**UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION**

**Washington,D.C.  20549**

**FORM 10-K**

**(Mark One)**
| **x**      | **ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF  THE SECURITIES EXCHANGE ACT OF 1934**     |
|------------|-----------------------------------------------------------------------------------------------|
| ** ** | ** **                                                                                    |
| ** ** | **For the  fiscal year ended March 31, 2007**                                                 |
| ** ** | ** **                                                                                    |
| ** ** | **or**                                                                                        |
| ** ** | ** **                                                                                    |
| **o**      | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |

 

**For the transition period from                 to                 **

**Commission File No. 0-17895**

**MAIR HOLDINGS, INC.**

(Exact name of registrant as specified in its charter)

| **Minnesota**                                                   |   | **41-1616499**                        |
|-----------------------------------------------------------------|--------|---------------------------------------|
| (State or other  jurisdiction of incorporation or organization) |   | (I.R.S. Employer  Identification No.) |

 

**150South Fifth Street, Suite 1360**

**Minneapolis,Minnesota  55402**

(Address of principal executive offices) (Zip Code)

Registrant’s telephone number, including area code:  **(612) 333-0021**

Securities registered pursuant to Section 12(b) of the Act:  **None**

Securities registered pursuant to Section 12(g) of the Act:
|                                        | ** ** | Name  of Each Exchange       |
|----------------------------------------|------------|------------------------------|
| **Title of Each Class**                | ** ** | **On Which Registered**      |
| Common Stock, par value $.01 per share |       | The NASDAQ Stock Market, LLC |

 

Indicateby check mark if the registrant is a well-known seasoned issuer, as defined inRule 405 of the Securities Act.

Yeso     No x

Indicateby check mark if the registrant is not required to file reports pursuant toSection 13 or Section 15(d) of the Act.

Yeso     No x

Indicateby check mark whether the registrant (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.  Yes x      Noo

Indicateby check mark if disclosure of delinquent filers pursuant to Item 405 ofRegulation S-K is not contained herein, and will not be contained, to the bestof registrant’s knowledge, in definitive proxy or information statementsincorporated by reference in Part III of this Form 10-K or any amendment tothis Form 10-K. o

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” inRule 12b-2 of the Exchange Act.  (Checkone):
| Large accelerated filer   o | Accelerated  filer   x | Non-accelerated filer   o |
|--------------------------------------------|---------------------------------------|------------------------------------------|

 

Indicateby check mark whether the registrant is a shell company (as defined in Rule12b-2 of the Exchange Act).  Yes o     No x

Theaggregate market value of the voting stock held by non-affiliates as ofSeptember 30, 2006 was $62 million.

Asof June 1, 2007, there were 15,008,285 shares of the registrant’s Common Stockoutstanding.

**DOCUMENTS INCORPORATED BY REFERENCE**

Portionsof the definitive Proxy statement for the registrant’s 2007 Annual Meeting ofShareholders are incorporated by reference into the Part III Items 10, 11, 12,13 and 14 of this Form 10-K.

 

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**MAIR HOLDINGS, INC.**

**Annual Report on Form 10-K**

**For theFiscal Year Ended March 31, 2007**

**TABLE OFCONTENTS**
| **CAUTIONARY NOTE REGARDING  FORWARD-LOOKING STATEMENTS**                                                                  |
|----------------------------------------------------------------------------------------------------------------------------|
| ** **                                                                                                                 |
| **PART I**                                                                                                                 |
| ** **                                                                                                                 |
| ITEM 1. BUSINESS                                                                                                           |
| ITEM 1A. RISK FACTORS                                                                                                      |
| ITEM 1B.  UNRESOLVED STAFF COMMENTS                                                                                        |
| ITEM 2. PROPERTIES                                                                                                         |
| ITEM  3. LEGAL PROCEEDINGS                                                                                                 |
| ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY  HOLDERS                                                               |
| EXECUTIVE OFFICERS OF THE REGISTRANT                                                                                       |
|                                                                                                                       |
| **PART II**                                                                                                                |
| ** **                                                                                                                 |
| ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED  SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
| ITEM 6. SELECTED FINANCIAL DATA                                                                                            |
| ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF  FINANCIAL CONDITION AND RESULTS OF OPERATIONS                        |
| ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES  ABOUT MARKET RISK                                                       |
| ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA                                                                         |
| ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL  DISCLOSURE                             |
| ITEM 9A.  CONTROLS AND PROCEDURES                                                                                          |
| ITEM 9B. OTHER  INFORMATION                                                                                                |
|                                                                                                                       |
| **PART III**                                                                                                               |
| ** **                                                                                                                 |
| ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT                                                               |
| ITEM 11. EXECUTIVE  COMPENSATION                                                                                           |
| ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED  SHAREHOLDER MATTERS                  |
| ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS                                                                   |
| ITEM 14.  PRINCIPAL ACCOUNTANT FEES AND SERVICES                                                                           |
|                                                                                                                       |
| **PART IV**                                                                                                                |
| ** **                                                                                                                 |
| ITEM 15.  EXHIBITS AND FINANCIAL STATEMENT SCHEDULES                                                                       |
|                                                                                                                       |
| **SIGNATURES**                                                                                                             |
| ** **                                                                                                                 |
| **EXHIBIT INDEX**                                                                                                          |

 

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# **CAUTIONARYNOTE REGARDING FORWARD-LOOKING STATEMENTS**

Statements in this AnnualReport on Form 10-K of MAIR Holdings, Inc. (“MAIR” or the “Company”)under the caption “Business” and “Management’s Discussion and Analysis ofFinancial Condition and Results of Operations” and elsewhere in this report areforward-looking and are based upon information currently available to theCompany.  The Company, through itsofficers, directors or employees, may also from time to time make oral forward-lookingstatements.  In connection with the “safeharbor” provisions of the Private Securities Litigation Reform Act of 1995, theCompany is hereby identifying important factors that could cause actual resultsto differ materially from those contained in any forward-looking statementmade by or on behalf of the Company. Many important factors that could cause such a difference are describedin “Item 1A.  Risk Factors” in thisAnnual Report on Form 10-K.

Undue reliance should notbe placed on the Company’s forward-looking statements because the mattersthey describe are subject to known and unknown risks, uncertainties and otherunpredictable factors, many of which are beyond the Company’s control.  The Company’s forward-lookingstatements are based on the information currently available and speak only asof the date on which this report was filed with the United States Securitiesand Exchange Commission (“SEC”).  Overtime, actual results, performance or achievements will likely differ from theanticipated results, performance or achievements that are expressed or impliedby the Company’s forward-looking statements, and such differences mightbe significant and materially adverse to the Company’s shareholders.

All subsequent written ororal forward-looking statements attributable to the Company or personsacting on the Company’s behalf are expressly qualified by the factors describedabove.  The Company assumes noobligation, and disclaims any obligation, to update information contained inthis Annual Report on Form 10-K, including forward-lookingstatements, as a result of facts, events or circumstances after the date ofthis report, except as required by law in the normal course of its publicdisclosure practices.

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# **PART I**

## **Item 1.  BUSINESS**

MAIR is the holdingcompany for Big Sky Transportation Co. (“Big Sky”), a regional air carrierbased in Billings, Montana.  As of March31, 2007, MAIR was also the holding company for Mesaba Aviation, Inc. (“Mesaba”),a regional air carrier based in Minneapolis, Minnesota.  The Company’s consolidated financialstatements include the accounts of MAIR and Big Sky, as well as Mesaba untilMesaba’s bankruptcy filing on October 13, 2005 (the “Petition Date”).  All intercompany transactions and balanceshave been eliminated in consolidation. As discussed below, the accounts of Mesaba have been deconsolidated fromthe Company’s consolidated financial statements effective as of the PetitionDate.

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 the Petition Date, after which Mesaba operated itsbusiness as a debtor-in-possession pursuant to the BankruptcyCode.  Mesaba filed its plan of reorganizationon January 22, 2007, which provided for Mesaba to exit bankruptcy as a wholly-ownedsubsidiary of Northwest Airlines, Inc. (“Northwest”).  The plan of reorganization was approved bythe Bankruptcy Court on April 9, 2007. On April 24, 2007, the plan of reorganization became effective andMesaba exited bankruptcy as a wholly-owned subsidiary of Northwest, and,therefore, is no longer owned by MAIR. As a result, Mesaba’s financial statements for fiscal 2007 are reportedin “Item 8. Financial Statements and Supplementary Data – Note 18” on acondensed basis.

Due to Mesaba’sbankruptcy and the uncertainties surrounding the nature, timing, and specificsof the bankruptcy proceedings, MAIR deconsolidated Mesaba’s financial resultseffective as of the Petition Date.  As aresult, Mesaba’s assets and liabilities have been removed from the Company’sconsolidated balance sheets as of the Petition Date and through March 31,2007.  Mesaba’s results of operationshave been removed from the Company’s consolidated results of operations andcash flows since the Petition Date, but continue to be included in suchconsolidated financial statements for periods prior to the Petition Date.

MAIR has accounted forMesaba’s financial results under the equity method of accounting since Mesaba’sbankruptcy filing on October 13, 2005. In accordance with Accounting Principles Board (“APB”) Opinion No. 18, **The EquityMethod of Accounting for Investments in Common Stock****, MAIR**evaluated whether its investment in Mesaba had experienced an other-than-temporaryimpairment as of March 31, 2006.  MAIR’sevaluation utilized a market and income approach, including a discounted cashflow analysis.  After analyzing Mesaba’sactual losses in fiscal 2006, projected losses in fiscal 2007 as ittransitioned to a Saab-only operation, Mesaba’s five-year Saabbusiness plan and Mesaba’s liabilities subject to compromise as of March 31,2006, MAIR concluded that its remaining investment in Mesaba had experienced another-than-temporary impairment. Accordingly, effective March 31, 2006, MAIR recorded an $8.9 millionimpairment charge to write off its remaining equity investment in Mesaba.  The impairment charge was recorded in “Impairmentand other charges” in the fiscal 2006 consolidated statement of operations.

As of March 31, 2007,Mesaba reported a net loss of $71.3 million.  MAIR did not record any additional losses inits consolidated financial statements due to MAIR not having any furtherobligations to fund any of Mesaba’s additional losses.

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 theapplication of accounting principles generally accepted in the United States ofAmerica (“GAAP”) in the preparation of financial statements.  However, SOP 90-7 does require that thefinancial statements, for periods including and subsequent to the filing of theChapter 11 petition, distinguish transactions and events that are directlyassociated with the reorganization from the ongoing operations of thebusiness.  See “Item 8. FinancialStatements and Supplementary Data – Note 18” for the condensed financialstatements of Mesaba presented in accordance with SOP 90-7 on a stand-alonebasis as of 

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March 31, 2007 and 2006,and its results of operations for each of the three years in the period endedMarch 31, 2007.

