**Exhibit99.1**

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTINGFIRM

To the Board of Directors ofMesaba Aviation, Inc. Eagan, Minnesota

We have audited the accompanying balance sheets ofMesaba Aviation, Inc. (Debtor-in-Possession) (“the Company”) as of March 31,2007 and 2006, and the related statements of operations, shareholder’s equity,and cash flows for the years then ended.  These financial statements arethe responsibility of the Company’s management.  Our responsibility is toexpress an opinion on these financial statements based on our audits.

We conducted our audits in accordance with generallyaccepted auditing standards as established by the Auditing Standards Board(United States) and in accordance with the auditing standards of the PublicCompany Accounting oversign Board (United State).  Those standards requirethat we plan and perform the audit to obtain reasonable assurance about whetherthe financial statements are free of material misstatement. The Company isnot required to have, nor were we engaged to perform, an audit of its internalcontrol over financial reporting. Our audits included consideration ofinternal control over financial reporting as a basis for designing auditprocedures that are appropriate in the circumstances, but not for the purposeof expressing an opinion on the effectiveness of the Company’s internal controlover financial reporting.  Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting theamounts and disclosures in the financial statements, assessing the accountingprinciples used and significant estimates made by management, as well asevaluating the overall financial statement presentation.  We believe thatour audits provide a reasonable basis for our opinion.

In our opinion, such financial statements presentfairly, in all material respects, the financial position of the Company as ofMarch 31, 2007 and 2006, and the results of its operations and its cash flowsfor the years then ended in conformity with accounting principles generallyaccepted in the United States of America.

As discussed in Note 1 to the financial statements, onApril 9, 2007, the Bankruptcy Court entered an order confirming the plan ofreorganization which became effective after the close of business on April 24,2007.  Under the plan of reorganization, the Company is required to complywith certain terms and conditions as more fully described in Note 1 to thefinancial statements.

As discussed in Note 2 to the financial statements, in2007, the Company changed its method of accounting for stock-basedcompensation.

Minneapolis, Minnesota

June 15, 2007

1

----

**MESABA AVIATION, INC.**

**(Debtor-in-Possession)**

**Balance Sheets**

**As of March 31, 2007 and 2006**

**(inthousands)**
| ** **                                                | ** ** | **2007** | ** ** | **2006** | ** ** |
|-----------------------------------------------------------|------------|----------|------------|----------|------------|
| ASSETS                                                    |       |     |       |     |       |
|                                                      |       |     |       |     |       |
| CURRENT ASSETS:                                           |       |     |       |     |       |
| Cash and cash  equivalents                                |       | $        | 12,961     |     | $          | 20,718 |   |
| Short-term  investments                                   |       | 2,922    |       | 3,262    |       |
| Restricted cash                                           |       | 2,524    |       | 6,782    |       |
| Accounts  receivable, net of reserves of $242 and $29,755 |       | 13,217   |       | 29,181   |       |
| Income tax  receivable                                    |       | 91       |       | 3,288    |       |
| Inventories, net                                          |       | 5,499    |       | 9,001    |       |
| Prepaid expenses  and other                               |       | 5,783    |       | 5,998    |       |
| Property and  equipment held for sale                     |       | 2,647    |       | —   |       |
| Intercompany  receivable from MAIR Holdings, Inc.         |       | 813      |       | 54       |       |
| Total current  assets                                     |       | 46,457   |       | 78,284   |       |
| PROPERTY AND EQUIPMENT,  net                              |       | 19,697   |       | 32,532   |       |
|                                                      |       |     |       |     |       |
| NONCURRENT ASSETS:                                        |       |     |       |     |       |
| Long-term  investments                                    |       | 4,849    |       | 6,761    |       |
| Other assets,  net                                        |       | 1,117    |       | 864      |       |
|                                                      |       | $        | 72,120     |     | $          | 118,441 |   |
|                                                      |       |     |       |     |       |
| LIABILITIES AND  SHAREHOLDER’S (DEFICIT) EQUITY      |       |     |       |     |       |
|                                                      |       |     |       |     |       |
| CURRENT LIABILITIES:                                      |       |     |       |     |       |
| Accounts payable                                          |       | $        | 8,833      |     | $          | 8,638 |   |
| Accrued  liabilities:                                     |       |     |       |     |       |
| Payroll                                                   |       | 15,265   |       | 14,666   |       |
| Maintenance                                               |       | 11,751   |       | 17,250   |       |
| Deferred income                                           |       | 1,007    |       | 2,962    |       |
| Other current  liabilities                                |       | 7,464    |       | 9,468    |       |
| Total current  liabilities                                |       | 44,320   |       | 52,984   |       |
|                                                      |       |     |       |     |       |
| OTHER NONCURRENT  LIABILITIES                             |       | 1,713    |       | 2,547    |       |
| Total  liabilities not subject to compromise              |       | 46,033   |       | 55,531   |       |
|                                                      |       |     |       |     |       |
| LIABILITIES SUBJECT TO  COMPROMISE                        |       | 94,397   |       | 59,973   |       |
| Total  liabilities                                        |       | 140,430  |       | 115,504  |       |
|                                                      |       |     |       |     |       |
| COMMITMENTS AND  CONTINGENCIES (Note 8)                   |       |     |       |     |       |
|                                                      |       |     |       |     |       |
| SHAREHOLDER’S (DEFICIT)  EQUITY:                     |       |     |       |     |       |
| Paid-in capital                                           |       | 48,255   |       | 48,255   |       |
| Accumulated  other comprehensive gain (loss)              |       | 2        |       | (13      | )          |
| Retained  earnings                                        |       | (116,567 | )          | (45,305  | )          |
| Total  shareholder’s (deficit) equity                |       | (68,310  | )          | 2,937    |       |
|                                                      |       | $        | 72,120     |     | $          | 118,441 |   |

 

2

----

**MESABA AVIATION, INC.**

**(Debtor-in-Possession)**

**Statements of Operations**

**Years Ended March 31, 2007 and2006**

**(inthousands)**
| ** **                                                                        | ** ** | **2007** | ** ** | **2006** | ** ** |
|-----------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| OPERATING  REVENUES:                                                              |       |     |       |     |       |
| Passenger                                                                         |       | $        | 238,195    |     | $          | 373,031 |   |
| Freight and other                                                                 |       | 30,108   |       | 35,783   |       |
| Total operating revenues                                                          |       | 268,303  |       | 408,814  |       |
|                                                                              |       |     |       |     |       |
| OPERATING  EXPENSES:                                                              |       |     |       |     |       |
| Wages and benefits                                                                |       | 120,237  |       | 145,495  |       |
| Aircraft maintenance                                                              |       | 49,212   |       | 83,368   |       |
| Aircraft rents                                                                    |       | 50,261   |       | 92,948   |       |
| Landing fees                                                                      |       | 6,265    |       | 9,333    |       |
| Insurance and taxes                                                               |       | 4,586    |       | 6,346    |       |
| Depreciation and amortization                                                     |       | 9,021    |       | 12,243   |       |
| Administrative and other                                                          |       | 50,648   |       | 68,000   |       |
| Impairment and other charges                                                      |       | —   |       | 31,206   |       |
| Total operating expenses                                                          |       | 290,230  |       | 448,939  |       |
| Operating loss                                                                    |       | (21,927  | )          | (40,125  | )          |
|                                                                              |       |     |       |     |       |
| NONOPERATING  (EXPENSE) INCOME:                                                   |       |     |       |     |       |
| Interest (expense) income and other                                               |       | (6,102   | )          | 449      |       |
| Reorganization items                                                              |       | (40,060  | )          | (22,650  | )          |
| Nonoperating expense, net                                                         |       | (46,162  | )          | (22,201  | )          |
| Loss before income taxes and cumulative effect of  change in accounting principle |       | (68,089  | )          | (62,326  | )          |
|                                                                              |       |     |       |     |       |
| PROVISION FOR  INCOME TAXES                                                       |       | (2,666   | )          | (8,408   | )          |
| NET LOSS BEFORE  CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE              |       | (70,755  | )          | (70,734  | )          |
|                                                                              |       |     |       |     |       |
| CUMULATIVE  EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE (Note 2)                     |       | 507      |       | —   |       |
| NET LOSS                                                                          |       | $        | (71,262    | )        | $          | (70,734 | ) |

