temporarily suspended matching
contributions to its 401(k) program following the events of September 11. In 2002, Midwest
Airlines reinstated matching contributions using a targeted profitability measure. Midwest
Connect matches 25% of employee contributions up to 10% of an employees salary. In
addition, Midwest Connect will increase matching contributions above that level if
targeted profitability measures are met.

Profit Sharing Plans The Company has
three profit sharing plans: an employee profit sharing plan for substantially all
employees of Midwest Airlines, an employee profit sharing plan for substantially all
employees of Midwest Connect, and an Annual Incentive Plan for key management employees.
Company contributions for all plans are based primarily on achieving specified levels of
profitability. The Company expensed $0, $0 and $0 under these plans during 2003, 2002 and
2001, respectively. During 2003, the Company announced an income-sharing plan that
replaces these plans.

63

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# NOTE 12. SEGMENT
REPORTING

Midwest Airlines and Midwest Connect
constitute the two reportable segments of the Company. The Companys reportable
segments are strategic units that are managed independently because they provide different
services with different cost structures and marketing strategies. No single customer
accounted for more than 10% of revenue. The accounting policies of the reportable segments
are the same as those described in Note 2.

As of December 31, 2003, Midwest
Airlines offered jet service to 23 destinations throughout the United States. As of
December 31, 2003, Midwest Airlines operated a fleet of 28 aircraft  4 DC-9s, 11
MD-81/82s, two MD-88s and 11 Boeing 717s.

Midwest Connect offers point-to-point
service in select markets and increases traffic for Midwest Airlines by providing
passengers with connecting service to Midwest Airlines flights. As of December 31,
2003, Midwest Connect operated a fleet of 14 Beech 1900D turboprop aircraft and 10
Fairchild 328JETs.

Revenue for passengers who travel on
both carriers within a single itinerary is allocated to each entity based on a formula
that is dependent on the fare type paid by the passenger. There were 207,084, 182,095 and
166,380 passengers in 2003, 2002 and 2001, respectively, under the aforementioned pricing
agreement.

Although Midwest Connect is
independent from an operational perspective, Midwest Airlines performs a number of
services for Midwest Connect including, but not limited to, aircraft scheduling, pricing,
reservations, yield management, advertising and fuel procurement. Midwest Connect is
charged a marketing service fee for these services  8.3 %, 8.3% and 8.3% of the
revenue for passengers who travel exclusively on Midwest Connect and approximately $1.16,
$1.16 and $1.16 per passenger for passengers who connect between the carriers for the
years ended December 31, 2003, 2002 and 2001, respectively. These service charges comprise
a majority of the intercompany revenue and expense between the two segments.

Midwest Airlines also performs
treasury functions for Midwest Connect, including centrally controlling cash. Midwest
Connect earns interest income at market rates for any cash managed by Midwest Airlines.
This interest income comprises the intercompany interest income and expense shown as
eliminations in the following information. The total asset elimination consists primarily
of the intercompany payable and receivable balances.

64

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Reportable segments, as defined by
SFAS No. 131, Disclosure about Segments of an Enterprise and Related
Information, are components of an enterprise about which separate financial
information is available that is evaluated regularly by the chief operating decision-maker
in deciding resource allocation and assessing performance.

|2003                                     | Midwest
Airlines | Midwest
Connect | Elimination | Consolidated
|---------------------------------------- | ---------------- | --------------- | ----------- | ------------
|Operating revenues                       |                  |                 | $           | 319,242     
|Operating loss                           |                  |                 |             | (22,799     
|Depreciation and amortization expense    |                  |                 |             | 16,774      
|Interest income                          |                  |                 |             | 1,154       
|Interest expense                         |                  |                 |             | 2,265       
|Loss before income tax credit            |                  |                 |             | (12,942     
|Income tax credit                        |                  |                 |             | (4,529      
|Net loss                                 |                  |                 |             | (8,413      
|Total assets                             |                  |                 |             | 356,498     
|Capital expenditures (including purchase |                  |                
|deposits on flight equipment)            |                  |                 |             | 34,352      
|
|Operating revenues                       |                  |                 | $           | 359,374     
|Operating loss                           |                  |                 |             | (47,529     
|Depreciation and amortization expense    |                  |                 |             | 17,312      
|Impairment loss                          |                  |                 |             | 29,911      
|Interest income                          |                  |                 |             | 1,346       
|Interest expense                         |                  |                 |             | 2,951       
|(Loss) income before income tax (credit) |                  |                
|provision                                |                  |                 |             | (48,924     
|Income tax (credit) provision            |                  |                 |             | (17,124     
|Net (loss) income                        |                  |                 |             | (31,800     
|Total assets                             |                  |                 |             | 324,121     
|Capital expenditures (including purchase |                  |                
|deposits on flight equipment)            |                  |                 |             | 53,614      
|
|Operating revenues                       |                  |                 | $           | 395,335     
|Operating loss                           |                  |                 |             | (32,820     
|Depreciation and amortization expense    |                  |                 |             | 18,221      
|Impairment loss                          |                  |                 |             | 8,839       
|Interest income                          |                  |                 |             | 1,793       
|Interest expense                         |                  |                 |             | 2,984       
|Loss before income tax credit            |                  |                 |             | (19,227     
|Income tax credit                        |                  |                 |             | (7,114      
|Net loss                                 |                  |                 |             | (12,113     
|Total assets                             |                  |                 |             | 338,322     
|Capital expenditures (including purchase |                  |                
|deposits on flight equipment)            |                  |                 |             | 37,649      