Since the Petition Date,intercompany balances between MAIR and Mesaba have not been eliminated. As ofMarch 31, 2007 and 2006, MAIR had an intercompany payable to Mesaba of $0.8 millionand $0.1 million, respectively, and Mesaba had equal intercompany amountsreceivable from MAIR.  During the thirdquarter of fiscal 2007, MAIR received $5.5 million in tax refunds relatedto net operating loss (“NOL”) carryback claims for fiscal 2006 and 2005, ofwhich $2.9 million was payable to Mesaba in accordance with the Company’stax sharing agreement.  During the fourthquarter of fiscal 2007, MAIR, Mesaba and the Internal Revenue Service (“IRS”)reached a settlement regarding Mesaba’s accounting for per diem allowancesduring fiscal years 2001 through 2004.  Under the settlement agreement MAIR agreed to pay the IRS $1.7 millionin taxes and interest on behalf of Mesaba for adjustments to taxable income forthe reclassification of per diem amounts for fiscal years 2002 and 2003.  The IRS adjustment and NOL carryback for fiscal2004 created an additional $0.2 million receivable from Mesaba toMAIR.  The tax return for fiscal 2005 wasamended to incorporate the IRS adjustments and resulted in a net additional$0.2 million receivable from Mesaba to MAIR.

As a result of the April2007 settlement of MAIR’s proof of claim in Mesaba’s bankruptcy proceedings,MAIR may be responsible for certain of Mesaba’s tax obligations incurredthrough April 24, 2007, the effective date of Mesaba’s plan of reorganization,for those states in which MAIR and Mesaba historically filed a unitary taxreturn. Although management does not believe there is any remaining exposure, underthe settlement between MAIR and Mesaba, Mesaba agreed to relinquish its rightto the $0.8 million intercompany balance so that MAIR can use these fundsto pay any Mesaba tax obligations that taxing authorities seek to collect fromMAIR.

**Operations**

Big Sky operates as aregional air carrier based in Billings, Montana, providing scheduled passenger,freight, express package and charter services. As of March 31, 2007, Big Sky provided scheduled air service to 18communities in Montana, Colorado, Idaho, Illinois, Oregon, Wyoming andWisconsin.  Big Sky operates dailyscheduled flights providing interline and online connecting services and localmarket services.  Big Sky also has code-sharingagreements with Alaska Airlines, Horizon Air, US Air and Northwest, where itsservices are marketed jointly with those air carriers for connecting flights.

In April 2007, Big Skybegan operations for Delta Air Lines, Inc. (“Delta”) serving communities to andfrom Boston, Massachusetts, as a Delta Connection carrier.  As of April 8, 2007, Big Sky provided DeltaConnection service to six cities in New York, Maine and Massachusetts with afleet of three Beechcraft 1900D aircraft. During the remainder of fiscal year 2008, Big Sky is scheduled toincrease this operation by adding five additional aircraft and providing serviceto other similar communities.

Big Sky participates inthe Essential Air Service (“EAS”) program with the Department of Transportation(“DOT”).  The EAS program subsidizes aircarriers to provide air service to designated rural communities throughout the countrythat could not otherwise economically justify that service based on theirpassenger traffic.  The DOT pays EASsubsidies for each departure in a covered market. During the years ended March31, 2007, 2006 and 2005, Big Sky recognized revenue from EAS subsidies of $7.9 million,$8.0 million, and $7.3 million, respectively.

**Regulations**

Pursuant to Federalaviation laws, the DOT and the Federal Aviation Administration (“FAA”) havecertain regulatory authority over the operations of all air carriers.  The jurisdiction of the FAA extends primarilyto the safety and operational provisions of the Federal Aviation Act, while theresponsibility of the DOT involves principally the regulation of certaineconomic aspects of airline operations.

*FAA Regulation*

Big Sky holds an aircarrier certificate issued by the FAA permitting Big Sky to conduct flightoperations in compliance with Federal Aviation Regulations, which are the sameregulatory requirements applicable to major airlines.  The FAA regulations to which Big Sky issubject are extensive and include, among other items, regulation of aircraftmaintenance and operations, equipment, ground facilities, dispatch,communications, training, weather 

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observation, flightpersonnel and other matters affecting air safety.  To ensure compliance with its regulations,the FAA requires airlines to obtain operating, airworthiness and othercertificates that are subject to suspension or revocation for cause.  Big Sky holds all certificates necessary forits operations.

Under FAA regulations,Big Sky has established, and the FAA has approved, maintenance programs for theaircraft it operates.  These programsprovide for the ongoing maintenance of Big Sky’s aircraft, ranging fromfrequent routine inspections to major overhauls.  Big Sky’s aircraft require various levels ofmaintenance or “checks” and periodically undergo complete overhauls.  Maintenance programs are monitored closely bythe FAA, with FAA representatives routinely present at the airline’smaintenance facilities.  The FAA issuesAirworthiness Directives (“ADs”), which mandate changes to an air carrier’smaintenance program.  These ADs, whichinclude requirements for structural modifications to certain aircraft, areissued to ensure that the nation’s transport aircraft fleet remainsairworthy.  Big Sky is currently, andexpects to remain, in compliance with all applicable requirements under all ADsand FAA approved maintenance programs.

*DOT Regulation*

Big Sky holds aCertificate of Public Convenience and Necessity issued by the DOT under federalaviation laws.  As a certificatedcarrier, Big Sky is required to file quarterly reports with the DOT, includinga report of aircraft operating expenses and related statistics.

*Transportation Security Administration Regulation*

In response to theterrorist attacks of September 11, 2001, Congress enacted the Aviation andTransportation Security Act of 2001 (the “ATSA”).  The ATSA created the Transportation SecurityAdministration (the “TSA”) to oversee aviation and airport security.  Among other security measures, the ATSAenhanced background checks, provided for federal air marshals aboard flights,improved flight deck security, enhanced airline crew security training,improved training of security screening personnel and enhanced airportperimeter security.

*Railway Labor Act*

Big Sky’s relations withits labor unions are governed by the Railway Labor Act (the “RLA”).  Comprehensive provisions are set forth in theRLA establishing the right of airline employees to organize and bargaincollectively and imposing a duty upon air carriers and their employees to exertevery reasonable effort to make and maintain collective bargainingagreements.  The RLA contains detailedprocedures which must be exhausted before a lawful work stoppage may occur,including a formal declaration of an impasse by the National Mediation Board.

*Environmental Regulations*

Big Sky is subject toregulation under various environmental laws and regulations, including theClean Air Act, the Clean Water Act and Comprehensive Environmental Response,Compensation and Liability Act of 1980. In addition, many state and local governments have adopted environmentallaws and regulations to which Big Sky’s operations are subject.  Environmental laws and regulations are administeredby numerous federal and state agencies. Management of Big Sky believes that Big Sky is in compliance withstandards for aircraft exhaust emissions and fuel storage facilities issued bythe Environmental Protection Agency and state and local agencies.

*Other Regulations*

Under the Noise ControlAct of 1972 and the Aviation Safety and Noise Abatement Act of 1979, the FAAhas authority to monitor and regulate aircraft engine noise.  Management of Big Sky believes that Big Sky’saircraft comply with or are exempt from such regulations.

**Insurance**

The Company carries thetypes of insurance customary in the airline industry, including coverage forpublic liability, passenger liability, property damage, aircraft loss ordamage, baggage and cargo liability, war risk, directors’ and officers’liability and workers’ compensation.

Big Sky was given theoption under the ATSA to purchase certain third-party war risk liabilityinsurance from the United States government on an interim basis at rates thatare more favorable than those available from the private market.  Big Sky has purchased this insurance from theFAA as provided under the ATSA.

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**Competition**

The airline industry ishighly competitive as a result of the Airline Deregulation Act of 1978 (the “DeregulationAct”), which generally increased competition by eliminating restrictions onfares and route selection.  TheDeregulation Act also contributed to the withdrawal of national and majorcarriers from short-haul markets by allowing them to more easily obtain additionallong-haul routes, which can be served more efficiently and profitably bylarger jet aircraft.  Elimination ofbarriers to entry into new markets, however, also created greater potential forcompeting service by other carriers operating small, fuel-efficientaircraft on short-haul routes serving small and medium-sizedcities.  Big Sky competes with otherregional airlines on most routes it serves. Big Sky also faces competition from regional carriers offering serviceto alternative hubs for connecting flights. Other carriers, including major carriers, can at any time institutecompeting service on routes served by Big Sky.

Competitive factors inthe airline industry generally include fares, frequency and dependability ofservice, convenience of flight schedules, type of aircraft flown, airportsserved, relationships with travel agents and efficiency and reliability ofreservations systems and ticketing services. The compatibility of flight schedules with those of other airlines andthe ability to offer through fares and convenient inter-airline flightconnections are also important competitive factors.

**Fuel**

Big Sky purchases itsfuel under arrangements with several fuel suppliers.  None of these arrangements providesprotection from fluctuations in fuel prices and supply.  Big Sky believes that its arrangements assurean adequate supply of fuel for current and future operations.  In fiscal 2007, Big Sky did not purchase anyfuel from Northwest.  Big Sky purchasedfuel from Northwest for $1.4 million and $1.7 million in fiscal 2006and 2005, respectively.

**Fares**

Big Sky generates itspassenger revenues from passenger ticket sales through its own reservationscenter, through participation in Airline Reporting Corp., a clearinghouse fortravel agencies, and through on-line e-ticketing via Big Sky’swebsite at www.bigskyair.com.  Big Skyhas ticketing and baggage agreements with all major airlines that serve itsregions, which allow its services to be sold by those airlines.  Big Sky establishes its passenger fares on amarket-by-market basis utilizing a combination of factors,including the cost of providing the service based upon projected passengerlevels, the competitive price of alternative means of transportation (includingboth air and surface) and the distance between markets.

**Aircraft Maintenance**

The maintenance performedon Big Sky’s aircraft can be divided into two general categories:  routine line maintenance and majoroverhauls.  Line maintenance consists ofroutine daily and weekly scheduled maintenance checks on aircraft, includingpre-flight, daily, weekly and overnight checks and any diagnostic androutine repairs.  Big Sky employs its ownaircraft, avionics and engine maintenance staffs that perform substantially allroutine line maintenance to the aircraft and engines.  Major overhauls on Big Sky’s fleets,including airframes, engines and other rotable parts, are performed internallyor at FAA authorized facilities.

**Airport and Terminal Services**

Big Sky leases airportcounter, baggage and ramp space for ground services and customer services atall of the cities it currently serves. Big Sky contracts for ground handling services from other airlines asneeded.

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**Employees**

As of March 31, 2007,MAIR had six employees, and Big Sky employed 363 employees.  Approximately 53% of Big Sky’s employees arerepresented by labor unions.  Big Sky didnot have any official work stoppages during fiscal 2007.  Big Sky’s labor agreements are as follows:
|                                         | ** ** | **Approximate**    | ** ** | ** **                                                     | ** ** | ** **    | ** ** |
|-----------------------------------------|------------|--------------------|------------|----------------------------------------------------------------|------------|---------------|------------|
| ** **                              | ** ** | **Number of** | ** ** | ** **                                                     | ** ** | **Amendable** | ** ** |
| **Employee Group**                 | ** ** | **Employees**      | ** ** | **Union**                                                      | ** ** | **Date**      | ** ** |
| Pilots                                  |       | 123                |       | United  Transportation Union                                   |       | December 2009 |       |
| Mechanics                               |       | 55                 |       | International  Association of Machinists and Aerospace Workers |       | August 2010   |       |
| Dispatchers                             |       | 16                 |       | United  Transportation Union                                   |       | December 2009 |       |
| Customer service  agents                |       | 125                |       | None                                                           |       |          |       |
| Management / Administrative  / Clerical |       | 44                 |       | None                                                           |       |          |       |
|                                    |       | 363                |       |                                                           |       |          |       |

 

**Cyclicality and Seasonality**

The airline industrygenerally is subject to cyclical moves in the economy.  Because both personal discretionary traveland business travel may be expected to decline during periods of economicweakness, the airline industry tends to experience poorer financial resultsduring such periods.