 

3

----

**MESABA AVIATION, INC.**

**(Debtor-in-Possession)**

**Statements of Shareholder’sEquity**

**Years Ended March 31, 2007 and2006**

**(inthousands)**
| ** **                                     | ** ** | ** **            | ** ** | ** **  | ** ** | ** **  | ** ** | ** **        | ** ** | **Accumulated**        | ** ** | ** **             | ** ** | ** ** | ** ** | ** **        | ** ** |
|------------------------------------------------|------------|-----------------------|------------|-------------|------------|-------------|------------|-------------------|------------|------------------------|------------|------------------------|------------|------------|------------|-------------------|------------|
| ** **                                     | ** ** | ** **            | ** ** | ** **  | ** ** | ** **  | ** ** | ** **        | ** ** | **Other**              | ** ** | ** **             | ** ** | **Total**  | ** ** | **Comprehensive** | ** ** |
| ** **                                     | ** ** | **Common Stock** | ** ** | **Paid-In** | ** ** | ** **  | ** ** | **Comprehensive** | ** ** | **Retained**           | ** ** | **Shareholders’** | ** ** | **Income** | ** ** |
| ** **                                     | ** ** | **Shares**            | ** ** | **Amount**  | ** ** | **Capital** | ** ** | **Warrants**      | ** ** | **Income (Loss)** | ** ** | **Earnings**           | ** ** | **Equity** | ** ** | **(Loss)**        | ** ** |
| Balance, March  31, 2005                       |       | 500                   |       | —      |       | $           | 1          |              | $          | 16,500                 |       | $                      | —     |       | $          | 25,429            |       | $ | 41,930 |   | $ | 8,104 |   |
|                                           |       |                  |       |        |       |        |       |              |       |                   |       |                   |       |       |       |              |       |
| Net loss                                       |       |                  |       |        |       |        |       |              |       |                   |       | (70,734                | )          | (70,734    | )          | (70,734           | )          |
| Capital  contribution from MAIR Holdings, Inc. |       |                  |       |        |       | 31,754      |       |              |       |                   |       |                   |       | 31,754     |       |              |       |
| Cancellation of  Northwest warrants            |       |                  |       |        |       | 16,500      |       | (16,500           | )          |                   |       |                   |       | —     |       |              |       |
| Unrealized loss  on investments                |       |                  |       |        |       |        |       |              |       | (13                    | )          |                   |       | (13        | )          | (13               | )          |
| Balance, March  31, 2006                       |       | 500                   |       | —      |       | 48,255      |       | —            |       | (13                    | )          | (45,305                | )          | 2,937      |       | $                 | (70,747    | ) |
|                                           |       |                  |       |        |       |        |       |              |       |                   |       |                   |       |       |       |              |       |
| Net loss                                       |       |                  |       |        |       |        |       |              |       |                   |       | (71,262                | )          | (71,262    | )          | (71,262           | )          |
| Unrealized gain  on investments                |       |                  |       |        |       |        |       |              |       | 15                     |       |                   |       | 15         |       | 15                |       |
| Balance, March  31, 2007                       |       | 500                   |       | $           | —     |        | $          | 48,255            |       | $                      | —     |                   | $          | 2          |       | $                 | (116,567   | ) | $ | (68,310 | ) | $ | (71,247 | ) |
|                                                |            |                       |            |             |            |             |            |                   |            |                        |            |                        |            |            |            |                   |            |  |  |  |  |  |  |  |

 

4

----

**MESABA AVIATION, INC.**

**(Debtor-in-Possession)**

**Statements of Cash Flows**

**Years Ended March 31, 2007 and2006**

**(inthousands)**
| ** **                                                           | ** ** | **2007** | ** ** | **2006** | ** ** |
|----------------------------------------------------------------------|------------|----------|------------|----------|------------|
| CASH FLOWS FROM  OPERATING ACTIVITIES:                               |       |     |       |     |       |
| Net loss                                                             |       | $        | (71,262    | )        | $          | (70,734 | ) |
| Adjustments to reconcile net loss to net cash used  in               |       |     |       |     |       |
| operating activities:                                                |       |     |       |     |       |
| Depreciation and amortization                                        |       | 9,021    |       | 12,243   |       |
| Other amortization                                                   |       | (596     | )          | (1,924   | )          |
| (Gain) loss on disposition of assets                                 |       | 10       |       | 63       |       |
| Deferred income taxes                                                |       | —   |       | 11,246   |       |
| Impairment and other charges                                         |       | —   |       | 31,206   |       |
| Cumulative effect of change in accounting principle                  |       | 507      |       | —   |       |
| Changes in current operating items:                                  |       |     |       |     |       |
| Accounts receivable                                                  |       | 15,964   |       | (32,310  | )          |
| Income taxes receivable                                              |       | 2,438    |       | —   |       |
| Inventories                                                          |       | 3,502    |       | 1,328    |       |
| Prepaid expenses and other                                           |       | 331      |       | (1,221   | )          |
| Accounts payable and other                                           |       | 34,883   |       | 47,180   |       |
| Net cash used in operating activities before  reorganization items   |       | (5,202   | )          | (2,923   | )          |
|                                                                 |       |     |       |     |       |
| CASH FLOWS FROM  REORGANIZATION ACTIVITIES:                          |       |     |       |     |       |
| Reorganization items, net                                            |       | (40,060  | )          | (22,650  | )          |
| Increase in reorganization liabilities                               |       | 36,719   |       | 20,066   |       |
| Impairment of property and equipment                                 |       | (439     | )          | 528      |       |
| Reversal of accrued maintenance                                      |       | (5,329   | )          | (4,239   | )          |
| Increase for interest income                                         |       | (1,356   | )          | (745     | )          |
| Net cash used in reorganization activities                           |       | (10,465  | )          | (7,040   | )          |
| Net cash used in operating activities                                |       | (15,667  | )          | (9,963   | )          |
|                                                                 |       |     |       |     |       |
| CASH FLOWS FROM  INVESTING ACTIVITIES:                               |       |     |       |     |       |
| Purchases of investments                                             |       | (5,002   | )          | (8,529   | )          |
| Sales of investments                                                 |       | 7,287    |       | 11,543   |       |
| Decrease (increase) in restricted cash                               |       | 4,258    |       | (6,782   | )          |
| Purchases of property and equipment                                  |       | (2,319   | )          | (8,101   | )          |
| Sale of property and equipment                                       |       | 4,510    |       | —   |       |
| Net cash provided by (used in) investing activities                  |       | 8,734    |       | (11,869  | )          |
|                                                                 |       |     |       |     |       |
| CASH FLOWS FROM  FINANCING ACTIVITIES                                |       |     |       |     |       |
| Debt issuance costs                                                  |       | (824     | )          | —   |       |
| Capital contribution from MAIR Holdings, Inc.                        |       | —   |       | 22,193   |       |
| Net cash (used in) provided by financing activities                  |       | (824     | )          | 22,193   |       |
|                                                                 |       |     |       |     |       |
| NET (DECREASE)  INCREASE IN CASH AND CASH EQUIVALENTS                |       | (7,757   | )          | 361      |       |
|                                                                 |       |     |       |     |       |
| CASH AND CASH  EQUIVALENTS:                                          |       |     |       |     |       |
| Beginning of period, excluding restricted cash and  cash equivalents |       | 20,718   |       | 20,357   |       |
| End of period, excluding restricted cash and cash  equivalents       |       | $        | 12,961     |     | $          | 20,718 |   |
|                                                                 |       |     |       |     |       |
| SUPPLEMENTAL  CASH FLOW INFORMATION:                                 |       |     |       |     |       |
| Cash paid (refund received) during period for:                       |       |     |       |     |       |
| Interest                                                             |       | $        | 38         |     | $          | — |   |
| Income taxes                                                         |       | (325     | )          | (866     | )          |
|                                                                 |       |     |       |     |       |
| SUPPLEMENTAL NON  CASH FINANCING ACTIVITY:                           |       |     |       |     |       |
| Capital contribution through transfer of short-term  and             |       |     |       |     |       |
| long-term investments from MAIR Holdings, Inc.                       |       | —   |       | 9,562    |       |
|                                                                 |       |     |       |     |       |
| Capital  expenditures within accounts payable                        |       | 411      |       | —   |       |

 

5

----

**Mesaba Aviation, Inc.**

**Notes to Financial Statements**

**YearsEnded March 31, 2007 and 2006**

**1.****              Basis ofPresentation, Corporate Organization and Business**

*CorporateOrganization*

Mesaba Aviation, Inc. (“Mesaba”)operates as a regional air carrier for Northwest Airlines, Inc. (“Northwest”).  Mesaba was a wholly-owned subsidiary of MAIRHoldings, Inc. (“MAIR”) through April 24, 2007, when Mesaba exited bankruptcyas a wholly-owned subsidiary of Northwest.