65

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# NOTE 13. VALUATION AND
QUALIFYING ACCOUNTS

|                                             | Balance
at Beginning
of Year | Additions
Charged
to Expense | Deductions from
Reserve | Balance
at End
of Year
|-------------------------------------------- | ---------------------------- | ---------------------------- | ----------------------- | ----------------------
|Allowance for doubtful accounts:             |                              |                              |                         |                       
|Year ended December 31, 2003                 |                              |                              |                         | $   133,000           
|Year ended December 31, 2002                 |                              |                              |                         | $   149,000           
|Year ended December 31, 2001                 |                              |                              |                         | $   226,000           
|Valuation allowance for deferred tax assets: |                              |                             
|Year ended December 31, 2003                 |                              |                              |                         | $2,675,000            
|Year ended December 31, 2002                 |                              |                              |                         | $2,000,000            
|Year ended December 31, 2001                 |                              |                              |                         | --                    
|Allowance for obsolete inventory:            |                              |                             
|Year ended December 31, 2003                 |                              |                              |                         | $   998,000           
|Year ended December 31, 2002                 |                              |                              |                         | $   834,000           
|Year ended December 31, 2001                 |                              |                              |                         | $   670,000           

# NOTE 14. QUARTERLY
FINANCIAL SUMMARY (Unaudited)

(In Thousands, Except Per
Share Data)(3)

|                                    | Three Months Ended
|----------------------------------- | ------------------
|
|Operating revenues                  |                   
|Operating expenses                  |                   
|Other income (expense), net (2)     |                   
|Operating loss                      |                   
|(Loss) income before income taxes   |                   
|(Credit) provision for income taxes |                   
|Net (loss) income                   |                   
|(Loss) income per share - basic:    |                   
|Net (loss) income                   |                   
|(Loss) income per share - diluted:  |                   
|Net (loss) income                   |                   
|
|Operating revenues                  |                   
|Operating expenses (1)              |                   
|Other income (expense), net (2)     |                   
|Operating (loss) income             |                   
|Income (loss) before income taxes   |                   
|Provision (credit) for income taxes |                   
|Net income (loss)                   |                   
|Income (loss) per share - basic:    |                   
|Net income (loss)                   |                   
|Income (loss) per share - diluted:  |                   
|Net income (loss)                   |                   

| | (1) | Operating
expenses for the three-month period ended June 30, 2003 include $4,600
               associated with the early recognition of lease expense on five DC-9s
removed                from service prior to the end of the period. Operating expenses
for the                three-month period ended September 30, 2003 include a $4,000 loss
recorded on                the sale/leaseback of one MD-80 aircraft. Operating expenses
for the three-month                period ended March 31, 2002 include an impairment loss
of $29,911 related to the                accelerated retirement of the Midwest DC-9 fleet
in anticipation of accelerated                deliveries of Boeing 717 aircraft.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (2) | Other
income (expense), net for the three-month period ended June 30, 2003
               includes $11,400 of income related to the reimbursement of security costs
under                the Emergency Wartime Supplemental Appropriations Act. Other income
(expense),                net for the three-month period ended March 31, 2002 includes
$39,500 associated                with the Companys settlement of its arbitration
with Fairchild Dornier                GMbH over the cancellation of its 428 JET program.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (3) | Numbers
in this table may not be recalculated due to rounding.
| | --- | --------------------------------------------------------------

66

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ITEM 9. CHANGES IN AND
DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

There were no changes in or
disagreements on any matters of accounting principles or financial statement disclosure
between the Company and its independent auditors during the two most recent fiscal years
or any subsequent interim period.

# ITEM 9A. CONTROLS AND
PROCEDURES

(a)    
          Evaluation of disclosure controls and procedures. In accordance with Rule
          13a-15(b) of the Securities Exchange Act of 1934 (the Exchange Act),
          as of the end of the period covered by this Annual Report on Form 10-K,
          the Companys management evaluated, with the participation of the
          Companys principal executive officer and principal financial officer, the
          effectiveness of the design and operation of the Companys disclosure
          controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act).
          Based upon their evaluation of these disclosure controls and procedures, the
          Companys Chairman of the Board, President and Chief Executive Officer and
          the Companys Senior Vice President and Chief Financial Officer have
          concluded that the disclosure controls and procedures were effective as of the
          date of such evaluation to ensure that material information relating to the
          Company, including its consolidated subsidiaries, was made known to them by
          others within those entities, particularly during the period in which this
          Annual Report on Form 10-K was being prepared.

(b)    
          Changes in internal controls. There were no changes in the Companys
          internal control over financial reporting that occurred during the quarter ended
          December 31, 2003 that have materially affected, or are reasonably likely to
          materially affect, the Companys internal control over financial reporting.