Seasonal factors,primarily weather conditions and passenger demand, generally affect Big Sky’smonthly passenger boardings.  Big Sky hashistorically shown a higher level of passenger boardings in the July throughDecember period as compared with the January through June period for many ofthe cities served.  As a result of such factors,Big Sky’s revenues and earnings have shown a corresponding increase during theJuly through December period.

**Recent Developments**

In December 2006, Deltaannounced that it had selected Big Sky to operate up to eight Beechcraft 1900Daircraft for Delta between Boston and various cities in the northeast UnitedStates.  On March 12, 2007, Big Sky andDelta executed a Hosted Prorate Agreement (“HPA”) governing the Bostonoperation.  Under the HPA, Delta isresponsible for all ticketing and reservations for flights operated by BigSky.  Big Sky receives 100% of theticketing revenue for all local traffic on Big Sky flights.  Big Sky receives a prorated portion of theticket revenue for passengers who connect through Boston to other Deltadestinations.  On the same date, Big Skyentered into an agreement with Champlain Enterprises, Inc. d/b/a CommutAir (“CommutAir”)to purchase eight Beechcraft 1900D aircraft and related spare parts withdelivery scheduled during the last half of calendar 2007.  Big Sky began its Boston operations in April2007.  Additionally, Big Sky was awardeda two-year contract from the DOT to provide EAS service between Massena,Ogdensburg and Watertown, New York to Boston, Massachusetts.  This service began in April 2007, and is apart of Big Sky’s Delta operations.

In January 2007, Mesabaand Northwest entered into a Stock Purchase and Reorganization Agreement (“SPRA”)by which Mesaba was to exit bankruptcy as a wholly-owned operatingsubsidiary of Northwest subject to the approval of Mesaba’s and Northwest’srespective bankruptcy courts.  Northwest’sbankruptcy court approved the SPRA on February 27, 2007.  The BankruptcyCourt approved Mesaba’s plan of reorganization on April 9, 2007.  Mesaba’splan of reorganization became effective on April 24, 2007, at which time Mesabaexited bankruptcy.  Thus, on April 24, 2007, MAIR’s ownership of Mesabaceased.

**Available Information**

The Company maintains awebsite at www.mairholdings.com.  On itswebsite, free of charge, the Company makes available its Annual Report on Form10-K and links to the SEC website for other public filings.  The Company’s 

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Code of Ethics for itsChief Executive Officer and financial officers is also available on itswebsite.  All information is alsoavailable in print upon written request to the Company’s General Counsel at 150South Fifth Street, Suite 1360, Minneapolis, Minnesota 55402.  The Company is not including the informationcontained on or available through its website as a part of, or incorporatingsuch information by reference into, this Annual Report on Form 10-K.

## **Item 1A.  RISK FACTORS**

The Company’s operationsand financial results are subject to various risks and uncertainties, some ofwhich are described below.  The Companycould also be adversely affected by additional risks and uncertainties notpresently known or believed to be material.

**Risks Related to Mesaba’sBankruptcy**

*If the final creditors’ claimsallowed in Mesaba’s bankruptcy proceedings exceed $125 million, MAIR willnot receive an equity distribution from Mesaba’s bankruptcy estate.*

As a part of Mesaba’sbankruptcy plan of reorganization, Northwest allowed Mesaba a $145 millionclaim in Northwest’s own bankruptcy case. This claim was subsequently sold to The Goldman Sachs Group, Inc. (“GoldmanSachs”) for approximately $125 million, and the proceeds of this sale wereused to fund the liquidating trust established to make distributions to Mesaba’screditors.  MAIR has an allowed claim ofapproximately $6.2 million in Mesaba’s bankruptcy estate.  In addition, Northwest assigned its $7.3 millionallowed claim in Mesaba’s bankruptcy to MAIR. Therefore, MAIR could receive up to $13.5 million in distributionsfrom Mesaba’s bankruptcy estate, and distributions for these claims will bemade pro rata with other unsecured creditors’ claims.  Mesaba estimated the total creditors’ claimsin its bankruptcy case at approximately $94 million.  If this estimate proves correct, after allcreditors are paid, MAIR could receive up to an additional $31 million forits equity ownership of Mesaba.  However,the failure of Mesaba’s bankruptcy estate to settle creditors’ claims couldresult in a larger portion of the liquidating trust being distributed tocreditors.  In such event, MAIR couldreceive a lower amount, or no amount at all, in distributions for its equityownership of Mesaba.

*If MAIR is unable to find analternate sublessee for Mesaba’s Cincinnati/Northern Kentucky Airport facility,MAIR may be required to accrue an additional $9.4 million of expenserelated to the bonds associated with the initial financing of the facility.*

Prior to its bankruptcy,Mesaba leased a facility at the Cincinnati/Northern Kentucky InternationalAirport, but vacated the facility and ceased making the required lease paymentson it in November 2005.  In 1999, MAIR unconditionally guaranteed full andprompt payment of the ground lease and the bonds associated with the initialfinancing of the facility.  In accordance with this guaranty, MAIR hasmade the required bond and ground lease payments due since November 2005. In April 2006, in exchange for the bondholders forbearing acceleration of thebonds, MAIR delivered a letter of credit to the bondholders to assure paymentof the bonds.  Subsequently, Mesaba rejected the facilities leaseassociated with the facility, but assumed and assigned the related ground leaseto MAIR.  The Airport Board consented to the assignment of the groundlease.  MAIR and the bondholders are negotiating an amendment to theoriginal forbearance that provides for the bondholders’ continued forbearanceto allow MAIR a specified number of months to identify a new tenant and executea sublease for the property.  As of December 31, 2005, MAIR recorded a$4.8 million liability with respect to the lease and guaranty, whichassumed that the facility would remain vacant for two years, during which timeMAIR would continue to make the bond and lease payments, and that thereafterMAIR would be able to sublease the facility at a 20% discount.  At March31, 2007, this accrued liability totaled $3.4 million.  If MAIR isunable to find an alternate sublessee for the facility, the bondholders havethe right to call the bonds, and MAIR may be required to record an additionalliability of up to $9.4 million.

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**Risks Related to the Company’sBusiness and Operation**

*Big Sky’s success is dependent onits ability to obtain all necessary aircraft, engines, parts and relatedmaintenance and support from various aircraft manufacturers and vendors.*

Big Sky is dependent onvarious aircraft manufacturers and other vendors to provide sufficient partsand related maintenance and support services on a timely basis.  Additionally, Big Sky relies on variousengine manufacturers for parts, repair and overhaul services and other types ofsupport services.  The failure ofaircraft or engine manufacturers and other vendors to provide parts or relatedservices on a timely, cost-effective basis could materially and adverselyaffect Big Sky’s business, financial condition and results of operations.

*Big Sky could incur significantcosts if it experiences difficulty finding, training and retaining employees.*

Big Sky’s business islabor-intensive and requires large numbers of pilots, maintenancetechnicians and other personnel.  Theairline industry has from time to time experienced a shortage of qualifiedpersonnel, specifically pilots and maintenance technicians.  In addition, as is common with most airlinecompetitors, Big Sky has faced turnover of its employees.  For example, Big Sky’s pilots and maintenancetechnicians may leave to work for larger airlines which generally offer highersalaries and more extensive benefit programs than regional airlines arefinancially able to offer.  In addition,Big Sky will nearly double the size of its pilot workforce in fiscal 2008 as itexpands its Boston operation with Delta. In the event of a significant increase in the turnover of employees inthe above-mentioned positions, Big Sky would incur significantly highertraining costs than would otherwise be necessary.  Big Sky cannot provide assurance that it willbe able to recruit, train and retain the qualified employees it requires tocarry out its business plan.

*Big Sky could be adverselyaffected by the highly competitive nature of the airline industry.*

The airline industry ishighly competitive, and Big Sky competes with low-cost airlines andregional carriers on many of its routes. Some of these competitors are significantly larger and possess greaterresources than Big Sky.  Moreover, anynew entry in the markets Big Sky serves could lessen the economic benefits BigSky derives from servicing these markets.

*MAIR’sability to diversify within the airline industry may be limited by the terms ofits side letter agreement with Mesaba’s pilots’ union.*

In January 2004, MAIRentered into a letter agreement with the Air Line Pilots Association,International (“ALPA”), Mesaba’s pilots’ union, that may limit the types ofaircraft Big Sky may fly and may place additional requirements on MAIR if itforms or acquires any other airline subsidiary. In December 2006, MAIR notified ALPA that MAIR terminated the letteragreement.  MAIR subsequently filed alawsuit in federal district court in Houston, Texas requesting a declaratoryjudgment that the letter agreement contains no termination date and is,therefore, terminable-at-will. If MAIR does not prevail in this litigation, MAIR may not be able toexpand Big Sky or otherwise diversify MAIR’s operations in the airlineindustry.

*Big Sky’s compliance with variousregulations governing the airline industry can be costly, and Big Sky could beharmed if it fails to comply with such regulations.*

Airlines are subject toextensive regulatory and legal requirements that involve significant compliancecosts that can result in increased costs for passengers and the airline.  The FAA, DOT and TSA periodically proposeadditional laws, regulations, taxes and airport rates and charges.  Such measures could have the effect ofraising ticket prices, reducing revenue, increasing costs or reducing demandfor air travel.  Big Sky expects tocontinue incurring expenses to comply with existing and futureregulations.  Moreover, if Big Sky failsto comply with applicable regulations, it may be subject to sanctions,including the following:

·                  warning letters;

·                  fines;

·                  injunctions;

8

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·                  orders relating to grounding ofaircraft, inspection of aircraft, installation of new safety-relateditems and removal and replacement of certain aircraft parts; or

·                  criminalprosecutions.

*Future terrorist attacks, otherworld events, general economic conditions and other factors beyond the Company’scontrol could substantially harm the Company.*

The terrorist attacks ofSeptember 11, 2001 and the prolonged unrest in the Middle East materiallyaffected and continue to affect the airline industry.  Concerns about further terrorist attacks havehad a negative impact on air travel demand. In addition, security procedures introduced at airports since the attackshave increased the inconvenience of air travel, both in reality and in customerperception, leading to further reduction in demand.  Finally, the continued rise in jet fuelprices has had an adverse economic effect on all airlines, including BigSky.  Additional terrorist attacks, thefear of such attacks, continued conflict in Iraq, Afghanistan or othercountries or continued increases in fuel prices could further affect theairline industry and could cause general instability in financial markets.

Because a substantialportion of air travel, including business travel, is discretionary, theindustry tends to experience adverse financial results during general economicdownturns.  Soft economic conditionscontinue to put pressure on the profitability of the industry.  Any general decline in passenger traffic mayharm the Company’s business.

Big Sky’s operations arealso subject to delays caused by factors beyond Big Sky’s control, includingair traffic congestion at airports, adverse weather conditions and increasedsecurity measures.  Such delays frustratepassengers, reduce aircraft utilization and increase costs, all of which mayaffect profitability and harm the Company’s financial condition and results ofoperations.