Mesaba filed a voluntarypetition for relief under Chapter 11 of the United States Bankruptcy Code (the “BankruptcyCode”) in the United States Bankruptcy Court for the District of Minnesota (the“Bankruptcy Court”) on October 13, 2005 (the “Petition Date”), after whichMesaba operated its business as a debtor-in-possession pursuant to theBankruptcy Code.  On January 22, 2007,Mesaba and Northwest entered into a Stock Purchase and Reorganization Agreement(the “SPRA”), under which Northwest agreed to allow Mesaba a $145 million claimin Northwest’s bankruptcy case.  Inexchange, Mesaba agreed to file a plan of reorganization under which Mesaba’sexisting equity would be cancelled and new equity would be issued to Northwest,making Mesaba a wholly-owned operating subsidiary of Northwest.  The Bankruptcy Court approved Mesaba’s planof reorganization on April 9, 2007.  Mesaba’s plan of reorganizationbecame effective on April 24, 2007, at which time Mesaba exitedbankruptcy.  Thus, on April 24, 2007, MAIR’s ownership of Mesaba ceased.

The SPRA authorizedMesaba to monetize its $145 million claim against Northwest to provide Mesaba’sbankruptcy estate with cash to satisfy creditors’ claims.  Mesaba’s creditors’ committee conducted anauction on January 29, 2007, after which The Goldman Sachs Group, Inc. (“GoldmanSachs”) and Mesaba entered into a forward contract by which Goldman Sachspurchased the $145 million claim for approximately $125 million.  The closing of the sale to Goldman Sachs wascontingent upon Northwest’s bankruptcy court allowing the $145 million claim andupon Mesaba’s plan of reorganization being approved by its own BankruptcyCourt.  Following Northwest’s bankruptcycourt’s February 27, 2007 order allowing the $145 million claim and Mesaba’sBankruptcy Court’s April 9, 2007 approval of Mesaba’s plan of reorganization,Goldman Sachs funded the $125 million purchase price on April 24, 2007, thedate Mesaba exited bankruptcy.

The entire $125 millionpurchase price from Goldman Sachs was placed in a liquidating trust, and theproceeds from the liquidating trust will ultimately be used to satisfy Mesaba’screditors’ claims.  Prior to the orderapproving Mesaba’s plan of reorganization, Mesaba, MAIR, and Mesaba’s creditors’committee settled the majority of Mesaba’s creditors’ claims.  The two remaining significant unresolvedclaims are held by Goldman Sachs Credit Partners, L.P. (“Goldman LP”) andSwedish Aircraft Holdings AB (“Saab”) and are discussed more fully in Note8.  Mesaba currently estimates that theallowed creditors’ claims will total approximately $94 million, which amountincludes MAIR’s $13.5 million claim that was approved by the Bankruptcy Courtin April 2007.

The trustee for Mesaba’sliquidating trust has not yet authorized payments to any creditors.  While the agreement governing the trust doesprovide for interim distributions to creditors, there is no assurance that thetrustee will authorize such distributions. Mesaba expects that the remaining creditors’ claims should be resolvedin the next nine months.

Inconnection with its bankruptcy and pursuant to its request fordebtor-in-possession financing, Mesaba entered into a financing agreement withMarathon Structured Finance Fund, L.P. (“Marathon”).  Mesaba incurred expenses of $0.8 million toobtain debtor-in-possession financing in fiscal 2007. On September 20, 2006,the Bankruptcy Court entered an order authorizing the debtor-in-possessionfinancing with Marathon.  Mesaba did not draw on the debtor-in-possessionfinancing prior to its exit from bankruptcy.  However, as disclosed inMesaba’s plan of reorganization, Mesaba was required to pay a termination feeof $0.4 million to Marathon on April 17, 2007 to terminate the financingagreement.

6

----

*Basis of Presentation*

The provisions ofStatement of Position 90-7, *Financial Reporting byEntities in Reorganization Under the Bankruptcy Code (“SOP 90-7”)*applied to Mesaba’s financial statements while Mesaba operated under theprovisions of Chapter 11 of the Bankruptcy Code.  SOP 90-7 does not change the application ofgenerally accepted accounting principles in the United States of America (“GAAP”)in the preparation of financial statements. However, SOP 90-7 does require that the financial statements, forperiods including and subsequent to the filing of the Chapter 11 petition,distinguish transactions and events that are directly associated with thereorganization from the ongoing operations of the business.  The accompanying financial statements ofMesaba are presented in accordance with SOP 90-7.

As of March 31, 2007 and2006, Mesaba had an intercompany receivable from MAIR of $0.8 million and $0.1million, respectively, and MAIR had equal intercompany amounts payable toMesaba.  During the third quarter offiscal 2007, MAIR received $5.5 million in tax refunds related to net operatingloss (“NOL”) carryback claims for fiscal 2006 and 2005, of which $2.9 millionwas payable to Mesaba in accordance with MAIR and Mesaba’s tax sharingagreement.  During the fourth quarter offiscal 2007, MAIR, Mesaba and the Internal Revenue Service (“IRS”) reached asettlement regarding Mesaba’s accounting for per diem allowances during fiscalyears 2001 through 2004.   Under thesettlement agreement MAIR agreed to pay the IRS $1.7 million in taxes andinterest on behalf of Mesaba for adjustments to taxable income for thereclassification of per diem amounts for fiscal years 2002 and 2003.  The IRS adjustment and NOL carryback forfiscal 2004 created an additional $0.2 million payable from Mesaba to MAIR.  The tax return for fiscal 2005 was amended toincorporate the IRS adjustments and netted an additional $0.2 million payablefrom Mesaba to MAIR.

Mesaba’s $0.8 milliontax-related intercompany receivable from MAIR at March 31, 2007 will bereversed as tax expense in fiscal 2008 as a result of the April 2007 settlementof MAIR’s proof of claim in Mesaba’s bankruptcy proceedings.  Under thesettlement between MAIR and Mesaba, Mesaba agreed to relinquish its right tothe $0.8 million intercompany balance so that MAIR can use these funds to payany potential remaining Mesaba tax obligations that taxing authorities seek tocollect from MAIR.

*Operations*

Mesaba operates as aregional carrier providing scheduled passenger service as “MesabaAirlines/Northwest Airlink” and Mesaba Airlines/Northwest Jet Airlink.  On August 29, 2005, Mesaba and Northwestentered into a ten-year omnibus Airline Service Agreement (“ASA”) governingMesaba’s regional airline operations for Northwest.  Subsequently, on September 14, 2005,Northwest filed a voluntary petition for bankruptcy; however, both partiescontinued to operate under the terms of the ASA with respect to Mesaba’s flightoperations and Northwest’s payments to Mesaba. On May 31, 2007, Northwest exited bankruptcy without assuming theASA.  Prior to the ASA, Mesaba providedregional airline services to Northwest pursuant to two separate agreements, anAirline Service Agreement (the “Airlink Agreement”) that governed Mesaba’soperation of Saab 340 jet-prop aircraft (“Saabs”), and a Regional Jet ServicesAgreement (the “Jet Agreement”) that governed Mesaba’s operation of Avro RJ85regional jets (“Avros”).  The ASAincorporated the existing payment terms for the Saabs and the Avros containedin the Airlink Agreement and the Jet Agreement and added new payment terms forthe 50-seat Canadair regional jets (“CRJ 200”) that Mesaba began operating inOctober 2005.  Mesaba incurred all of thestart-up costs necessary to bring the CRJ 200 fleet into service.  For the fiscal year ended March 31, 2006,Mesaba incurred and expensed approximately $7.0 million in start-up costrelated to adding the CRJ 200 aircraft into its fleet.