67

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# PART III

# ITEM 10. DIRECTORS AND
EXECUTIVE OFFICERS OF THE REGISTRANT

Certain of the information required
in this item is set forth under the headings Election of Directors,
Executive Officers and Section 16(a) Beneficial Ownership Report
Compliance, which is incorporated herein by reference to the Companys
definitive Proxy Statement for the Annual Meeting of Shareholdersto be held on
April 22, 2004.

Code of Ethics The Company has
adopted a written code of ethics that applies to its Chief Executive Officer, Chief
Financial Officer, Controller and all other financial officers and executives performing
similar functions. As discussed previously under Available Information, a
copy of this code of ethics is available on the Companys Web site. The Company
intends to satisfy the disclosure requirements under Item 10 of Form 8-K regarding
amendments to, or waivers from, the code of ethics by posting such information on its Web
site at www.midwestairlines.com.

# ITEM 11. EXECUTIVE
COMPENSATION

The information required in this item
is set forth under the heading Executive Compensation, which is incorporated
herein by reference to the Companys definitive Proxy Statement for the Annual
Meeting of Shareholders to be held on April 22, 2004; provided, however, that the
subsection entitled Board Compensation Committee Report on Executive
Compensation shall not be deemed to be incorporated herein by reference.

ITEM 12. SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The information required in this Item
(other than the information required by Item 201(d) of Regulation S-K) is set forth under
the heading Stock Ownership of Management and Others, incorporated herein by
reference to the Companys definitive Proxy Statement for the Annual Meeting of
Shareholders to be held on April 22, 2004.

The information with respect to Item
201(d) of Regulation S-K as of December 31, 2003, is as follows:

# Equity Compensation Plan
Information

|Plan category                 | Number of securities to be
issued upon exercise of
outstanding options,
warrants and rights

(a) | Weighted-average exercise
price of outstanding options,
warrants and rights

(b) | Number of securities
remaining available for
future issuance under equity
compensation plans
(excluding securities
reflected in column (a)) (1)
(c)
|----------------------------- | ------------------------------------------------------------------------------------------------ | -------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------
|Equity compensation plans     |                                                                                                  |                                                                                  |                                                                                                                                                    
|approved by security holders  | 4,540,562                                                                                        | $   10.23                                                                        | 933,426                                                                                                                                            
|Equity compensation plans not
|approved by security holders  | N.A.                                                                                             | N.A.                                                                             | 56,250                                                                                                                                             
|Total                         | 4,540,562                                                                                        | $   10.23                                                                        | 989,676                                                                                                                                            

|(1) | 56,250
shares of Common Stock may be issued under the Midwest Express Holdings,
               Inc. Annual Incentive Plan (the Incentive Plan), which has not
been                approved by the Companys shareholders.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The Incentive Plan provides
incentives to create additional shareholder value by establishing objectives that are
deemed to be in the best long-range interests of the Company and then making annual
payments of incentive awards to participants whose performance meaningfully contributed to
the attainment of these objectives. Annual payments of incentive awards may be made in
cash or common stock. Officers and other employees of the Company may participate, as
determined by the administrator, which is the Companys Compensation Committee in the
case of the officers and the Companys Chief Executive Officer in the case of the
other employees. The Companys Compensation Committee may amend, interpret and
construe the Incentive Plan. A total of 56,250 shares of Common Stock may be issued under
the Incentive Plan, all of which remain, subject to appropriate adjustments in the event
of stock dividends (other than a stock dividend declared in lieu of an ordinary cash
dividend), spin-off, merger, consolidation, recapitalization or split-up, combination or
exchange of shares.

68

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Under the Incentive Plan,
shareholder value added is a dollar amount equal to the excess of net
operating profit after tax over a calculated cost of the capital employed in the Company.
The plan provides that target awards under the plan may focus on corporate
shareholder value added, subsidiary shareholder value added and/or individual performance
measures that drive shareholder value as determined by the Companys Compensation
Committee or the Chief Executive Officer, as the case may be. The Companys
Compensation Committee or the Chief Executive Officer, as the case may be, approves for
each eligible officer or employee an annual incentive target award that represents a
percentage of the base salary range midpoint for the employees position. The
Incentive Plan does not provide for a maximum award, however to provide an incentive for
officers and employees to remain with the Company, the plan specifies that any awards
earned in excess of an employees target award are credited to an account for the
participant in an award bank. A participants balance in the award bank
is subject to forfeiture, and one-third of the balance is payable in each of the following
three years, assuming continued employment.

Incentive awards are paid in one lump
sum in the first quarter after the Companys fiscal year end. The incentive award is
paid in cash or, at the discretion of the administrator, in whole or in part by delivering
shares of common stock of the Company having a fair market value, determined as of the
last business day of the Companys fiscal year end to which the award relates, equal
to the amount of the incentive award to be paid in shares of common stock.

# ITEM 13. CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS

The information required in this item
is set forth under the heading Election of Directors, which is incorporated
herein by reference to the Companys definitive Proxy Statement for the Annual
Meeting of Shareholders to be held on April 22, 2004.