*Big Sky is increasingly dependentupon technology in its operations, and any failure of such technology couldadversely affect it.*

Big Sky has madeinvestments in technology to manage its operations.  In particular, the systems operations controlcenter, which oversees daily flight operations, is dependent on a number oftechnology systems to operate effectively. These technology systems may be vulnerable to various sources ofinterruption due to events beyond Big Sky’s control, including naturaldisasters, terrorist attacks, computer viruses and hackers.  In addition, large-scale interruptionin technology on which Big Sky depends, such as power, telecommunications orthe Internet, could substantially disrupt Big Sky’s operations.

*Any airline accident in which BigSky is involved could subject Big Sky to substantial liability and seriouslyharm the Company’s financial condition and results of operations.*

An accident involving BigSky aircraft could result in injuries and loss of life and, therefore, resultin significant claims from injured persons and surviving relatives.  An accident could also result in substantialproperty damage, loss of aircraft from service and adverse publicity for theaffected airline.  The DOT requiresairlines to carry liability insurance. Although Big Sky believes its liability insurance is in amounts and ofthe type generally consistent with industry practice, substantial claimsresulting from an accident in excess of insurance coverage would harm theCompany’s business and financial results. Any resulting claims would also be costly to defend and could harm BigSky’s reputation.  Moreover, any aircraftaccident, even if fully insured or not directly involving Big Sky, could causea public perception that flying is less safe or reliable than othertransportation alternatives, which could harm the Company’s financial conditionand results of operations.

**Risks Related to the Company’sStock**

*Lack ofsufficient aviation-related business opportunities or lack of shareholdersupport may preclude MAIR from implementing its diversification strategy.*

Following Mesaba’s exitfrom bankruptcy as a subsidiary of Northwest, MAIR’s only operating subsidiaryis Big Sky.  Additionally, MAIR has approximately $66 million of cashand investments at March 31, 2007.  MAIR has 

9

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expressed its desire tocontinue to grow Big Sky’s operation and seek other business opportunitieswithin the airline industry.  Meanwhile, certain of MAIR’s shareholdershave publicly stated their belief that MAIR should return its cash to itsshareholders.  MAIR has been reviewing various strategic alternatives fordiversifying, and each alternative is weighed against the value of returningcash to MAIR’s shareholders.  If MAIR is unable to identify acceptablediversification opportunities or if it is unable to obtain shareholder supportfor those opportunities it does identify, MAIR may return some or all of itscash to its shareholders.  In such event, MAIR may effectively beprecluded from pursuing any other strategic transactions.

*Future sales of the Company’scommon stock by its shareholders could depress the price of the Company’sstock.*

Sales of a large numberof shares of the Company’s common stock or the availability of a large numberof shares for sale could adversely affect the market price of the Company’scommon stock.  As of March 31, 2007, theCompany had 15,008,285 shares of common stock outstanding.  Several of the Company’s shareholders ownsubstantial blocks of the Company’s common stock.  Future sales of these large blocks of theCompany’s common stock could substantially depress the Company’s stock price.

*The Company’s stock price maycontinue to be volatile.*

In the past two fiscalyears, the market price of the Company’s common stock has ranged from a low of$4.50 per share to a high of $10.23 per share. Because the Company’s stock is thinly traded, its market price issensitive and may continue to experience substantial fluctuations due to avariety of factors, including the following:

·                  failure of the Company’s operatingresults to meet analysts’ or investors’ expectations in any quarter;

·                  securities analysts’ estimates;

·                  material announcements by the Companyor Big Sky’s competitors;

·                  public sales of a substantial numberof shares of the Company’s common stock;

·                  regulatory actions; or

·                  generalmarket conditions.

*Anti-takeover provisions ofthe Company’s articles of incorporation and bylaws and of Minnesota law coulddiscourage, delay or prevent a change in control.*

The Company’s articles ofincorporation and bylaws, along with Minnesota law, could discourage, delay orprevent persons from acquiring or attempting to acquire the Company.  The Company’s articles of incorporationauthorize the board of directors, without action by the Company’s shareholders,to designate and issue preferred stock in one or more series, with such rights,preferences and privileges as the board of directors shall determine.  The Company’s articles of incorporation andbylaws also mandate a classified board of directors, which makes changingcontrol of the board more difficult.  TheCompany’s bylaws grant the board of directors the authority to adopt, amend orrepeal all or any of such bylaws, subject to the power of the shareholders tochange or repeal such bylaws.  TheCompany’s bylaws also limit who may call meetings of the Company’sshareholders.

As a public corporation,the Company is prohibited by the Minnesota Business Corporation Act, exceptunder certain specified circumstances, from engaging in any merger, significantsale of stock or assets or business combination with any shareholder or groupof shareholders who own at least 10% of the Company’s common stock.

## **Item 1B.  UNRESOLVEDSTAFF COMMENTS**

None.

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## **Item 2.  PROPERTIES**

**Aircraft**

*Big Sky*

The following table setsforth certain information as to Big Sky’s passenger aircraft fleet as of March31, 2007.
|                                | ** ** | ** **         | ** ** | ** **   | ** ** | **Approximate**        | ** ** | **Approximate**           | ** ** |
|--------------------------------|------------|--------------------|------------|--------------|------------|------------------------|------------|---------------------------|------------|
| ** **                     | ** ** | **Number of** | ** ** | **Seating**  | ** ** | **Single Flight** | ** ** | **Average Cruising** | ** ** |
| **Type of Aircraft** | ** ** | **Aircraft**       | ** ** | **Capacity** | ** ** | **Range (miles)** | ** ** | **Speed (mph)**      | ** ** |
| Operating:                     |       |               |       |         |       |                   |       |                      |       |
| Beechcraft 1900D               |       | 10                 |       | 19           |       | 750                    |       | 325                       |       |
| Nonoperating:                  |       |               |       |         |       |                   |       |                      |       |
| Metro III                      |       | 1                  |       |         |       |                   |       |                      |       |

 

As of March 31, 2007, BigSky’s fleet of Metro and Beechcraft aircraft had remaining lease terms of 5 to44 months and aggregate monthly lease payments of approximately $0.2 million.On March 12, 2007, Big Sky entered into an agreement with CommutAir to purchaseeight Beechcraft 1900D aircraft and related spare parts with delivery scheduledduring the last half of calendar 2007. Big Sky is in the process of obtaining financing for these aircraft.

**Facilities**

*MAIR*

MAIR’s executive officesare located in downtown Minneapolis, Minnesota. MAIR leases approximately 3,370 square feet of office space with leasepayments of approximately $6,000 per month. The lease expires on September 30, 2010 but contains an earlytermination provision allowing the lease to be cancelled on September 30, 2007.

*Big Sky*

Big Sky’s main hangar andoperations offices are located at the Billings Logan International Airport inBillings, Montana.  The main facilityconsists of a 12,000 square foot building that can hold three aircraft formaintenance, a parts warehouse, back shop area and two floors of offices.  A two-story building adjacent to thehangar houses Big Sky’s operations center and flight administrationoffices.  These buildings are situated onapproximately 83,000 square feet of land owned by the City of Billings andleased to Big Sky on long-term facility and ground leases.  The facility lease has a 19-year term,and the ground lease has a 26-year term. In April 2007, Big Sky entered into a five year agreement to lease approximately5,000 square feet of office space in downtown Billings for variousadministrative and reservation functions. The combined monthly lease paymentsfor all of Big Sky’s facilities are approximately $15,000**.**

## **Item 3.  LEGALPROCEEDINGS**

*Mesaba Bankruptcy*

On October 13, 2005,Mesaba filed a voluntary petition for relief under Chapter 11 of the UnitedStates Bankruptcy Code with the Bankruptcy Court.  The Bankruptcy Court is administering Mesaba’scase under the caption “In re Mesaba Aviation, Inc., dba Mesaba Airlines, CaseNo. 05/39258(GFK).”  On April 9, 2007,the Bankruptcy Court approved Mesaba’s plan of reorganization, under whichMesaba exited bankruptcy on April 24, 2007 as a wholly-owned operatingsubsidiary of Northwest.  The BankruptcyCourt will continue to administer the estate and supervise the distribution offunds from the bankruptcy estate’s liquidating trust.  For more information on Mesaba’s plan ofreorganization, see “Item 8. Financial Statements and Supplementary Data – Note14.”

*Goldman Sachs Bankruptcy Claim*

Goldman Sachs CreditPartners, L.P. (“Goldman”) is the largest creditor in Mesaba’s bankruptcyproceedings, and it holds approximately $58 million in disputed claimsasserted by itself or purchased from other creditors.  All of Goldman’s disputed claims are foraircraft and equipment leases that were rejected by Mesaba.  Goldman hasasserted that the stipulated loss provisions of the applicable leases, underwhich liquidated damages are calculated, should apply to determine the totalclaim amount due to Goldman.  Mesaba’s bankruptcy estate has filed forsummary judgment with the 

11

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Bankruptcy Courtasserting that the liquidated damages constitute unenforceable penalties. Mesaba’s bankruptcy trustee instead believes that the claim allowed to Goldmanshould reflect actual damages suffered, which is the amount related to Goldman’sclaim that is recorded in Mesaba’s liabilities subject to compromise. Mesaba’s bankruptcy estate will be funding the litigation expenses related tothe Goldman claim and will be responsible for making a distribution to Goldmanfollowing resolution of the claim.  Any payments in excess of actualdamages by Mesaba’s bankruptcy estate would ultimately reduce the equitydistribution MAIR expects to receive from the estate.

*Saab Leasing 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 340A aircraft. Mesaba appealed this ruling, and while the appeal was pending, Saab Leasing(relying on the District Court’s declaratory judgment ruling) filed a separateaction in the District Court alleging approximately $35 million in damagesfor past due and future aircraft lease obligations.  While the damagesaction was pending, the U.S. Court of Appeals for the Eighth Circuit affirmedthe 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.  Any such payments byMesaba’s bankruptcy estate would ultimately reduce the equity distribution MAIRmay receive from the estate.

*ALPA Litigation*

In January 2004, MAIRentered into a letter agreement with ALPA, Mesaba’s pilots’ union, that placedcertain limits on the types of aircraft Big Sky may fly and placed additionalrequirements on other potential MAIR subsidiaries.  In December 2006, MAIR notified ALPA thatMAIR terminated the letter agreement between the parties.  MAIR then initiated a lawsuit in federaldistrict court in Houston, Texas requesting a declaratory judgment that theletter agreement contained no termination date and, therefore, was terminable-at-will.  MAIR has filed a motion for summary judgment,but the court has not yet ruled on this motion. This litigation will not subject MAIR to any judgment for monetarydamages, but instead was filed to allow MAIR to pursue expansion opportunitieswith Big Sky and with other potential airline subsidiaries.

## **Item 4.  SUBMISSION OFMATTERS TO A VOTE OF SECURITY HOLDERS**

None.

## **EXECUTIVE OFFICERS OF THE REGISTRANT**

**Paul F.Foley**, age 54, has been the President and Chief ExecutiveOfficer of MAIR since October 1999 and was President and Chief ExecutiveOfficer of Mesaba from October 1999 to September 2002.  He is also a director of MAIR.  He was Vice President at Atlas Air, Inc. fromDecember 1996 to September 1999.  Mr.Foley graduated with a bachelor of science degree from Cornell University and amaster of business administration degree from Southern Methodist University inDallas, Texas.