Northwest purchasesMesaba’s entire capacity and pays Mesaba in arrears on the 11th and 26th ofeach month for regional airline services that Mesaba provides to Northwestutilizing the Saabs.  Beginning inOctober 2005, Northwest began paying Mesaba, on a regular bi-monthly basis, onthe 1st and 16th of each month for regional airline services that Mesabaprovides to Northwest utilizing the CRJ 200. The CRJ 200 payment made on the 1st ofeach month represents a prepayment based on an estimate of regional airlineservices to be provided by Mesaba for the first 15 days of the month.  The CRJ 200 payment made on the 16th of themonth consists of a prepayment based on an estimate of regional airlineservices to be provided by Mesaba for the 16th through the end of the month anda true-up amount adjusting for actual services provided by Mesaba in the priormonth.

For flights utilizing theSaabs, Mesaba recognizes revenue for each completed available seat mile, or ASM(the number of seats in an aircraft multiplied by the number of miles thoseseats are flown), and purchases fuel (which is set at a fixed price of $0.835per gallon), ground handling and other services from Northwest.  Mesaba paid

7

----

Northwest $20.7 millionand $18.3 million for ground handling and other services in fiscal 2007 and2006, respectively.

For flights utilizing theCRJ 200, Mesaba recognizes revenue through monthly expense reimbursementpayments for actual expenses incurred relating to aircraft rent, maintenance,landing fees and fuel (which is set at a fixed price of $0.70 per gallon);semi-monthly payments for each block hour and cycle operated; a monthly fixedcost payment based on the size of the CRJ 200 fleet (intended to cover Mesaba’scosts that are not reimbursed through the monthly reimbursement payments, whichconsist mainly of labor costs, ground handling costs, overhead anddepreciation) and margin payments based on the revenues described abovecalculated to achieve a target operating margin.

All 35 Avros that Mesabaoperated under the ASA were returned by December 2006.  Until then, for flights utilizing the Avros,Mesaba recognized revenue for each block hour flown (the elapsed time betweenaircraft departing and arriving at a gate). Northwest provided fuel and airport and passenger related services atNorthwest’s expense for the Avros.

Subsequent to executingthe SPRA, Mesaba announced that in fiscal 2008, it would begin operating up to36 76-seat Canadair Regional Jets (“CRJ 900”) for Northwest.  Mesaba incurred start up and training expenseof $0.7 million in the fourth quarter of fiscal 2007 to prepare for these newaircraft.

As of March 31, 2007,Mesaba served 72 cities in the Unites States and Canada from Northwest’s hubairports located in Minneapolis/St. Paul, Detroit and Memphis.  All scheduled flights that Mesaba operatesare designated as Northwest flights using Northwest’s designator code in allcomputer reservation systems, with an asterisk and a footnote indicating thatMesaba is the carrier providing the service. In addition, flight schedules of Mesaba and Northwest are closelycoordinated to facilitate interline connections, and Mesaba’s passenger gatefacilities at the Minneapolis/St. Paul International Airport, DetroitMetropolitan Airport and Memphis International Airport are integrated withNorthwest’s facilities in the main terminal buildings.  Mesaba receives ticketing and certaincheck-in, baggage, freight and aircraft handling services from Northwest atcertain airports.  In addition, Mesabareceives its computerized reservations services from Northwest.  Northwest also performs all marketing,scheduling, yield management and pricing services for Mesaba’s flights.

The ASA provided forincentive payments from Northwest to Mesaba based on achievement of certainoperational goals on a semi-annual basis. Such incentives totaled $2.0 million and $3.7 million for fiscal 2007and 2006, respectively, and are included in passenger revenues in Mesaba’sfinancial statements.

Approximately 85.6% and79.2% of the respective March 31, 2007 and 2006 net accounts receivablebalances in Mesaba’s balance sheets were due from Northwest and were notcollateralized.  Approximately 93.2% and94.5% of Mesaba’s operating revenue recognized in fiscal 2007 and 2006,respectively, was from Northwest. Accounts payable owed to Northwest by Mesaba, primarily for groundhandling, were $0.2 million and $4.2 million as of March 31, 2007 and 2006,respectively.

**2.****              Summary ofSignificant Accounting Policies**

The accounting policiesof Mesaba conform to accounting principles generally accepted in the UnitedStates of America.  Significant policiesare described below.

*Use ofEstimates*

The preparation offinancial statements in conformity with accounting principles generallyaccepted in the United States of America requires management to make estimatesand assumptions that affect the reported amounts of assets and liabilities anddisclosure of contingent assets and liabilities, as well as the reportedamounts of revenues and expenses.  Themost significant use of estimates relates to bankruptcy damage claims,allowance for doubtful accounts, accrued maintenance expenses, aircraft propertyand equipment lives, inventory obsolescence reserves and accounting for incometaxes.  Ultimate results could differfrom those estimates.

8

----

*Cash andCash Equivalents*

Cash equivalents consistprimarily of United States government and municipal securities andinterest-bearing deposits with original maturities of less than 90 days and arestated at cost, which approximates fair value. Cash equivalents are generally held to maturity.

*Investments*

Investments consistprincipally of government, agency, corporate and municipal securities and areclassified as available-for-sale. Available-for-sale investments are reported at fair value withunrealized gains and losses excluded from operations and reported as a separatecomponent of shareholder’s equity, except for other-than-temporary impairments,which are reported as a charge to current operations and result in a new costbasis for the investment.

*Inventories*

Inventories are stated atthe lower of cost or market and consist of expendable aircraft service parts,fuel and glycol (de-icing agent).  Mesaba uses the first-in, first-outinventory method.  A provision isrecorded to reduce inventories to the estimated net realizable value, ifrequired.  As of March 31, 2007 and 2006, Mesaba’s reserve balance was$7.1 million and $4.4 million, respectively.

*Propertyand Equipment*

Property and equipmentare stated at cost.  Additions,improvements or major renewals are capitalized, while expenditures that do notenhance or extend the asset’s useful life are charged to operating expense asincurred.  Depreciation is computed on astraight-line basis for financial reporting purposes over estimated usefullives of three to 30 years.  Leaseholdimprovements are amortized over the shorter of the life of the lease or theremaining estimated useful life of the asset.  Mesaba’s depreciation and amortization expenseon property and equipment was $9.0 million and $11.6 million in fiscal 2007 and2006, respectively.

Mesaba’s property andequipment and related accumulated depreciation and amortization were as followsas of March 31, in thousands:
|                                                  | ** ** | **2007** | ** ** | **2006** | ** ** |
|--------------------------------------------------|------------|----------|------------|----------|------------|
| Flight equipment                                 |       | $        | 70,342     |     | $          | 95,357 |   |
| Ground services  equipment                       |       | 14,428   |       | 14,349   |       |
| Office and  general equipment                    |       | 15,747   |       | 14,978   |       |
| Buildings and  leasehold improvements            |       | 7,685    |       | 7,685    |       |
| Maintenance shop  equipment                      |       | 4,309    |       | 4,361    |       |
| Other                                            |       | 316      |       | —   |       |
|                                             |       | 112,827  |       | 136,730  |       |
| Less:  Accumulated depreciation and amortization |       | (93,130  | )          | (104,198 | )          |
| Net property and  equipment                      |       | $        | 19,697     |     | $          | 32,532 |   |

 

*Valuationof Long-Lived Assets*

Mesabaevaluates long-lived assets for potential impairments in compliance with SFASNo. 144, *Accounting for the Impairment or Disposal ofLong-Lived Assets*.  Mesaba records impairment losses onlong-lived assets when events and circumstances indicate the assets might beimpaired and the undiscounted cash flows estimated to be generated by thoseassets are less than their carrying amounts.  Impairment losses aremeasured by comparing the fair value of the assets to their carryingamounts.  In determining the need to record impairment charges, Mesaba isrequired to make certain estimates regarding such things as the current fairmarket value of the assets and future net cash flows to be generated by theassets.  The current fair market value is determined by independentappraisal or published sales values of similar assets, and the future net cashflows are based on assumptions such as asset utilization, expected remaininguseful lives, future market trends and projected salvage values.  If there are subsequent changes in theseestimates, or if actual results differ from these estimates, additionalimpairment charges may be required.