# ITEM 14. PRINCIPAL
ACCOUNTANT FEES AND SERVICES

The information required in this item
is set forth under the heading Independent Auditors, which is incorporated
herein by reference to the Companys definitive Proxy Statement for the Annual
Meeting of Shareholders to be held on April 22, 2004.

69

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# PART IV

# ITEM 15. EXHIBITS,
FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

# (a)(1) Financial
Statements

Included in Item 8 of Part II of this
Annual Report on Form 10-K are the following: Independent Auditors Report,
Consolidated Statements of Operations, Consolidated Balance Sheets, Consolidated
Statements of Cash Flows, Consolidated Statements of Shareholders Equity and Notes
to Consolidated Financial Statements.

# (a)(2) Financial
Statement Schedules

The information required in Schedule
II is incorporated by reference to Note 13 of the Notes to Consolidated Financial
Statements contained in this Annual Report on Form 10-K.

# (b) Reports on Form 8-K

The following reports on Form 8-K
were filed during the quarter ended December 31, 2003:

|Date Filed        | Date of Report     | Item                                                               
|----------------- | ------------------ | -------------------------------------------------------------------
|October 1, 2003   | September 29, 2003 | The Company reported a financing transaction under Items 5 and 7 of
|                  |                    | Form 8-K.                                                          
|October 14, 2003  | October 10, 2003   | The Company filed a news release under Items 7 and 12 of Form 8-K  
|                  |                    | reporting September performance data.                              
|October 23, 2003  | October 22, 2003   | The Company filed a news release announcing the completion of a    
|                  |                    | financing transaction under Item 5 of Form 8-K and a news release  
|                  |                    | announcing the Company's reporting of financial results for the    
|                  |                    | quarter ended September 30, 2003 under Items 7 and 12.             
|November 24, 2003 | November 21, 2003  | The Company filed a news release under Items 5 and 7 of Form 8-K   
|                  |                    | announcing the results of the Company's special shareholder meeting
|                  |                    | on November 21, 2003.                                              
|November 26, 2003 | November 25, 2003  | The Company filed a news release under Items 5 and 7 of Form 8-K   
|                  |                    | announcing completion of a debt transaction and an equity          
|                  |                    | transaction.                                                       
|December 9, 2003  | December 4, 2003   | The Company filed a news release under Items 5 and 7 of Form 8-K   
|                  |                    | announcing a Wisconsin circuit court decision with regard to ad    
|                  |                    | valorem property taxes for hub airlines.                           
|December 15, 2003 | December 10, 2003  | The Company filed a news release under Items 5 and 7 of Form 8-K   
|                  |                    | announcing the CFO's planned resignation from the Company.         

# (c) Exhibits

The Exhibits filed or incorporated by
reference herewith are as specified in the Exhibit Index.

70

---

# SIGNATURES

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

|               | MIDWEST AIR GROUP, INC.                                     
|-------------- | ------------------------------------------------------------
|               | Registrant                                                  
|March 15, 2004 | By /s/ TIMOTHY E. HOEKSEMA                                  
|               | Timothy E. Hoeksema                                         
|               | Chairman of the Board, President and Chief Executive Officer

Pursuant to the requirements of the
Securities Exchange Act of 1934, this Report has been signed below by the following
persons on behalf of the registrant and in the capacities indicated on March 15, 2004.

|/s/ TIMOTHY E. HOEKSEMA       | Chairman of the Board of Directors,              
|----------------------------- | -------------------------------------------------
|Timothy E. Hoeksema           | President and Chief Executive Officer            
|                              | (Principal Executive Officer)                    
|/s/ ROBERT S. BAHLMAN         | Senior Vice President and Chief Financial Officer
|Robert S. Bahlman             | (Principal Financial and Accounting Officer)     
|/s/ JOHN F. BERGSTROM         | Director                                         
|John F. Bergstrom            
|/s/ JAMES G. GROSKLAUS        | Director                                         
|James G. Grosklaus           
|/s/ ULICE PAYNE, JR           | Director                                         
|Ulice Payne, Jr              
|/s/ SAMUEL K. SKINNER         | Director                                         
|Samuel K. Skinner            
|/s/ ELIZABETH T. SOLBERG      | Director                                         
|Elizabeth T. Solberg         
|/s/ RICHARD H. SONNENTAG      | Director                                         
|Richard H. Sonnentag         
|/s/ FREDERICK P. STRATTON, JR | Director                                         
|Frederick P. Stratton, Jr    
|/s/ DAVID H. TREITEL          | Director                                         
|David H. Treitel             
|/s/ JOHN W. WEEKLY            | Director                                         
|John W. Weekly               