**Robert E.Weil**, age 42, has been Vice President, Chief FinancialOfficer and Treasurer of MAIR since January 2000 and also served as VicePresident, Chief Financial Officer of Mesaba from January 2000 to September2002.  

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Mr.Weil was the Managing Director of Finance - Ground Operation forNorthwest Airlines from December 1997 until joining MAIR.  He also heldthe position of Controller - Ground Operations and held various otherfinance positions at Northwest since 1991. Mr. Weil graduated with a bachelor of arts degree in economics fromNorthwestern University and a master of management degree from Northwestern’sKellogg Graduate School of Management.

**Ruth M.Timm**, age 37, joined the Company in April 2005 as its Vice President,General Counsel.  Ms. Timm was GeneralCounsel at Integris Metals, Inc. from October 2004 until February 2005, whenthe company was sold to a competitor. Ms. Timm was an associate in the corporate department of Leonard, Streetand Deinard Professional Association from October 2000 until September 2004,and an associate at Maun & Simon, PLC from September 1999 to October2000.  Ms. Timm served as a judicial lawclerk for the Honorable Paul A. Magnuson, Chief Judge, U.S. District Court forthe District of Minnesota from 1997 to 1999. She received her law degree from Valparaiso University School of Law in1997.

# **PART II**

## **Item 5.  MARKET FORREGISTRANT’S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OFEQUITY SECURITIES**

The Company’s commonstock is traded under the symbol “MAIR” on the Nasdaq National Market.

The following table setsforth, for the periods indicated, the high and low price per share for theCompany’s common stock for the two most recent fiscal years.  Quotations for such periods are as reportedby Nasdaq for National Market issues. The Company has not issued cash dividends since September 1995.  The Company is currently analyzing various strategicalternatives in aviation-related industries, and each of these alternativeswill be weighed against the option of issuing dividends to the Company’sshareholders.
|             | ** ** | **Fiscal 2007** | ** ** | **Fiscal 2006** | ** ** |
|-------------|------------|----------------------|------------|----------------------|------------|
| **Quarter** | ** ** | **High**             | ** ** | **Low**              | ** ** | **High** | ** ** | **Low** | ** ** |
| First       |       | $                    | 6.21       |                 | $          | 4.67 |   | $ | 10.23 |   | $ | 8.50 |   |
| Second      |       | $                    | 6.07       |                 | $          | 5.03 |   | $ | 9.50 |   | $ | 5.67 |   |
| Third       |       | $                    | 7.17       |                 | $          | 5.25 |   | $ | 6.03 |   | $ | 4.50 |   |
| Fourth      |       | $                    | 7.70       |                 | $          | 6.51 |   | $ | 6.30 |   | $ | 4.61 |   |

 

On June 1, 2007,the number of holders of record of common stock was 527.

The transfer agentfor the Company’s common stock is Wells Fargo Shareowner Services, 161 North ConcordExchange, South St. Paul, Minnesota, 55075-0738, telephone:  (651) 450-4064.

**EquityCompensation Plan Information**
| ** **                          | ** ** | **Number of securities to be  issued upon exercise of  outstanding options, warrants   and rights** | ** ** | **Weighted-average   exercise price of   outstanding options,   warrants and rights** | ** ** | **Number of securities remaining   available for future issuance under  equity compensation plans   (excluding securities reflected in   column (a))** | ** ** |
|-------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| **Plan Category**              | ** ** | **(a)**                                                                                                                                                    | ** ** | **(b)**                                                                                                                       | ** ** | **(c)**                                                                                                                                                                                                                                | ** ** |
| Plans approved  by security holders |       | 1,458,118                                                                                                                                                  |       | $                                                                                                                             | 6.87       |                                                                                                                                                                                                                                   | 1,685,883  |   |
|                                     |            |                                                                                                                                                            |            |                                                                                                                               |            |                                                                                                                                                                                                                                        |            |  |

 

The equitycompensation plans approved by the Company’s shareholders are the 1994 StockOption Plan, the 1996 Director Stock Option Plan and the 2000 Stock IncentivePlan.  The 2000 Stock Incentive Plancontains a provision that automatically increases the authorized sharesavailable for grant on September 1 of each year by the lesser of 

13

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300,000 or 1% ofthe then outstanding common shares.  See “Item8. Financial Statements and Supplementary Data, Note 10 – Shareholders’ Equity”for additional information regarding the Company’s equity compensation plans.

**Company Stock Performance**

The following graphprovides a five-year comparison of the total cumulative returns for theCompany’s Common Stock, the CRSP Index for the Nasdaq Stock Market (U.S.companies), and the CRSP Index for air carriers traded on NYSE, AMEX andNasdaq.  The CRSP Indexes are prepared bythe Center for Research in Security Prices of the University of Chicago.  The total cumulative return for each periodis based on the investment of $100 on March 31, 2002, assuming compoundeddaily returns and the reinvestment of all dividends.

**Comparison of Five-YearCumulative Total Returns**

****

 

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______  Company Common Stock

_ _ _ _  ¬Nasdaq Stock Index

--------  ▲ Air Carrier Index
| ** **                          | ** ** | **March 28** | ** ** | **March 31** | ** ** | **March 31** | ** ** | **March 31** | ** ** | **March 31** | ** ** | **March 30** | ** ** |
|-------------------------------------|------------|-------------------|------------|-------------------|------------|-------------------|------------|-------------------|------------|-------------------|------------|-------------------|------------|
| ** **                          | ** ** | **2002**          | ** ** | **2003**          | ** ** | **2004**          | ** ** | **2005**          | ** ** | **2006**          | ** ** | **2007**          | ** ** |
| MAIR Holdings,  Inc.                |       | 100.0             |       | 62.2              |       | 104.4             |       | 99.7              |       | 52.6              |       | 73.9              |       |
| Nasdaq Stock  Market (US Companies) |       | 100.0             |       | 73.4              |       | 108.3             |       | 109.1             |       | 128.6             |       | 133.4             |       |
| NYSE/AMEX/NASDAQ Stocks  (1)        |       | 100.0             |       | 73.6              |       | 96.4              |       | 102.3             |       | 129.1             |       | 125.4             |       |

 

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(1) Consists ofU.S. Companies in Air Transportation, Scheduled and Air Courier Services

14

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**Purchases of Equity Securities**
| **Period**                       | ** ** | **Total Number  of Shares  Purchased** | ** ** | **Average  Price Paid  per Share** | ** ** | **Total Number of  Shares Purchased  as Part of Publicly  Announced Plans  or Programs** | ** ** | **Maximum Number  of Shares that May  Yet Be Purchased  Under the Plans or  Programs** | ** ** |
|----------------------------------|------------|--------------------------------------------------|------------|----------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------|------------|
| January 1 to  January 31, 2007   |       | —                                           |       | —                                       |       | —                                                                                                                           |       | —                                                                                                                              |       |
| February 1 to  February 28, 2007 |       | —                                           |       | —                                       |       | —                                                                                                                           |       | —                                                                                                                              |       |
| March 1 to March 31,  2007       |       | 5,657,113                                        |       | $                                            | 6.25       |                                                                                                                             | —     |                                                                                                                                | —     |   |
|                                  |            |                                                  |            |                                              |            |                                                                                                                                  |            |                                                                                                                                     |            |  |

 

In January 2007, MAIR andNorthwest entered into a Stock Purchase Agreement (“SPA”) under which MAIRrepurchased from Northwest all of the common stock of MAIR owned byNorthwest.  Specifically, MAIR purchased5,657,113 shares of stock from Northwest at a purchase price of $6.25 pershare.  The closing for the stockpurchase occurred on March 12, 2007, at which time MAIR paid Northwest $4.25per share, or approximately $24 million, and Northwest returned all of theshares to MAIR for cancellation.  MAIRwill be required to pay to Northwest the remaining $2.00 per share, orapproximately $11.3 million, the earlier of October 22, 2007 or the dateon which MAIR receives at least $25 million in distributions from Mesaba’sbankruptcy estate on account of MAIR’s equity interest in Mesaba.  The remaining payment is reflected inaccounts payable within the consolidated financial statements.  On March 12, 2007, Northwest also returned toMAIR for cancellation a warrant it held to purchase an additional 4,112,500shares of MAIR’s stock.  The warrant wasissued to Northwest in connection with Mesaba’s and Northwest’s’ August 29,2005 Airline Services Agreement (the “ASA”), but had never vested.

## **Item 6.  SELECTEDFINANCIAL DATA**

The following tables setforth selected financial data with respect to the Company as of the dates andfor the periods indicated.  The selectedfinancial data has been derived from the Company’s audited consolidatedfinancial statements.  As of the PetitionDate, the accounts of Mesaba were deconsolidated from the Company’sconsolidated financial statements. Therefore, the financial data below excludes Mesaba from the PetitionDate forward.  The financial data setforth below should be read in conjunction with the Company’s ConsolidatedFinancial Statements and Notes thereto and “Item 7. Management’s Discussion andAnalysis of Financial Condition and Results of Operations.”

Balance Sheet Data:
| ** **                                       | ** ** | **As of March 31 (in thousands)** | ** ** |
|--------------------------------------------------|------------|------------------------------------------------------------|------------|
| ** **                                       | ** ** | **2007**                                                   | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|                                             |       |                                                       |       |   |   |   |   |   |   |   |   |
| Current assets                                   |       | $                                                          | 63,339     |   | $ | 98,436 |   | $ | 187,547 |   | $ | 174,934 |   | $ | 158,976 |   |
| Property and  equipment, net                     |       | 1,680                                                      |       | 1,423 |   | 38,421 |   | 39,722 |   | 43,798 |   |
| Long-term  investments                           |       | 11,357                                                     |       | 19,484 |   | 43,240 |   | 39,984 |   | 32,162 |   |
| Other noncurrent  assets, net                    |       | 15,314                                                     |       | 2,599 |   | 11,746 |   | 14,167 |   | 15,052 |   |
| Total assets                                     |       | $                                                          | 91,690     |   | $ | 121,942 |   | $ | 280,954 |   | $ | 268,807 |   | $ | 249,988 |   |
|                                             |       |                                                       |       |   |   |   |   |   |   |   |   |
| Current  liabilities                             |       | $                                                          | 23,403     |   | $ | 12,571 |   | $ | 82,206 |   | $ | 77,098 |   | $ | 65,372 |   |
| Other noncurrent  liabilities                    |       | 1,081                                                      |       | 772 |   | 6,069 |   | 7,448 |   | 7,161 |   |
| Shareholders’  equity                       |       | 67,206                                                     |       | 108,599 |   | 192,679 |   | 184,261 |   | 177,455 |   |
| Total liabilities and  shareholders’ equity |       | $                                                          | 91,690     |   | $ | 121,942 |   | $ | 280,954 |   | $ | 268,807 |   | $ | 249,988 |   |

 