9

----

*OtherAssets*

In connection with the Airlink Agreement and JetAgreement, Northwest received contract rights in the form of warrants topurchase an aggregate of 4,151,922 shares of MAIR’s common stock at exerciseprices ranging from $7.25 to $21.25 per share.  Mesaba amortized thecontract rights over the life of the warrants.  Upon execution of the ASAin August 2005, and pursuant to a separate agreement between MAIR andNorthwest, the prior warrants were replaced by an amended and restated warrantto purchase 4,112,500 shares of MAIR’s stock (the “Amended Warrant”).  In fiscal 2006, when the Amended Warrant wasissued, Mesaba wrote off $2.1 million, which amount represented the remainingunamortized portion of the prior warrants issued in connection with the Airlinkand Jet Agreements.  The unamortizedAmended Warrant was written off on April 24, 2007.

*Airframeand Engine Maintenance*

Routine airframe andengine maintenance is charged to expense as incurred.  Overhaul costs covered by third-partymaintenance agreements are accrued based on the hours flown and estimates ofaircraft activity.  Modifications thatenhance the operating performance or extend the useful lives of airframes orengines are capitalized and amortized over the shorter of the remainingestimated useful life of the asset or the lease term.

*OtherCurrent Liabilities*

Mesaba’s other currentliabilities were as follows as of March 31, in thousands:
|                         | ** ** | **2007** | ** ** | **2006** | ** ** |
|-------------------------|------------|----------|------------|----------|------------|
| Other accrued  expenses |       | $        | 6,709      |     | $          | 7,885 |   |
| Taxes payable           |       | 755      |       | 1,583    |       |
|                    |       | $        | 7,464      |     | $          | 9,468 |   |

 

*OtherNoncurrent Liabilities*

In order to assist Mesabain integrating new aircraft into its fleets, certain manufacturers providedMesaba with spare parts or rent deferrals. Mesaba has deferred these amounts and amortizes them over the terms ofthe agreements as a reduction of aircraft rent expense.  Mesaba’s amortization of these creditsresulted in a reduction of rent expense of $2.3 million and $1.8 million infiscal 2007 and 2006, respectively. Mesaba’s other noncurrent liabilities were as follows as of March 31, inthousands:
|                        | ** ** | **2007** | ** ** | **2006** | ** ** |
|------------------------|------------|----------|------------|----------|------------|
| Manufacturers  credits |       | $        | —     |     | $          | 743 |   |
| Deferred rent          |       | 1,713    |       | 1,804    |       |
|                   |       | $        | 1,713      |     | $          | 2,547 |   |

 

*StockAppreciation Rights*

Effective April 1, 2006,Mesaba adopted the fair value recognition provisions of SFAS No. 123R, *Share-Based Payment,*(“SFAS 123R”),**using the modified prospective transition method.Under that transition method, compensation expense that Mesaba recognizesbeginning on that date includes expense associated with the fair value of allawards granted on and after April 1, 2006, and expense for the unvested portionof previously granted awards outstanding on April 1, 2006. Results for priorperiods have not been restated.

Under SFAS 123R,forfeitures are estimated at the time of valuation and reduce expense ratablyover the vesting period.  This estimateis adjusted periodically based on the extent to which actual forfeituresdiffer, or are expected to differ, from the previous estimate.  Under SFAS No. 123, *Accounting for Stock-Based Compensation*and APB 25, *Accounting for Stock Issued to Employees,*Mesabaelected to account for forfeitures when awards are actually forfeited, at whichtime all previous pro forma expense will be reversed to reduce pro formaexpense for that period.

The fair value of eachSAR grant is estimated quarterly using the Black-Scholes option pricing modelwith the following assumptions:  risk-freeinterest rate, stock price volatility and expected life.  Mesaba establishes the risk-free interestrate using the U.S. Treasury yield curve as of the grant date.  The estimated expected term is consistentwith the simplified method identified in SEC Staff Accounting Bulletin (“SAB”)No. 107*, Share-Based Payment*, for share-basedawards granted during fiscal 2007.  The simplified method calculates theexpected term as the average of the vesting and contractual terms of theaward.  The expected volatilityassumption is set based primarily on historical volatility.  For SARs granted, Mesaba amortizes the fairvalue on a straight-line basis over the vesting period of the SARs.  The fair value and recorded liability isadjusted each quarter to estimate the current market value.  There were no SARs granted in either fiscal2007 or 2006.

10

----

*RevenueRecognition*

Mesaba recognizespassenger revenue as services are provided. For flights utilizing the Saabs, Mesaba recognizes revenue for eachcompleted ASM.  For flights utilizing theAvros, Mesaba recognized revenue for each block hour flown.  For flights utilizing the CRJ 200, Mesabarecognizes revenue through monthly expense reimbursement payments for actualexpenses incurred relating to aircraft rent, maintenance, landing fees and fuel(which is set at a fixed price of $0.70 per gallon for the CRJ200);semi-monthly payments for each block hour and cycle operated; a monthly fixedcost payment based on the size of the CRJ 200 fleet (intended to cover Mesaba’scosts that are not reimbursed through the monthly reimbursement payments, whichconsist mainly of labor costs, ground handling costs, overhead anddepreciation) and margin payments based on the revenues described abovecalculated to achieve a target operating margin.

In addition, the ASAincludes semi-annual incentive payments based upon achievement of certainoperational targets, such as completion factor and on-time performance.  Such incentives are earned and due based onperformance over a given period (generally six months).  In periods prior to the finalization of suchoperational incentives, revenue is recognized when the targets have beenexceeded.  The amount recognized is limitedto a ratable portion of the incentive payment as if the contract period were toterminate at the end of the interim period.

*IncomeTaxes*

Mesaba accounts forincome taxes under the asset and liability method whereby deferred income taxassets and liabilities are computed annually for differences between thefinancial statement and tax bases of assets and liabilities.  These differences will result in taxable ordeductible amounts in the future based on enacted tax laws and rates applicableto the periods in which the differences are expected to affect taxable income.

Under the provisions ofSFAS No. 109, *Accounting for Income Taxes*, therealization of the future tax benefits of a deferred tax asset is dependent onfuture taxable income against which such tax benefits can be applied. Allavailable evidence must be considered in the determination of whethersufficient future taxable income will exist. Such evidence includes, but is notlimited to, Mesaba’s financial performance, the market environment in whichMesaba operates, the utilization of past tax credits, and the length of relevantcarryback and carryforward periods. Sufficient negative evidence, such ascumulative net losses during a three-year period that includes the current yearand the prior two years, may require that a valuation allowance be establishedwith respect to existing and future deferred tax assets.  A valuation allowance is recorded whendeferred tax assets are not considered more likely than not to be realized.

*FairValue of Financial Instruments*

Mesaba’s financialinstruments consist primarily of cash and cash equivalents of which carryingamounts do not significantly differ from fair value due to their short-termnature or variable interest rates.

*NewAccounting Pronouncements*

In July 2006, the FASBissued FASB Interpretation No. 48, *Accounting for Uncertaintyin Income Taxes,* an interpretation of FASB Statement No. 109 (“FIN 48”),which clarifies the accounting for uncertainty in tax positions. FIN 48requires that Mesaba recognize in its financial statements the impact of a taxposition if that position is more likely than not to be sustained on audit,based on the technical merits of the position. The accounting provisions of FIN48 will be effective for Mesaba beginning April 1, 2007. Mesaba is in theprocess of determining what effect, if any, the adoption of FIN 48 will have onits financial statements.

In September 2006, theFASB issued SFAS No. 157, *Fair Value Measurements*(“SFASNo. 157”), to define fair value, establish a framework for measuring fair valuein accordance with GAAP, and expand disclosures about fair valuemeasurements.  SFAS No. 157 will beeffective for Mesaba beginning April 1, 2008. Mesaba is in the process ofdetermining what effect, if any, the adoption of SFAS No. 157 will have on itsfinancial statements.

In September 2006, the FASBissued FASB Staff Position AUG AIR-1, *Accounting for PlannedMajor Maintenance Activities*(the “FSP”), that reduces the number ofacceptable methods of accounting for planned major maintenance activities. TheFSP will be effective for Mesaba beginning April 1, 2007 and requiresretrospective application to all financial statements presented unless doing sois impractical.  Mesaba is in the processof determining what effect the adoption of the FSP will have on its financialstatements.