71

---

# EXHIBIT INDEX

# MIDWEST AIR GROUP, INC. Annual Report on Form
10-K FOR THE FISCAL YEAR
ENDED DECEMBER 31, 2003

Exhibit Number     Document Description

|(3.1) | Restated
 Articles  of  Incorporation  (incorporated  by  reference  to Exhibit  3.1 to the
 Company's  Registration                Statement on Form 8-B filed May 2, 1996 (File No.
1-13934)).
|----- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3.2) | By-laws
of the Company as amended  through April 29, 1999  (incorporated  by reference to Exhibit
3 to the Company's                Quarterly Report on Form 10-Q for the quarter ended
June 30, 1999 (File No. 1-13934)).
|----- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3.3) | Articles
of  Amendment  relating to Series A Junior  Participating  Preferred  Stock
 (incorporated  by reference to                Exhibit 3.3 to the Company's Registration
Statement on Form 8-B filed May 2, 1996 (File No. 1-13934)).
|----- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3.4) | Articles
of Amendment relating to increase in authorized shares.
|----- | ----------------------------------------------------------------

|(4.1) | Rights
Agreement,  dated February 14, 1996,  between the Company and U.S. Bank National
 Association as successor in                interest to Firstar Trust Company
(incorporated by reference to Exhibit 4.1 to the Company's  Registration Statement
               on Form 8-A filed February 15, 1996 (File No. 1-13934)).
|----- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4.2) | Amendment
to the Rights Agreement,  dated April 19, 1996, between the Company and U.S. Bank
National  Association as                successor  in  interest  to Firstar  Trust
 Company  (incorporated  by  reference  to Exhibit  4.1 to the  Company's
               Registration Statement on Form 8-B filed May 2, 1996 (File No. 1-13934)).
|----- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4.3) | Amendment
to Rights  Agreement,  effective as of September 30, 2002, by and among U.S. Bank,
 National  Association,                the Company and American Stock Transfer & Trust
Company  (incorporated  by reference to Exhibit 4.3 to the Company's
               Annual Report on Form 10-K for the year ended December 31, 2002 (File No.
1-13934)).
|----- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4.4) | Form
of Common Stock  Purchase  Warrant,  dated as of August 19, 2003,  issued to the parties
named on the signature                pages to the related  Registration  Rights
 Agreement  (incorporated  by reference  to Exhibit 4.2 to the  Company's
               Current Report on Form 8-K filed September 5, 2003 (File No. 1-13934)).
|----- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4.5) | Form
of Convertible  Senior Secured Note  (incorporated by reference to Exhibit 4.3 to the
Company's  Current Report                on Form 8-K filed October 1, 2003 (File No.
1-13934)).
|----- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(10.1) | Lease
Agreement  between  Milwaukee County and Midwest  Airlines,  dated May 12, 1988
 (incorporated by reference to                Exhibit 10.4 to the Company's Registration
Statement on Form S-1 (File No. 33-95212) (the "S-1")).
|------ | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(10.2) | Airline
Lease, as amended,  between  Milwaukee County and Midwest Airlines,  dated October 1,
1984  (incorporated by                reference to Exhibit 10.5 to the S-1).
|------ | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(10.3) | Omaha
Airport  Authority  Agreement and Lease at Eppley Airfield with Midwest Airlines between
the Airport Authority                of the City of Omaha and Midwest Airlines
(incorporated by reference to Exhibit 10.6 to the S-1).
|------ | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(10.4) | Airline
Lease, as amended,  between Milwaukee County and Midwest Connect,  dated November 23,
1994  (incorporated by                reference to Exhibit 10.7 to the S-1).
|------ | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(10.5) | Lease
Agreement  between Milwaukee County and Phillip Morris  Incorporated,  dated October 7,
1982, to which Midwest                Connect has succeeded as lessee (incorporated by
reference to Exhibit 10.8 to the S-1).
|------ | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(10.6) | Tax
Allocation and Separation Agreement among  Kimberly-Clark  Corporation,  K-C Nevada,
Inc., the Company,  Midwest                Airlines and Midwest  Connect dated September
27, 1995  (incorporated  by reference to Exhibit 10.1 to the Company's
               Quarterly Report on Form 10-Q for the quarter ended September 30, 1995
(File No. 1-13934)).
|------ | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(10.7) | Guarantee
Fee Agreement between  Kimberly-Clark  Corporation and the Company dated September 27,
1995  (incorporated                by reference to Exhibit 10.3 to the  Company's
 Quarterly  Report on Form 10-Q for the quarter  ended  September 30,                1995
(File No. 1-13934)).
|------ | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(10.8) | Employee
 Matters  Agreement  between   Kimberly-Clark   Corporation  and  the  Company  dated
 September  27,  1995                (incorporated  by reference to Exhibit 10.4 to the
 Company's  Quarterly  Report on Form 10-Q for the quarter  ended
               September 30, 1995 (File No. 1-13934)).
|------ | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(10.9) | Tenth
Amendment to Airline Lease between Milwaukee County and Midwest Airlines,  dated August
18, 1997 (incorporated                by reference to Exhibit 10.9 to the Company's
 Annual Report on Form 10-K for the year ended December 31, 1997 (File                No.
1-13934)).
|------ | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(10.10) | Eleventh
 Amendment  to Airline  Lease  between  Milwaukee  County and Midwest  Airlines,  dated
 December  17, 1997                (incorporated  by reference to Exhibit 10.10 to the
Company's Annual Report of Form 10-K for the year ended December                31, 1997
(File No. 1-13934)).
|------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(10.11) | Twelfth
Amendment to Airline Lease, as amended between  Milwaukee County and Midwest Airlines,
 dated April 21, 1998                (incorporated by reference to Exhibit 10 to the
Company's  Quarterly Report on Form 10-Q for the quarter ended March                31,
1998 (File No. 1-13934)).
|------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