15

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Statement of OperationsData:
| ** **                                                                          | ** ** | **For the Years Ended March 31** | ** ** |
|-------------------------------------------------------------------------------------|------------|-----------------------------------------------------------|------------|
| ** **                                                                          | ** ** | **(in thousands, except share data)** | ** ** |
| ** **                                                                          | ** ** | ** **                                                | ** ** | ** ** | ** ** | **As restated** | ** ** |
| ** **                                                                          | ** ** | **2007**                                                  | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|                                                                                |       |                                                      |       |   |   |   |   |   |   |   |   |
| Operating revenues                                                                  |       | $                                                         | 23,932     |   | $ | 256,279 |   | $ | 442,610 |   | $ | 432,789 |   | $ | 456,880 |   |
| Operating expenses                                                                  |       | 38,554                                                    |       | 318,980 |   | 433,971 |   | 428,763 |   | 448,549 |   |
| Operating (loss) income                                                             |       | $                                                         | (14,622    | ) | $ | (62,701 | ) | $ | 8,639 |   | $ | 4,026 |   | $ | 8,331 |   |
|                                                                                |       |                                                      |       |   |   |   |   |   |   |   |   |
| Equity in loss of  Mesaba Aviation, Inc.                                            |       | $                                                         | —     |   | $ | (39,953 | ) | $ | — |   | $ | — |   | $ | — |   |
|                                                                                |       |                                                      |       |   |   |   |   |   |   |   |   |
| Net (loss) income                                                                   |       | $                                                         | (7,405     | ) | $ | (82,848 | ) | $ | 7,355 |   | $ | 4,496 |   | $ | 4,151 |   |
|                                                                                |       |                                                      |       |   |   |   |   |   |   |   |   |
| Net (loss) income per  share-basic                                                  |       | $                                                         | (0.36      | ) | $ | (4.02 | ) | $ | 0.36 |   | $ | 0.22 |   | $ | 0.20 |   |
| Weighted average number  of issued shares outstanding-basic                         |       | 20,333                                                    |       | 20,584 |   | 20,505 |   | 20,334 |   | 20,308 |   |
|                                                                                |       |                                                      |       |   |   |   |   |   |   |   |   |
| Net (loss) income per  share-diluted                                                |       | $                                                         | (0.36      | ) | $ | (4.02 | ) | $ | 0.35 |   | $ | 0.22 |   | $ | 0.20 |   |
| Weighted average common and potentially dilutive common shares  outstanding-diluted |       | 20,333                                                    |       | 20,584 |   | 21,050 |   | 20,562 |   | 20,357 |   |

 

Selected Operating Data:
| ** **                                  | ** ** | **For the Years Ended March 31** | ** ** |
|---------------------------------------------|------------|-----------------------------------------------------------|------------|
| ** **                                  | ** ** | **2007**                                                  | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|                                        |       |                                                      |       |   |   |   |   |   |   |   |   |
| *Big Sky  (1)*                              | * *   | * *                                                  | * *   | * * | * * | * * | * * | * * | * * | * * | * * |
| Passengers                                  |       | 112,917                                                   |       | 113,525 |   | 85,455 |   | 105,913 |   | 39,587 |   |
| Available seat  miles (“ASM”) (2) |       | 83,829                                                    |       | 77,786 |   | 59,284 |   | 75,188 |   | 29,810 |   |
| Revenue  passenger miles (3)                |       | 32,656                                                    |       | 32,193 |   | 21,630 |   | 27,066 |   | 10,630 |   |
| Load factor (4)                             |       | 39.0                                                      | %          | 41.4 | % | 36.5 | % | 36.0 | % | 35.7 | % |
| Block hours  flown                          |       | 21,842                                                    |       | 20,839 |   | 16,396 |   | 20,307 |   | 9,456 |   |
| Departures                                  |       | 22,143                                                    |       | 21,615 |   | 19,423 |   | 23,245 |   | 8,415 |   |
| Revenue per ASM                             |       | 0.285                                                     |       | 0.263 |   | 0.254 |   | 0.219 |   | 0.193 |   |
| Cost per ASM                                |       | 0.344                                                     |       | 0.363 |   | 0.337 |   | 0.267 |   | 0.262 |   |

 

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(1)            Big Sky was purchasedby MAIR in December 2002.  Operating datafor fiscal 2003 is from the date of purchase to March 31, 2003.

(2)            ASM are determined bymultiplying the number of seats available for passengers by the number of milesflown.  Amounts are in thousands.

(3)            Revenue passengermiles are determined by multiplying the number of fare-paying passengerscarried by the distance flown.  Amountsare in thousands.

(4)            Load factor isdetermined by dividing revenue passenger miles by available seat miles.

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## **Item 7.  MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

Management’s Discussionand Analysis of Financial Condition and Results of Operations should be read inconjunction with the accompanying consolidated financial statements.  The Company’s operations and financialresults are subject to various risks and uncertainties as discussed in “Item1A.  Risk Factors.”

**Year inReview and Outlook**

*Summary*

At the outset of fiscalyear 2007, MAIR was facing a number of significant challenges.  Mesaba had been in bankruptcy for six months,its labor negotiations were in disarray and Northwest had threatened to notonly take away Mesaba’s Avro and Canadair regional jet operations, but alsosend Mesaba’s Saab business out for bid with other regional airlines.  Separately, Mesaba’s creditors’ committee hadlaunched an investigation of the management fees and dividends paid betweenMesaba and MAIR over the previous five years. In addition, with fuel prices at $60 per barrel, Big Sky was unable tofind a way to profitably operate its fleet of ten Beechcraft 1900D aircraft.

In thisenvironment, MAIR set the following goals for fiscal 2007:

·                  Retainingthe cash at MAIR to preserve financial flexibility as Mesaba reorganized inbankruptcy;

·                  Maintainingoperating and safety performance at both subsidiaries;

·                  MaximizingMAIR’s equity value in Mesaba by minimizing creditor’s claims and developing aplan of reorganization;

·                  StabilizingBig Sky’s business plan by expanding its 19-seat operation and pursuingother partnerships; and

·                  Exploringother growth opportunities to maximize shareholder value.

By the end of fiscal2007, MAIR had achieved its goals, positioning the Company to set out in a newdirection in fiscal 2008:

·                  Aspart of the SPRA, the creditors’ committee released MAIR from all claimsassociated with the committee’s investigation of the dividends and managementfees paid to MAIR.

·                  Bothsubsidiaries maintained operating performance excellence throughout the fiscalyear.  Mesaba accomplished it whiledownsizing significantly as the Avros were eliminated from service, and Big Skymaintained its operating performance while expanding outside the Pacific Northwestto Illinois and Florida and preparing for the new Boston operation in fiscal2008.

·                  Duringthe negotiations with Northwest regarding Mesaba’s plan of reorganization, MAIRmaximized its equity value in Mesaba by gaining an additional $11 millionin value from Northwest - first by Northwest assigning its own $7.3 millionclaim against Mesaba to MAIR and second by Northwest agreeing that up to $4.0 millionof Mesaba’s cash could be used to satisfy cure costs related to assumedcontracts, thus relieving the bankruptcy estate of such liability.  Through these negotiations, MAIR also obtainedNorthwest’s agreement to terminate its equity position in MAIR, and on March12, 2007, MAIR repurchased all of the MAIR stock owned by Northwest.  Immediately after the SPRA was effective, onJanuary 24, 2007, MAIR, with Mesaba’s creditors’ committee, took advantage ofthe market opportunity to auction Mesaba’s $145 million allowed claim inNorthwest’s bankruptcy, which resulted in a commitment from Goldman Sachs topurchase the claim for approximately $125 million when Mesaba’s plan ofreorganization became effective.  Theseproceeds were placed in a liquidating trust on April 24, 2007 to pay Mesaba’screditors.  Mesaba has estimated that itscreditors’ claims total approximately $94 million (including MAIR’s $6.2 millionsettled claim in Mesaba’s bankruptcy and Northwest’s $7.3 million claim 

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assigned to MAIR). Assuming these projections are correct, MAIR could receive up to $44 millionfrom Mesaba’s plan of reorganization.

·                  Inaddition to expanding in Illinois, Big Sky entered into an agreement with Deltato operate Beechcraft 1900D aircraft throughout the Northeast with Boston asits hub.  As part of that expansion plan,Big Sky was awarded EAS service between Massena, Ogdensburg and Watertown, NewYork and Boston, Massachusetts.  TheBoston operation started successfully in April, 2007.

·                  Throughoutthe fiscal year MAIR reviewed a number of potential transactions to diversifyits operations.

*Outlook*

For fiscal 2008, MAIRwill continue to play an active role in Mesaba’s plan of reorganization tomaximize the potential value to MAIR as Mesaba’s former equity holder.  A MAIR representative sits on an oversightcommittee to the liquidating trust and will monitor all payments from the trustto Mesaba’s creditors.  MAIR expects thatall distributions from the trust should be made by the end of fiscal 2008.  While Mesaba’s bankruptcy estate is beingresolved, MAIR will also continue to explore additional growth opportunitiesfor Big Sky and will consider acquisitions to diversify within airline-relatedindustries.  These opportunities will beevaluated in the context of maximizing shareholder value and weighed againstother tax efficient mechanisms to return capital to shareholders.

**Fiscal Year Ended March 31, 2007 Comparedwith Fiscal Year Ended March 31, 2006**

*Earnings Summary*

The Company reported aconsolidated net loss of $7.4 million, or $0.36 per basic and dilutedshare, for fiscal 2007, compared to net loss of $82.8 million, or $4.02per basic and diluted share, in fiscal 2006.

As of the Petition Date,the accounts of Mesaba were deconsolidated from the Company’s consolidatedfinancial statements.  Therefore, thefinancial data below excludes Mesaba from the Petition Date forward.  Mesaba’s condensed financial statements on astand-alone basis are presented in “Item 8. Financial Statements andSupplementary Data, Note 18 – Financial Information of Mesaba.”

*Big Sky*

Big Sky OperatingRevenues

Total operating revenuesincreased 17.2% to $23.9 million in fiscal 2007 from $20.4 million infiscal 2006.  Passenger revenuesincreased 19.6% as a result of a 20.3% increase in average fare offset by a0.5% decrease in passengers transported. Other revenue increased 14.0% as aresult of the new Chicago-Midway to Springfield, Illinois and Eau Claire,Wisconsin air service.

Big Sky OperatingExpenses

Total operating expensesincreased 2.2% to $28.8 million in fiscal 2007 from $28.2 million infiscal 2006.  The following tablecompares components of operating cost per ASM for the years ended March 31, inthousands:
| ** **                     | ** ** | **Operating Expenses** | ** ** | **Operating Cost Per ASM** | ** ** |
|--------------------------------|------------|-----------------------------|------------|-------------------------------------------|------------|
| ** **                     | ** ** | **2007**                    | ** ** | **2006**                                  | ** ** | **$ Change** | ** ** | **% Change** | ** ** | **2007** | ** ** | **2006** | ** ** |
| Wages and  benefits            |       | $                           | 9,270      |                                      | $          | 7,484 |   | $ | 1,786 |   | 23.9 | % | 11.1 | ¢ | 9.6 | ¢ |
| Aircraft fuel                  |       | 5,434                       |       | 4,826                                     |       | 608 |   | 12.6 | % | 6.4 |   | 6.2 |   |
| Aircraft  maintenance          |       | 3,785                       |       | 3,302                                     |       | 483 |   | 14.6 | % | 4.5 |   | 4.2 |   |
| Aircraft rents                 |       | 1,812                       |       | 2,014                                     |       | (202 | ) | (10.0 | )% | 2.2 |   | 2.6 |   |
| Landing fees                   |       | 347                         |       | 340                                       |       | 7 |   | 2.1 | % | 0.4 |   | 0.4 |   |
| Insurance and  taxes           |       | 325                         |       | 390                                       |       | (65 | ) | (16.7 | )% | 0.4 |   | 0.5 |   |
| Depreciation and  amortization |       | 676                         |       | 878                                       |       | (202 | ) | (23.0 | )% | 0.8 |   | 1.1 |   |
| Administrative  and other      |       | 7,194                       |       | 6,488                                     |       | 706 |   | 10.9 | % | 8.6 |   | 8.4 |   |
| Impairment and  other charges  |       | —                      |       | 2,503                                     |       | (2,503 | ) | N/M |   | 0.0 |   | 3.3 |   |
|                           |       | $                           | 28,843     |                                      | $          | 28,225 |   | $ | 618 |   | 2.2 | % | 34.4 | ¢ | 36.3 | ¢ |

 

During fiscal 2007, wagesand benefits increased $1.8 million or 23.9% as a result of a 4.8%increase in block hours, contractual rate increases and hiring and training ofthe additional staffing requirements in flight, maintenance and stations forthe new Delta Connection service out of Boston.