11

----

InFebruary 2007, the FASB issued SFAS No. 159,*The Fair Value Option for Financial Assets and Financial Liabilities*(“SFAS 159”). SFAS 159 permits entities to choose to measure many financialinstruments and certain other items at fair value that are not currently requiredto be measured at fair value. SFAS 159 is effective for fiscal years beginningApril 1, 2008. Mesaba is in the process of determining what effect, if any, theadoption of SFAS 159 will have on its financial statements.

**3.****              Impairment and OtherCharges**

Impairment charges of$31.2 million were recorded in fiscal 2006 as a result of the $29.1 millioncharge to establish a reserve on the unsecured prepetition receivables due fromNorthwest (net of certain offsetting liabilities), and the $2.1 million write-offof the warrants related to the prior airline services agreements (see Note2).  In the fourth quarter of fiscal2007, Mesaba wrote-off its Northwest receivables and reduced its reserve by$29.1 million.

**4.****              Investments**

Investments consistprincipally of government, agency, corporate and municipal securities and areclassified as available-for-sale.  Fairvalue of investments is determined based on quoted market prices.  Mesaba classifies investments with anoriginal maturity of more than 90 days that mature within one year asshort-term and greater than one year as long-term.

As of March 31, 2007 and2006, cash, cash equivalents, short-term and long-term investments totaled$20.7 million and $30.7 million, respectively.

At March 31, 2007 and2006, Mesaba’s amortized cost and fair value of short and long-term investmentsclassified as securities available for sale totaled $7.8 million and $10.0million, respectively, of which gross unrealized gains and losses wereinsignificant.  Gross realized gains andlosses were insignificant in fiscal 2007 and 2006, as Mesaba generally held theinvestments until maturity.

**5.****              Leases**

*AircraftLeases*

Mesaba’s airlinefleet consisted of the following aircraft held under operating leases as ofMarch 31, 2007:
| ** **                     | ** ** | ** **         | ** ** | ** **   | ** ** | **Approximate**        | ** ** | **Approximate**           | ** ** |
|--------------------------------|------------|--------------------|------------|--------------|------------|------------------------|------------|---------------------------|------------|
| ** **                     | ** ** | **Number of** | ** ** | **Seating**  | ** ** | **Single Flight** | ** ** | **Average Cruising** | ** ** |
| **Type of Aircraft** | ** ** | **Aircraft**       | ** ** | **Capacity** | ** ** | **Range (miles)** | ** ** | **Speed (mph)**      | ** ** |
| Saab 340                       |       | 49                 |       | 34           |       | 500                    |       | 300                       |       |
| CRJ 200                        |       | 1                  |       | 50           |       | 1,500                  |       | 500                       |       |

 

Mesaba leases its Saabaircraft through subleases with Northwest under operating leases with initialterms of up to 17 years that expire between 2014 and 2016.  The sublease agreements with Northwestcontain certain requirements of Mesaba regarding the payment of taxes on theaircraft, acceptable use of the aircraft, the level of insurance to bemaintained, the maintenance procedures to be performed and the condition of theaircraft upon their return.  The ASAallows Mesaba to return Saab aircraft to Northwest upon the occurrence ofcertain events, including termination of the ASA.

Mesaba subleases its CRJ200 from Northwest under operating leases with initial terms of up to ten yearsthat expire in 2015.  The lease agreementcontain certain requirements of Mesaba regarding the payment of taxes on theaircraft, acceptable use of the aircraft, the level of insurance to bemaintained, the maintenance procedures to be performed and the condition of theaircraft upon their return to Northwest. Northwest reimburses Mesaba’s aircraft rental expense in full under the ASA.

Mesaba’s aircraft leasescontain customary return condition provisions, but do not contain anyguaranteed lease residual provisions for which there would be a potentialcontingency at the termination of the lease period.

12

----

As of March 31, 2007, theabove aircraft operating leases for Mesaba’s Saab aircraft require futureminimum rental payments as follows, in thousands:
| Year Ending March 31 | ** ** | **Amount** | ** ** |
|-------------------------------------|------------|------------|------------|
| 2008                                |       | $          | 34,503     |   |
| 2009                                |       | 34,503     |       |
| 2010                                |       | 34,503     |       |
| 2011                                |       | 34,503     |       |
| 2012                                |       | 34,503     |       |
| Thereafter                          |       | 105,472    |       |
|                                |       | $          | 277,987    |   |

 

The information in thetable above is based on Mesaba’s Saab fleet. Payments for the CRJ 200 are currently being made on a month to monthbasis.  As Mesaba did not enter into alease agreement for any CRJ 900 prior to year end, those future minimum rentpayments are not included in the above tables. The estimated annual payment per CRJ 900 is $2.1 million.

Mesaba’s rent expense foraircraft operating leases (net of deferred rent expense amortization) was $50.3million and $93.0 million in fiscal 2007 and 2006, respectively (including$50.5 million and $73.9 million paid to Northwest in fiscal 2007 and 2006,respectively).

Prior to March 31, 2007,Mesaba also leased or subleased its 35 Avro aircraft from Northwest.  The Avro lease and sublease agreements withNorthwest contained certain requirements of Mesaba regarding the payment oftaxes on the aircraft, acceptable use of the aircraft, the level of insuranceto be maintained, the maintenance procedures to be performed and the conditionof the aircraft upon their return to Northwest. The ASA allowed Mesaba toreturn Avros to Northwest upon the occurance of certain events, includingtermination of the ASA. As of March 31, 2007 all Avros were removed from thefleet and not reflected in the table above.  Mesaba’s rent expense for the Avro leases was$11.5 million and $52.6 million in fiscal 2007 and 2006, respectively.

*Non-AircraftLeases*

Mesaba leasesland, offices, hangar facilities, equipment and certain terminal facilitiesunder operating leases through 2028, which provide for approximate futureminimum rental payments as follows as of March 31, in thousands:
| Year Ending March 31 | ** ** | **Amount** | ** ** |
|-------------------------------------|------------|------------|------------|
| 2008                                |       | $          | 2,896      |   |
| 2009                                |       | 2,370      |       |
| 2010                                |       | 2,251      |       |
| 2011                                |       | 2,085      |       |
| 2012                                |       | 863        |       |
| Thereafter                          |       | 3,694      |       |
|                                |       | $          | 14,159     |   |

 

Mesaba’s rent expense fornon-aircraft operating leases was approximately $9.3 million and $12.6 millionin fiscal 2007 and 2006, respectively. The large decrease in future minimum rental payments in fiscal 2008 isthe result of the rejection of and renegotiation of facility leases duringbankruptcy.

13

----

**6.****              Income Taxes**

Mesaba’s provision for incometaxes was comprised of the following elements for the years ended March 31, inthousands:
|          | ** ** | **2007** | ** ** | **2006** | ** ** |
|----------|------------|----------|------------|----------|------------|
| Current: |       |     |       |     |       |
| Federal  |       | $        | 2,545      |     | $          | (3,443 | ) |
| State    |       | 121      |       | —   |       |
| Deferred |       |     |       |     |       |
| Federal  |       | —   |       | 10,844   |       |
| State    |       | —   |       | 1,007    |       |
|     |       | $        | 2,666      |     | $          | 8,408 |   |

 

The actual income taxexpense differs from the statutory tax expense as follows for the years endedMarch 31, in thousands:
|                                                                  | ** ** | **2007** | ** ** | **2006** | ** ** |
|------------------------------------------------------------------|------------|----------|------------|----------|------------|
| Computed tax  (benefit) expense at Federal statutory rate of 35% |       | $        | (24,009    | )        | $          | (21,814 | ) |
| Increase  (decrease) in income taxes resulting from:             |       |     |       |     |       |
| State taxes, net  of federal tax benefit                         |       | (2,055   | )          | (2,026   | )          |
| Non-deductible  meals and entertainment expenses                 |       | 299      |       | 533      |       |
| Non-deductible  amortization expenses                            |       | —   |       | 1,062    |       |
| Non-deductible reorganization  expenses                          |       | 2,666    |       | 1,550    |       |
| Deferred tax  asset valuation allowance                          |       | 23,125   |       | 27,736   |       |
| IRS exam                                                         |       | 2,233    |       | —   |       |
| Other, net                                                       |       | 407      |       | 1,367    |       |
|                                                             |       | $        | 2,666      |     | $          | 8,408 |   |