72

---

Exhibit Number     Document Description

|(10.12)+ | Assignment
of Rights Agreement between Dolphin Trade & Finance,  LTD and Midwest  Airlines,  dated
November 14, 1997                (incorporated  by reference to Exhibit 10.11 to the
Company's Annual Report on Form 10-K for the year ended December                31, 1997
(File No. 1-13934)).
|-------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(10.13)* | Midwest
 Express  Holdings,  Inc.  1995 Stock Option Plan, as amended  through  February 13, 1997
 (incorporated  by                reference  to Exhibit  4.2 to the  Company's
 Registration  Statement  on Form S-8 (File No.  333-44253)).  (Further
               amendment effected on April 25, 2001. See Exhibit (10.24) below).
|-------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(10.14)* | Midwest
 Express  Holdings,  Inc.  1995 Stock Plan for  Outside  Directors,  as amended  through
 February  20, 2002                (incorporated  by reference to Exhibit 10.14 to the
Company's Annual Report on Form 10-K for the year ended December                31, 2001
(File No. 1-13934)).
|-------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(10.15)* | Annual
Incentive  Compensation  Plan,  amended through February 11, 1998 (incorporated by
reference to Exhibit 10.14                to the Company's Annual Report on Form 10-K for
the year ended December 31, 1997 (File No. 1-13934)).
|-------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(10.16)* | Supplemental
 Benefits Plan  (incorporated by reference to Exhibit 10.19 to the Company's Annual
Report on Form 10-K                for the year ended December 31, 1995 (File No.
1-13934)).
|-------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(10.17)* | Form
of Key Executive Employment and Severance Agreement between the Company and each of
Timothy E. Hoeksema,  Carol                N. Skornicka,  Robert S. Bahlman, David C.
Reeve, Christopher I. Stone and Thomas J. Vick (incorporated by reference
               to Exhibit 10.17 to the Company's Registration Statement on Form S-1 (File
No. 333-110639)).
|-------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(10.18)* | Form
of Key  Executive  Employment  and Severance  Agreement  between the Company and Dennis
J. O'Reilly and certain                other  officers  (incorporated  by reference to
Exhibit  10.17 to the Company's  Registration  Statement on Form S-1                (File
No. 333-110639)).
|-------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(10.19) | Thirteenth
 Amendment to Airline Lease, as amended between  Milwaukee  County and Midwest  Airlines,
 dated April 5,                1999  (incorporated by reference to Exhibit 10 to the
Company's  Quarterly Report on Form 10-Q for the quarter ended                March 31,
1999 (File No. 1-13934)).
|------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(10.20) | Fourteenth
 Amendment to Airline Lease, as amended between  Milwaukee  County and Midwest  Airlines,
 dated June 15,                1999  (incorporated by reference to Exhibit 10 to the
Company's  Quarterly Report on Form 10-Q for the quarter ended                June 30,
1999 (File No. 1-13934)).
|------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(10.21) | Fifteenth
 Amendment to Airline Lease, as amended between Milwaukee County and Midwest Airlines,
 dated February 16,                2000  (incorporated by reference to Exhibit 10 to the
Company's  Quarterly Report on Form 10-Q for the quarter ended                March 31,
2000 (File No. 1-13934)).
|------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(10.22) | Seventeenth
 Amendment to Airline Lease, as amended between  Milwaukee County and Midwest  Airlines,
 dated June 29,                2000  (incorporated by reference to Exhibit 10 to the
Company's  Quarterly Report on Form 10-Q for the quarter ended                September
30, 2000 (File no. 1-13934)).
|------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(10.23) | Sixteenth
 Amendment to Airline Lease, as amended between  Milwaukee County and Midwest  Airlines,
 dated January 1,                2001  (incorporated  by reference to Exhibit  10.23 to
the  Company's  Annual Report on Form 10-K for the year ended                December 31,
2000 (File No. 1-139394)).
|------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(10.24)* | Amendment
to Midwest  Express  Holdings,  Inc. 1995 Stock Option Plan, as approved by the Company's
 shareholders on                April 25, 2001  (incorporated  by reference to Appendix B
to the Notice of Annual Meeting and Proxy Statement of the                Company for the
Annual Meeting of the Shareholders on April 25, 2002 (File No. 1-3934)).
|-------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(10.25) | Senior
Secured  Revolving Credit Agreement dated as of August 31, 2001, among the Company,  the
several lenders from                time to time parties  thereto and U.S. Bank National
 Association.  (incorporated  by reference to Exhibit 10 to the                Company's
Quarterly Report on Form 10-Q for the quarter ended September 30, 2001 (File No.
1-13934)).
|------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(10.26) | First
 Amendment  to Senior  Secured  Revolving  Credit  Agreement,  dated as of January  9,
2002,  by and among the                Company,  the lenders party thereto and U.S. Bank
National  Association  (incorporated by reference to Exhibit 10.26                to the
Company's Annual Report on Form 10-K for the year ended December 31, 2001 (File No.
1-13934)).
|------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(10.27) | Eighteenth
 Amendment to Airline Lease, as amended between  Milwaukee  County and Midwest  Airlines,
 dated July 27,                2001  (incorporated  by reference to Exhibit  10.27 to the
 Company's  Annual Report on Form 10-K for the year ended                December 31,
2001 (File No. 1-13934)).
|------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(10.28) | Second
Amendment to Senior Secured Revolving Credit Agreement,  dated as of June 28, 2002, by
and among the Company,                the lenders  party  thereto and U.S. Bank  National
 Association  (incorporated  by reference to Exhibit 10.1 to the                Company's
Quarterly Report on Form 10-Q for the quarter ended September 30, 2002 (File No.
1-13934)).
|------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(10.29) | Third
 Amendment  to Senior  Secured  Revolving  Credit  Agreement,  dated as of August 29,
 2002,  by and among the                Company, the lenders party thereto and U.S. Bank
National Association  (incorporated by reference to Exhibit 10.2 to                the
Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2002 (File
No. 1-13934)).
|------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