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Aircraft fuel expenseincreased 12.6% from fiscal 2006 to fiscal 2007 as a result of a 15 centincrease in the average price of jet fuel, from $1.98 per gallon in fiscal 2006to $2.13 per gallon in fiscal 2007, and an increase of 4.8% in block hours infiscal 2007 from fiscal 2006.

Aircraft maintenanceexpense increased 14.6% due to increased flying year-over-year.Scheduled heavy checks and propeller overhaul events totaled $0.4 millionin fiscal 2007, primarily due to a November 2006 FAA wing spar airworthinessdirective which mandated more rigorous inspection of the wing spar portion ofthe Beechcraft 1900D aircraft.

The elimination of Metroaircraft resulted in a 10.0% decrease in aircraft rents and a 23.0% decrease indepreciation and amortization expense during fiscal 2007.

Insurance and taxesdecreased 16.7% as the result of property tax and aircraft hull insuranceliability adjustments in fiscal 2007.

Administrative and otherexpenses increased 10.9%, or $0.7 million, in fiscal 2007 over fiscal 2006as a result of a $0.6 million bad debt reserve.  Both fiscal 2007 and 2006 had similarexpenses associated with the Metro aircraft return of $0.8 million and$0.7 million, respectively.

Fiscal 2006 contained a$2.5 million goodwill impairment charge. The impairment was determined by comparing the fair value of theintangible asset to the current carrying value. For more information on the impairment, see “Item 8. FinancialStatements and Supplementary Data, Note 3 – Intangible Assets.”

*MAIR*

MAIR Operating Expenses

Total operating expensesin fiscal 2007 decreased $11.2 million to $9.9 million from $21.1 millionin fiscal 2006, primarily due to $13.7 million in impairment and othercharges in fiscal 2006, consisting of an $8.9 million write-off ofMAIR’s equity investment in its Mesaba subsidiary and a $4.8 millioncharge associated with MAIR’s guaranty of Mesaba’s facilities and ground leasefor its facility at the Cincinnati/Northern Kentucky InternationalAirport.  These expenses were offset by a$1.4 million increase in legal and other professional services due to theMesaba bankruptcy.

*Consolidated Operating Income*

Operating losses totaled$14.6 million in fiscal 2007, as compared to $62.7 million in fiscal2006.  Fiscal 2006 included Mesaba’soperating losses for approximately six months through the Petition Date.

*Consolidated Nonoperating Income*

Nonoperating income (net)decreased to $5.2 million for fiscal 2007 from $6.0 million in fiscal2006.  The decrease was primarily due toa $1.8 million arbitration settlement with an investment advisor in thefirst quarter of fiscal 2006, partially offset by additional interest incomegenerated by higher interest rates in fiscal 2007.

*Consolidated Provision for Income Taxes*

The Company recorded atax benefit of $2.0 million in fiscal 2007 compared to a benefit of $13.8 millionin fiscal 2006.  The Company’s blendedeffective tax rate was (21.2)% in fiscal 2007, as compared to (24.4)% in fiscal2006 after the deconsolidation of Mesaba’s financial results from the Company’sconsolidated financial statements as of the Petition Date.  In fiscal 2007, the benefit of $2.0 millionwas due to the $0.5 million federal benefit of an NOL carryback and a $1.5 millionbenefit due to a January 2007 settlement with the IRS and the deconsolidationof Mesaba whereby Mesaba recorded the corresponding $1.5 millionexpense.  Under the settlement agreementMAIR agreed to pay the IRS on behalf of Mesaba $1.7 million in taxes andinterest for adjustments to taxable income for the reclassification of per diemamounts.  This settlement resulted in anadditional $0.2 million of tax expense at Mesaba in the third quarter offiscal 2007 as the Company had previously recorded a reserve of $1.5 millionin the prior fiscal year.

In fiscal 2007, theCompany recorded a valuation allowance against its net deferred tax assets of$3.5 million, which resulted in a valuation allowance balance of $6.9 millionat March 31, 2007.  The effective taxrate would have been 

19

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(36.7)% based on bookincome and permanent differences exclusive of the valuation allowance.  In fiscal 2006, the Company recorded avaluation allowance against its net deferred tax assets of $3.6 million.  The effective tax rate would have been(30.8)% exclusive of the valuation allowance.

**Fiscal Year Ended March 31, 2006Compared with Fiscal Year Ended March 31, 2005**

*Earnings Summary*

The Company reported aconsolidated net loss of $82.8 million, or $4.02 per basic and dilutedshare, in fiscal 2006, compared to net income of $7.4 million, or $0.35per diluted share, in fiscal 2005.  Toallow for a more direct and meaningful comparison, Mesaba’s results ofoperations have been analyzed for the entire fiscal years ended March 31, 2006and 2005 notwithstanding the deconsolidation of Mesaba from the Company’sconsolidated financial statements as of October 13, 2005, the date of Mesaba’sbankruptcy filing.  Mesaba’s condensedfinancial statements on a stand-alone basis are presented in “Item 8.Financial Statements and Supplementary Data, Note 18 – Financial Information ofMesaba.”

*Big Sky*

Big Sky Operating Revenues

Total operating revenuesincreased 35.1% to $20.4 million in fiscal 2006 from $15.1 million infiscal 2005.  New fiscal 2006 servicebetween Sheridan, Wyoming and Denver, Colorado, Bozeman, Montana, Pocatello,Idaho, Walla Walla, Washington and Boise, Idaho contributed to the 27.1%increase in flying.  The systemexperienced an increase of 4.9 load factor points and a 17.6% increase inaverage fare in fiscal 2006 compared to fiscal 2005.

Other revenues increased14.8% as a result of a new EAS subsidy contract for service between Sheridan,Wyoming and Denver, Colorado and an improvement in flight completion of 2.5points.   Fiscal 2006 includes groundhandling revenue and a short-term wet lease operation provided by Big Skygenerating $0.3 million.

Big Sky Operating Expenses

Total operating expensesin fiscal 2006 increased 41.2% to $28.2 million from $20.0 million infiscal 2006.  The following tablecompares components of operating cost per ASM for the years ended March 31, inthousands:
| ** **                     | ** ** | **Operating Expenses** | ** ** | **Operating Cost Per ASM** | ** ** |
|--------------------------------|------------|-----------------------------|------------|-------------------------------------------|------------|
| ** **                     | ** ** | **2006**                    | ** ** | **2005**                                  | ** ** | **$ Change** | ** ** | **% Change** | ** ** | **2006** | ** ** | **2005** | ** ** |
| Wages and  benefits            |       | $                           | 7,484      |                                      | $          | 6,195 |   | $ | 1,289 |   | 20.8 | % | 9.6 | ¢ | 10.4 | ¢ |
| Aircraft fuel                  |       | 4,826                       |       | 2,471                                     |       | 2,355 |   | 95.3 | % | 6.2 |   | 4.2 |   |
| Aircraft  maintenance          |       | 3,302                       |       | 2,416                                     |       | 886 |   | 36.7 | % | 4.2 |   | 4.1 |   |
| Aircraft rents                 |       | 2,014                       |       | 1,976                                     |       | 38 |   | 1.9 | % | 2.6 |   | 3.3 |   |
| Landing fees                   |       | 340                         |       | 249                                       |       | 91 |   | 36.5 | % | 0.4 |   | 0.4 |   |
| Insurance and  taxes           |       | 390                         |       | 510                                       |       | (120 | ) | (23.5 | )% | 0.5 |   | 0.9 |   |
| Depreciation and  amortization |       | 878                         |       | 774                                       |       | 104 |   | 13.4 | % | 1.1 |   | 1.3 |   |
| Administrative  and other      |       | 6,488                       |       | 5,400                                     |       | 1,088 |   | 20.1 | % | 8.4 |   | 9.1 |   |
| Impairment and  other charges  |       | 2,503                       |       | —                                    |       | 2,503 |   | N/M |   | 3.3 |   | 0.0 |   |
|                           |       | $                           | 28,225     |                                      | $          | 19,991 |   | $ | 8,234 |   | 41.2 | % | 36.3 | ¢ | 33.7 | ¢ |

 

During fiscal 2006, wagesand benefits increased due to changes in the workers’ compensation coverage andthe addition of 44 new pilots and customer service agents due to new serviceofferings.  In fiscal 2006, Big Sky paidactual claims compared to having claims covered by insurance in fiscal 2005.  In fiscal 2005, Big Sky recorded a reservefor remaining open workers’ compensation claims from the previous policyperiod.

Aircraft fuel representedthe largest expense increase, 95.3%, from fiscal 2005 to fiscal 2006.  The number of gallons of fuel burned increasedapproximately 70% due to added flight hours and the Beechcraft 1900D aircraft’shigher consumption per hour. Additionally, the average price per gallon of fuel increased 16% to$1.98 in fiscal 2006 from $1.71 in fiscal 2005.

Aircraft maintenanceincreased 36.7% due to increased flying year-over-year.  Block hours increased 27.1%, and ASMsincreased 31.2% from fiscal 2005 to fiscal 2006.

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Aircraft rents increased 1.9% due to six Beechcraftaircraft brought on line while three Metro aircraft were retired.  During fiscal 2006, a total of ten Beechcraftaircraft and four Metro aircraft were leased compared to four Beechcraft and 14Metro aircraft being leased during fiscal 2005.

The decrease in insuranceand taxes was the result of a property tax adjustment in fiscal 2005.

Administrative and otherexpenses increased 20.1%, or $1.1 million, in fiscal 2006 over fiscal2005.  Credit card commissions increased$0.1 million and computer reservation system charges increased $0.2 millionin fiscal 2006 as a result of a 32.8% increase in passengers.  In addition, Big Sky recorded $0.8 millionin expense associated with the return of non-operating Metro aircraft.

Fiscal 2006 contained a$2.5 million goodwill impairment charge. The impairment was determined by comparing the fair value of theintangible asset to the current carrying value.

*MAIR*

MAIR Operating Expenses

Total operating expensesin fiscal 2006 increased to $21.1 million from $5.7 million in fiscal2005, primarily due to $13.7 million in impairment and other charges,consisting of an $8.9 million write-off of MAIR’s equity investmentin its Mesaba subsidiary and a $4.8 million charge associated with MAIR’sguaranty of Mesaba’s facilities and ground lease for its facility at theCincinnati/Northern Kentucky International Airport.