 

The following is a tableof the significant components of Mesaba’s deferred tax assets and liabilitiesas of March 31, in thousands:
|                                    | ** ** | **2007** | ** ** | **2006** | ** ** |
|------------------------------------|------------|----------|------------|----------|------------|
| Deferred tax  assets:              |       |     |       |     |       |
| Maintenance                        |       | $        | 4,262      |     | $          | 6,424 |   |
| Allowance for  doubtful accounts   |       | 92       |       | 5,778    |       |
| Inventories                        |       | 2,705    |       | 1,667    |       |
| NOL  carryforwards                 |       | 16,549   |       | 2,189    |       |
| Liabilities  subject to compromise |       | 23,795   |       | 9,857    |       |
| Other accruals                     |       | 5,891    |       | 4,585    |       |
| Gross deferred  tax assets         |       | 53,294   |       | 30,500   |       |
|                               |       |     |       |     |       |
| Deferred tax  liabilities:         |       |     |       |     |       |
| Property and  equipment            |       | $        | 1,514      |     | $          | 2,640 |   |
| Other accruals                     |       | 485      |       | 124      |       |
| Gross deferred  tax liabilities    |       | 1,999    |       | 2,764    |       |
| Less valuation  allowance          |       | (51,295  | )          | (27,736  | )          |
| Net deferred tax assets            |       | $        | —     |     | $          | — |   |

 

SFAS No. 109 requiresthat all available evidence, both positive and negative, be considered todetermine whether, based on the weight of that evidence, a valuation allowanceis needed.  Future realization of the taxbenefits of an existing deductible temporary difference or carryforwardultimately depends on the existence of sufficient taxable income of theappropriate character within the carryback or carryforward periods availableunder the tax law.

At March 31, 2006, due toMesaba’s losses resulting from creditors’ bankruptcy claims, reductions in itsfleet and the future income projections of a downsized operation, managementdetermined that the realization of all deferred tax assets from futureprofitable operations was not more likely than not.  Under these circumstances, deferred tax

14

----

assets may only berecognized to the extent such benefits may be realized through future reversalsof taxable temporary differences.  Mesabahas performed an analysis and determined that a valuation allowance is requiredagainst deferred tax assets to the extent they cannot be used to offset futureincome arising from the expected reversal of taxable differences.  A valuation allowance in the amount of $51.3million has been provided as of March 31, 2007 to reduce the gross amount ofthese assets to the extent necessary to result in an amount that is more likelythan not of being realized.

Deferred income taxesreflect the net tax effects of temporary differences between the carryingamounts of assets and liabilities for financial reporting purposes and theamounts used for income tax purposes.  AtMarch 31, 2007, Mesaba’s deferred tax assets included $42.6 million of federalNOLs which expire in 2026 and 2027 and $50.6 million of state NOL carryforwardswhich expire over the next four to twenty years.  Mesaba also has federal alternative minimumtax credits of $0.4 million which expire in 2024 and 2025.

Further, Section 382 ofthe Internal Revenue Code provides that certain transfers of Mesaba’s equity,or issuances of equity in connection with its restructuring, may impair Mesaba’sability to utilize its NOL carryforwards in the future.  Under federal income tax law, a corporationis generally permitted to deduct from taxable income in any year NOLs carriedforward from prior years.  As mentionedabove, Mesaba has NOL carryforwards which expire at various times over the nexttwenty years. Mesaba’s ability to deduct NOL carryforwards could be subject toa significant limitation due to Mesaba’s ownership change (see Note 1).  The effect of Mesaba’s ownership change onthe NOL carryforwards has not yet been analyzed at this time.

During the fourth quarterof fiscal 2007, Mesaba received verification of a final settlement with the IRSconcerning the IRS’ examination of the consolidated tax return for the fiscal2001 through 2004.  Mesaba recorded anexpense of $2.2 million related to the settlement with the IRS.

**7.****              Shareholder’s Equity**

*SARs Plan*

During fiscal 2004,Mesaba approved the SARs plan for key employees and directors.  The exercise price of each SAR is equal tothe fair market value of MAIR’s common stock on the date of the award.  Cash is paid based on the difference betweenthe fair market value at the date of grant and the date the SAR isexercised.  The SARs vest over four yearsand have a ten-year term.

During fiscal 2007, theadoption of SFAS 123R has resulted in an expense of $0.3 million related to theSARs.  These amounts have been includedin the “Wages and benefits” caption in the accompanying statements ofoperations for the fiscal year ended March 31, 2007.

Upon adoption on April 1,2006, in accordance with SFAS 123R, Mesaba also recorded $0.5 million for thecumulative effect of a change in accounting principle during the fist quarterof fiscal 2007 as a result of valuing SARs under the fair value method.

A summary of Mesaba’s SARactivity since March 31, 2006 was as follows:
| ** **                             | ** ** | **Options  Outstanding** | ** ** | **Weighted Average  Exercise Price** | ** ** | **Weighted Average  Contractual Term (in  years)** | ** ** | **Aggregate Intrinsic  Value (in  thousands)** | ** ** |
|----------------------------------------|------------|--------------------------|------------|------------------------------------------------|------------|-------------------------------------------------------------------|------------|----------------------------------------------------------|------------|
| Balance at March  31, 2006             |       | 680,000                  |       | $                                              | 9.23       |                                                              |       |                                                     | —     |   |
| Exercised                              |       | —                   |       |                                           |       |                                                              |       |                                                     |       |
| Cancelled                              |       | (125,000                 | )          | 9.34                                           |       |                                                              |       |                                                     |       |
| Balance at March  31, 2007             |       | 555,000                  |       | 9.21                                           |       | 7.02                                                              |       | —                                                   |       |
| Options exercisable at  March 31, 2007 |       | 414,822                  |       | 9.25                                           |       | 7.00                                                              |       | —                                                   |       |
|                                        |            |                          |            |                                                |            |                                                                   |            |                                                          |            |  |

 

The aggregate intrinsicvalue of SARs outstanding or exercisable at March 31, 2007 was zero.  The aggregate intrinsic value is calculatedas the difference between the exercise price of the underlying SARs and themarket price of the common stock.  Thefair value of SARs vested during fiscal 2007 and 2006 was $0.4 million and $0.3million, respectively.  All of the MesabaSARs were cancelled on April 24, 2007.

15

----

*Unrecognized Compensation*

As of March 31, 2007,Mesaba had $0.4 million of total unrecognized compensation cost related to thenon-vested SARs compensation arrangements granted under the SAR plans.  Total unrecognized compensation will be adjustedfor future changes in estimated forfeitures.

**8.****              Commitments andContingencies**

*Workforce*

Approximately 40% ofMesaba’s workforce consists of members of unions representing pilots,mechanics, dispatchers and flight attendants. Early on in its bankruptcy proceedings, Mesaba reached an agreement tomodify its collective bargaining agreement (“CBA”) with its dispatchers.  Subsequently, Mesaba sought approval from theBankruptcy Court to reject the existing CBAs with the remaining three unionsand impose new contract terms on each labor union.  In late October 2006, Mesaba reachedtentative agreements with its pilots, flight attendants and mechanics.  Each union voted to ratify its respectiveagreement, and the new pay rates took effect on December 1, 2006.  As part of the agreements, the unions wereallowed claims totaling $22.7 million based on the present value of the wagesand benefits concessions contained within the unions’ agreements.

*BenefitPlans*

Mesaba maintains a 401(k)benefit plan for eligible employees. Mesaba will match 25% to 125% of employee contributions to the plan, upto 10% of each employee’s eligible earnings, depending on the employee’s lengthof service.  Mesaba’s expense related tothe plan totaled $2.7 million and $3.3 million in fiscal 2007 and 2006,respectively.

In fiscal 2007, Mesababegan a separate 401(k) benefit plan for its pilots whereby contributions tothe plan are at the discretion of Mesaba. Mesaba’s expense related to the new pilot plan was zero in fiscal 2007.Beginning in fiscal 2008, the pilot plan mirrors the plan for other eligibleemployees.