73

---

Exhibit Number     Document Description

|(10.30) | Fourth
 Amendment to Senior Secured  Revolving  Credit  Agreement,  dated as of September 30,
2002, by and among the                Company, the lenders party thereto and U.S. Bank
National Association  (incorporated by reference to Exhibit 10.3 to                the
Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2002 (File
No. 1-13934)).
|------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(10.31) | Fifth
 Amendment  to Senior  Secured  Revolving  Credit  Agreement,  dated as of October  7,
2002,  by and among the                Company, the lenders party thereto and U.S. Bank
National Association  (incorporated by reference to Exhibit 10.4 to                the
Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2002 (File
No. 1-13934)).
|------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(10.32) | Intercreditor
 Agreement,  dated as of October 7, 2002, by and among U.S. Bank National  Association;
 Bank One, NA;                M&I Marshall & Ilsley Bank; Thrivent Financial for
Lutherans;  and the Company (incorporated by reference to Exhibit                10.5 to
the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2002
(File No. 1-13934)).
|------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(10.33)+ | General
Terms Agreement,  dated August 13, 2001 (the "August Terms Agreement"),  between
Rolls-Royce Corporation and                Astral Aviation,  Inc.  ("Astral") and Side
Letter Number One to the August Terms Agreement,  dated August 13, 2001,
               between  Rolls-Royce  Corporation and Astral  (incorporated by reference
to Exhibit 10.1 to the Company's  Quarterly                Report on Form 10-Q for the
quarter ended June 30, 2002 (File No. 1-13934)).
|-------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(10.34)+ | Purchase
 Agreement  DCT-043/01,  dated August 13, 2001 ("Embraer  Purchase  Agreement"),  between
Embraer - Empresa                Brasileira de Aeronautica S.A. ("Embraer") and Astral;
Letter Agreement DCT-044/01,  dated August 13, 2001 ("Embraer                Letter
Agreement"),  between Embraer and Astral relating to Embraer Purchase  Agreement,
 including Amendment No. 01                to Embraer Letter  Agreement,  dated
 September 27, 2001,  between Embraer and Astral;  Amendment  No. 01 to Embraer
               Purchase  Agreement,  dated September 27, 2001,  between Embraer and
Astral;  Amendment  No. 02 to Embraer  Purchase                Agreement,  dated October
19, 2001, between Embraer and Astral; and Amendment No. 03 to Embraer Purchase
 Agreement,                dated  March 6, 2002,  between  Embraer and Astral
 (incorporated  by  reference  to Exhibit  10.2 to the  Company's
               Quarterly Report on Form 10-Q for the quarter ended June 30, 2002 (File
No. 1-13934)).
|-------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(10.35)+ | General
Terms Agreement,  dated April 11, 2002 (the "April Terms Agreement"),  between
Rolls-Royce Deutschland Ltd &               Co KG ("Rolls-Royce") and Midwest Airlines
and Side Letter Agreement Number One to the April Terms Agreement,  dated
               April 12,  2002,  between  Rolls-Royce  and Midwest  Airlines
 (incorporated  by  reference  to Exhibit  10.3 to the                Company's Quarterly
Report on Form 10-Q for the quarter ended June 30, 2002 (File No. 1-13934)).
|-------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(10.36)+ | Aircraft
General Terms Agreement Number AGTA-MWE, dated September 28,  2001 (the "AGTA-MWE Terms
Agreement"),  among                The Boeing Company,  and its  wholly-owned  subsidiary
 McDonnell  Douglas  Corporation  ("McDonnell"),  and Midwest                Airlines;
 Letter Agreement  (6-1162-RCN-1483)  to the AGTA-MWE Terms Agreement and 717 Purchase
 Agreement (defined                below),  dated September 28, 2001 ("Letter  Agreement
No. 1 to AGTA-MWE"),  between  McDonnell and Midwest Airlines;                and Letter
Agreement  (6-1162-RCN-1484) to the AGTA-MWE Terms Agreement and 717 Purchase Agreement,
 dated September                28, 2001 ("Letter Agreement No. 2 to AGTA-MWE"),  between
McDonnell and Midwest Airlines  (incorporated by reference                to Exhibit
 10.4 to the  Company's  Quarterly  Report on Form 10-Q for the  quarter  ended  June 30,
 2002 (File No.                1-13934)).
|-------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(10.37)+ | Purchase
Agreement Number 2371, dated September 28, 2001 ("717 Purchase  Agreement"),  between
McDonnell and Midwest                Airlines;  Supplemental  Agreement  No. 1 to 717
Purchase  Agreement,  dated April 12, 2002,  between  McDonnell and
               Midwest  Airlines;  Letter Agreement No. 1 to AGTA-MWE (see above);
 Letter Agreement No. 2 to AGTA-MWE (see above);                Letter Agreement
 (6-1162-RCN-1497)  to 717 Purchase  Agreement,  dated  September 28,  2001,  between
McDonnell and                Midwest Airlines;  Letter Agreement  (6-1162-RCN-1503) to
717 Purchase Agreement,  dated September 28, 2001, between                McDonnell and
Midwest Airlines;  Letter Agreement  (6-1162-RCN-1593) to 717 Purchase Agreement,  dated
September 28,                2001, between McDonnell and Midwest Airlines;  Letter
Agreement  (6-1162-RCN-1476) to 717 Purchase Agreement,  dated                September
28, 2001,  between McDonnell and Midwest Airlines;  Letter Agreement  (6-1162-RCN-1481R1)
 to 717 Purchase                Agreement,  dated April 12, 2002, between McDonnell and
Midwest Airlines; Letter Agreement  (6-1162-RCN-1482) to 717                Purchase
 Agreement,  dated  September  28, 2001,  between  McDonnell  and Midwest  Airlines;  and
Letter  Agreement                (6-1162-MJB-002)  to 717 Purchase  Agreement,  dated
 September 28, 2001,  between  McDonnell  and Midwest  Airlines
               (incorporated  by reference to Exhibit 10.5 to the  Company's  Quarterly
 Report on Form 10-Q for the quarter  ended                June 30, 2002 (File No.
1-13934)).
|-------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(10.38) | Sixth
Amendment to Senior Secured  Revolving Credit Agreement and Limited Waiver,  dated as of
February 18, 2003, by                and among the Company,  the lenders party thereto
and U.S. Bank National  Association  (incorporated by reference to                Exhibit
10.39 to the Company's Annual Report on Form 10-K for the year ended December 31, 2002
(File No. 1-13934)).
|------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(10.39) | Seventh
Amendment to Senior Secured  Revolving Credit Agreement and Limited Waiver,  dated as of
August 29, 2003, by                and among the Company,  the lenders party thereto and
U.S. Bank National  Association  (incorporated by reference to                Exhibit 10
to the Company's Current Report on Form 8-K filed September 5, 2003 (File No. 1-13934)).
|------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

74

---

Exhibit Number     Document Description

|(10.40) | Partial
Termination,  Consent and Cash Collateral Agreement, dated as of October 21, 2003, by and
among the Company,                the lenders  party thereto and U.S. Bank  National
 Association  (incorporated  by reference to Exhibit 10.40 to the
               Company's Registration Statement on Form S-1 (File No. 333-110639)).
|------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(10.41) | Form
of Basic Moratorium Note  (incorporated by reference to Exhibit 4.1 to the Company's
Current Report on Form 8-K                filed September 5, 2003 (File No. 1-13934)).
|------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(10.42) | Midwest
Express Holdings, Inc. 2003 All-Employee Stock Option Plan.
|------- | -------------------------------------------------------------------

|(21) | List
of the Company's  subsidiaries  (incorporated by reference to Exhibit 21 to the Company's
Annual Report on Form                10-K for the year ended December 31, 2000 (File No.
1-139344)).
|---- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(23) | Consent
of Deloitte & Touche LLP, Independent Auditors.
|---- | -------------------------------------------------------

|(31.1) | Certification
of Chief Executive Officer pursuant to Rule 13a-14(a).
|------ | --------------------------------------------------------------------

|(31.2) | Certification
of Chief Financial Officer pursuant to Rule 13a-14(a).
|------ | --------------------------------------------------------------------

|(32) | Certification
of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350.
|---- | --------------------------------------------------------------------------------------------------------

| | + | Portions
 of this  exhibit  have been  redacted  and are subject to a  confidential  treatment
 request  filed with the                 Secretary of Securities and Exchange  Commission
 pursuant to Rule 24b-2 under the Securities  Exchange Act of 1934, as
                amended. The redacted material was filed separately with the Securities
and Exchange Commission.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | * | A
management contract or compensatory plan or arrangement.
| | - | ----------------------------------------------------------

75