*RegulatoryMatters*

Mesaba is party toongoing FAA proceedings arising in the ordinary course of business.  In the opinion of management, the resolutionof these matters will not have a material adverse effect on Mesaba’s financialposition, results of operations or cash flows.

*Litigation*

From time to time, Mesabahas been a party to legal and tax proceedings arising in the ordinary course ofbusiness.  See Note 1 for a discussion ofMesaba’s bankruptcy proceedings.

*SaabLeasing Litigation*

In 2002, FairbrookLeasing, Inc., Lambert Leasing, Inc. and Swedish Aircraft Holdings AB (“SaabLeasing”) filed a declaratory judgment action against Mesaba relating to 20Saab 340A (“340A”) aircraft leased by Mesaba.  In 2003, the District Courtdeclared that the term sheet relating to the leases for the 340A aircraft was abinding preliminary agreement requiring Mesaba to negotiate in good faithtoward the execution of long-term agreements for each of the 340Aaircraft.  Mesaba appealed this ruling, and while the appeal was pending,Saab Leasing (relying on the District Court’s declaratory judgment ruling)filed a separate action in the District Court alleging approximately $35million in damages for past due and future aircraft lease obligations. While the damages action was pending, the U.S. Court of Appeals for the EighthCircuit affirmed the District Court’s declaratory judgment ruling.  Despite the Eighth Circuit’s ruling, Mesababelieved, based on advice from its legal counsel, that it had defenses in thedamages case that limited Saab Leasing’s ability to recover damages.  TheDistrict Court in the damages action agreed, and on July 6, 2006, grantedMesaba’s motion for partial summary judgment and ruled that Saab Leasing is noteligible to receive damages for the majority of its claims against Mesaba.

Because the potentialdamages for the remaining claim against Mesaba are not significant, Mesabanever established any accrual with regard to this litigation within itscondensed financial statements. However, Mesaba was unable to reach asettlement with Saab Leasing within the context of Mesaba’s bankruptcyproceedings; thus, Mesaba’s bankruptcy estate consented to lift the automaticstay and allow Saab Leasing to appeal the District Court’s July 2006 ruling tothe Eighth Circuit Court of Appeals. Mesaba’s bankruptcy estate will now be required to fund any litigationexpenses and any amounts that may be due to Saab Leasing if the District Court’sruling is reversed.

16

----

*GoldmanBankruptcy Claim*

Goldman LP is the largestcreditor in Mesaba’s bankruptcy proceedings, and it holds approximately $58million in disputed claims asserted by itself or purchased from othercreditors.  All of Goldman LP’s disputed claimsare for aircraft and equipment leases that were rejected by Mesaba. Goldman LP has asserted that the stipulated loss provisions of the applicableleases, under which liquidated damages are calculated, should apply todetermine the total claim amount due to Goldman LP.  Mesaba’s bankruptcyestate has filed for summary judgment with the Bankruptcy Court asserting thatthe liquidated damages constitute unenforceable penalties.  Mesaba’sbankruptcy trustee instead believes that the claim allowed to Goldman LP shouldreflect actual damages suffered, which is the amount related to Goldman LP’sclaim that is recorded in Mesaba’s liabilities subject to compromise. Mesaba’s bankruptcy estate will be funding the litigation expenses related tothe Goldman LP claim and will be responsible for making a distribution toGoldman LP following resolution of the claim.

*OtherLitigation Matters*

Although prior to itsbankruptcy, Mesaba was a defendant in various lawsuits arising in the ordinarycourse of business, those lawsuits will be settled and discharged via thebankruptcy proceedings.  Any liabilitiesthat remain from pre-petition lawsuits must be satisfied through the bankruptcyliquidating trust.

*OtherGuarantees*

Mesaba has letters ofcredit to guarantee certain obligations principally for workers’ compensationpolicies, airport leases and other obligations, which totaled $4.6 million and$4.1 million as of March 31, 2007 and 2006, respectively.  There were no amounts drawn on these lettersof credit during fiscal 2007 or 2006.  Ascollateral for these letters of credit, Mesaba had $4.8 million and $4.5million in cash held in an investment account as of March 31, 2007 and 2006,respectively.  This amount is restrictedand has been classified within “Long-term investments” in Mesaba’s balancesheets.

**9.****              Liabilities Subjectto Compromise**

Liabilities subject tocompromise in Mesaba’s condensed balance sheets at March 31, 2007 and 2006refers to both secured and unsecured obligations that will be accounted forunder a plan of reorganization, including claims incurred prior to the PetitionDate.  They represent the estimatedamount expected to be allowed, plus interest, on known or potential claims tobe resolved through the Chapter 11 bankruptcy process and remain subject tofuture adjustments arising from negotiated settlements, actions of theBankruptcy Court, rejection of executory contracts and unexpired leases, thedetermination as to the value of any collateral securing claims, proofs ofclaim or other events.

Although Mesaba hasestimated the value of the claims that will be allowed by the Bankruptcy Courtat $94.4 million, the Bankruptcy Court will make the final determinationregarding what portion of the $245.7 million in total proofs of claim filedwill be deemed allowable claims.  Thedetermination of how those liabilities will ultimately be treated will not beknown until the claims resolution process is complete.  Mesaba worked with its creditors’ committeeand with MAIR to resolve as many proofs of claim as possible prior to theconfirmation of its plan of reorganization. The proceeds from the sale of Mesaba’s claim in Northwest’s bankruptcyhave been placed in a liquidating trust and are being held for distribution toMesaba’s creditors and MAIR.  Aliquidating trustee has been appointed to work with the creditors’ committeeand with MAIR to continue to resolve any outstanding proofs of claim.  As a result, the amounts of liabilitiessubject to compromise may change.  SeeNote 1 for a discussion of Mesaba’s plan of reorganization

17

----

Liabilitiessubject to compromise at March 31, 2007 and 2006 were as follows, in thousands:
|                                         | ** ** | **March 31** | ** ** | **March 31** | ** ** |
|-----------------------------------------|------------|-------------------|------------|-------------------|------------|
| ** **                              | ** ** | **2007**          | ** ** | **2006**          | ** ** |
| Accounts payable  and other liabilities |       | $                 | 28,395     |              | $          | 34,936 |   |
| Damage claims                           |       | 60,233            |       | 20,066            |       |
| Secured claims                          |       | 3,365             |       | 2,520             |       |
| Priority tax  claims                    |       | 2,404             |       | 2,451             |       |
|                                    |       | $                 | 94,397     |              | $          | 59,973 |   |

 

**10.****       Reorganization Items**

Reorganization itemsrecorded from the Petition Date through March 31, 2007 consisted oftransactions and events that were directly associated with the reorganizationof Mesaba.  The reorganization activityincluded aircraft impairment and other rejection charges, legal andprofessional fees to support the restructuring process, interest income and thewrite-off of maintenance accruals.  Thecharge for damage claims results from estimated claims as a result of Mesaba’srejection or renegotiation of certain aircraft and other leases and obligationsas part of the bankruptcy process.

Net reorganization itemsfor the year ended March 31, 2007 and 2006 were as follows, in thousands:
|                                       | ** ** | **March 31** | ** ** | **March 31** | ** ** |
|---------------------------------------|------------|-------------------|------------|-------------------|------------|
| ** **                            | ** ** | **2007**          | ** ** | **2006**          | ** ** |
| Damage claims                         |       | $                 | 36,719     |              | $          | 20,066 |   |
| Legal and  professional fees          |       | 10,238            |       | 6,896             |       |
| Impairment of  property and equipment |       | (439              | )          | 528               |       |
| Interest income                       |       | (1,356            | )          | (745              | )          |
| Other expenses                        |       | 226               |       | 144               |       |
| Reversal of  accrued maintenance      |       | (5,328            | )          | (4,239            | )          |
|                                  |       | $                 | 40,060     |              | $          | 22,650 |   |

 

**11.  Property and Equipment Held for Sale**

As of March 31, 2007,Mesaba reclassified $2.6 million of surplus Avro rotable and repairables from “Flightequipment” to “Property and equipment held for sale” to properly reflect thevalue of the excess Avro parts which Mesaba is in the process of putting on themarket to sell to other Avro operators.

18

----