*Consolidated Operating Income*

Operating losses totaled$62.7 million in fiscal 2006, as compared to operating income of $8.6 millionin fiscal 2005.  The Company’s operatingmargin decreased to (24.5)% in fiscal 2006 from 2.0% in fiscal 2005.

*Consolidated Nonoperating Income*

Nonoperating income (net)increased to $6.0 million for fiscal 2006 from $2.3 million in fiscal2005.  The increase is primarily due toincreased interest income as a result of higher rates earned on cash and investmentsand a $1.8 million arbitration settlement with an investment advisor inthe first quarter of fiscal 2006.

*Consolidated Provision for Income Taxes*

The Company recorded atax benefit of $13.8 million in fiscal 2006 compared to a provision forincome taxes of $3.6 million in fiscal 2005.  The Company’s blended effective tax rate was(24.4)% in fiscal 2006, after the deconsolidation of Mesaba’s financial resultsfrom the Company’s consolidated financial statements as of October 13, 2005,the date of Mesaba’s bankruptcy filing, as compared to 32.9% in fiscal 2005,which includes the financial results of Mesaba. In fiscal 2006, the Companybooked a valuation allowance against its net deferred tax assets of $3.6 million.  The effective tax rate would have been(30.8)% exclusive of the valuation allowance. During the first quarter of fiscal 2005, the Company receivedverification of a final settlement with the IRS concerning its examination ofthe Company’s fiscal 1995 and 1996 income tax returns.  As a result of this settlement, the Companyreduced its income tax payable and tax provision by $1.2 million.  Without this adjustment, the Company’seffective tax rate would have been 43.8% in fiscal 2005.

**Liquidity and Capital Resources**

Unrestricted cash, cashequivalents and investments decreased $44.7 million, or 40.4%, to $66.0 millionat March 31, 2007 from $110.7 million at March 31, 2006.  The Company’s working capital decreased to$39.9 million at March 31, 2007 compared to working capital of $85.9 millionat March 31, 2006.  These decreases wereprimarily due to MAIR’s purchase of all of Northwest’s 5,657,113 shares ofstock at a purchase price of $6.25 per share. The closing for the stock purchase occurred on March 12, 2007, at whichtime MAIR paid Northwest $4.25 per share, or approximately $24 million.MAIR will be required to pay Northwest the remaining $2.00 per share, orapproximately $11.3 million, the earlier of October 22, 2007 or the dateon which MAIR receives at least $25 million in distributions from Mesaba’sbankruptcy estate on account of MAIR’s equity interest in Mesaba.  The decrease was also due to MAIR recordingrestricted cash of $13.1 million for MAIR’s establishment of a letter ofcredit supporting MAIR’s guaranty of Mesaba’s obligations for the hangar at theCincinnati/Northern Kentucky International Airport.

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*Operating Activities*

Net cash used inoperating activities in fiscal 2007 was $9.0 million, primarily due to theCompany’s net loss of $7.4 million, increases of $2.0 million in prepaidexpenses and $1.2 million in amortization of investment discounts.  The uses of cash were partially offset bydepreciation and amortization of $0.7 million and a decrease in income taxreceivable of $0.9 million.

*Investing Activities*

Net cash provided byinvesting activities in fiscal 2007 was $13.3 million.  The source of cash from investing activitieswas the net sales of short- and long-term investments of $27.3 million.  The primary uses of cash were for MAIR’sestablishment of a $13.1 million letter of credit supporting MAIR’sguaranty of Mesaba’s obligations for the hangar at the Cincinnati/NorthernKentucky International Airport, $0.6 million of restricted cash recordedat Big Sky for certificates of deposit supporting letters of credit for workers’compensation insurance, aircraft fuel and airport lease agreements, and $0.6 millionfor purchases of property and equipment.

*Financing Activities*

Net cash used infinancing activities in fiscal 2007 was $22.8 million primarily due toMAIR’s $24.0 million purchase of Northwest’s shares of stock, offset by$0.5 million for MAIR’s proceeds from the exercise of stock options and$0.8 million for MAIR’s intercompany payable to Mesaba for tax refundsreceived at MAIR.

*Other Non-Cash Activities*

In fiscal 2007, MAIRrecorded $10.9 million in accounts payable, which reflects the presentvalue of the $11.3 million payable to Northwest for the remaining $2.00per share from the purchase of Northwest’s shares of stock.

*Outlook*

The Company hashistorically relied on cash and cash equivalents, investments and internallygenerated funds to support its working capital requirements.  Absent adverse factors outside the control ofthe Company, management believes current liquidity and funds from MAIR’ and BigSky’s operations will provide adequate resources for meeting currentobligations through the end of fiscal 2008 and beyond.

**Contractual Obligations,Commitments and Off-Balance Sheet Arrangements**

*Big Sky*

As of March 31, 2007, BigSky’s fleet consisted of 11 aircraft (ten active and one inactive) coveredunder operating leases with terms of 5 to 44 months and aggregate monthly leasepayments of approximately $0.2 million. Big Sky leases its Metro aircraft from AirLift Inc. and its Beechcraft1900D’s from Mesa Air Group (“Mesa”). Funding of the monthly minimum lease payments is dependent on continuedpassenger boardings, Big Sky’s operations and, potentially, funding from MAIR.

Although Big Sky’sairline fleet operating leases contain standard return conditions, the operatingleases do not contain any other guaranteed lease residual provisions orpurchase options for which there would be a potential contingency at thetermination of the lease period.

On March 12, 2007, BigSky entered into an agreement with CommutAir to purchase eight Beechcraft 1900Daircraft and related spare parts with delivery scheduled during the last halfof calendar 2007.  Big Sky is in theprocess of obtaining financing for these aircraft.

In April 2007, Big Skyentered into a five year agreement to lease approximately 5,000 square feet ofoffice space for $0.1 million per year in a downtown Billings officebuilding for various administrative and reservation functions.

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The following tablesummarizes Big Sky’s commitments to make long-term debt and leasepayments for the years ending March 31, in thousands:
| ** **                                        | ** ** | **2008** | ** ** | **2009** | ** ** | **2010** | ** ** | **2011** | ** ** | **2012** | ** ** | **Thereafter** | ** ** | **Total** | ** ** |
|---------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------------|------------|-----------|------------|
| Operating  leases: (1)                            |       |     |       |     |       |     |       |     |       |     |       |           |       |      |       |
| Aircraft (2)                                      |       | $        | 1,860      |     | $          | 1,810    |       | $        | 1,719      |     | $          | 392            |       | $         | —     |   | $ | — |   | $ | 5,781 |   |
| Non-aircraft                                      |       | 200      |       | 183      |       | 109      |       | 109      |       | 109      |       | 218            |       | 928       |       |
| Long-term  debt and capital lease obligations (3) |       | 56       |       | 28       |       | 31       |       | 36       |       | 34       |       | 356            |       | 541       |       |
| Total                                             |       | $        | 2,116      |     | $          | 2,021    |       | $        | 1,859      |     | $          | 537            |       | $         | 143        |   | $ | 574 |   | $ | 7,250 |   |

 

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(1)          Amountsrepresent minimum lease payments with initial or remaining terms of more thanone year.  See “Item 8.  Financial Statements and Supplementary Data,Note 7 – Leases” for additional discussion of operating leases on non-idled aircraft.

(2)          Amounts arebased on lease terms, which have early terminations and extensions.  The Beechcraft 1900D leases have initialterms of up to five years with early terminations.

(3)          Amountsrepresent principal payments only.  See “Item8. Financial Statements and Supplementary Data, Note 8 – Notes Payable and Long-TermDebt” for additional discussion of long-term debt and future maturities.

*MAIR*

In connection with MAIR’sguaranty of Mesaba’s obligations related to its facility at theCincinnati/Northern Kentucky International Airport, MAIR is obligated under thefacilities and ground leases for such facility. The following table summarizes MAIR’s guaranty to make lease paymentsfor the years ending March 31, in thousands:
| ** **       | ** ** | **2008** | ** ** | **2009** | ** ** | **2010** | ** ** | **2011** | ** ** | **2012** | ** ** | **Thereafter** | ** ** | **Total** | ** ** |
|------------------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------------|------------|-----------|------------|
| Operating leases |       | 1,310    |       | 1,313    |       | 1,317    |       | 1,275    |       | 1,230    |       | 20,101         |       | 26,546    |       |
| Total            |       | $        | 1,310      |     | $          | 1,313    |       | $        | 1,317      |     | $          | 1,275          |       | $         | 1,230      |   | $ | 20,101 |   | $ | 26,546 |   |
|                  |            |          |            |          |            |          |            |          |            |          |            |                |            |           |            |  |  |  |  |  |  |  |

 

An off-balancesheet arrangement is any transaction, agreement or other contractualarrangement involving an unconsolidated entity under which a company has (i)guarantees; (ii) a retained or a contingent interest in transferred assets;(iii) an obligation under derivative instruments classified as equity; or (iv)any obligation arising out of a material variable interest in an unconsolidatedentity that provides financing, liquidity, market risk or credit risk supportto the company, or that engages in leasing, hedging, or research anddevelopment arrangements with the company. Other than MAIR’s guaranty related to Mesaba’s facility at theCincinnati/Northern Kentucky International Airport, the Company has noarrangements of the types described that may have a material current or futureeffect on the Company’s financial condition, liquidity or results ofoperations.

In connection with BigSky’s leasing of the Beechcraft aircraft, in April 2005, MAIR entered into aletter of credit agreement with Wells Fargo Bank, N.A.  The letter ofcredit is in the amount of $1.9 million and is for the benefit of Mesa,who may draw on the letter of credit if Big Sky fails to perform itsobligations under the Beechcraft aircraft leases.  The letter of creditautomatically renews each year unless MAIR notifies Mesa that it does notintend to renew it.  If MAIR does not renew the letter of credit, Big Sky’sleases with Mesa will increase by approximately $0.5 million per year.

**Critical Accounting Policies andEstimates**

The preparation of theCompany’s consolidated financial statements and Mesaba’s stand-alonecondensed financial statements in conformity with GAAP requires the use ofestimates, judgments and assumptions that affect the reported amounts of assetsand liabilities as of the date of the consolidated financial statements,revenues and expenses during the reporting period and related disclosures ofcontingent assets and liabilities in the consolidated financial statements andthe accompanying notes.  The SEC hasdefined a company’s most critical accounting policies as the ones that are mostimportant to the portrayal of the company’s financial condition and results,and which require the company to make its most difficult and subjectivejudgments, often as a result of the need to make estimates of matters that areinherently uncertain.  Based on thisdefinition, the Company and its subsidiaries have identified their critical accountingpolicies to include those discussed in the following paragraphs.  The Company 

23

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and its subsidiaries alsohave other key accounting policies that involve the use of estimates, judgmentsand assumptions.

Management believes thatits estimates and assumptions are reasonable based on information presentlyavailable; however, changes in these estimates, judgments and assumptions willoccur as a result of future events, and, accordingly, ultimate results coulddiffer from amounts estimated.

*Allowance for Doubtful Accounts -*Big Sky grants trade credit to certain approved customers andperforms monthly analyses of outstanding trade receivables to assess thelikelihood of collection.  For balanceswhere Big Sky does not expect full payment of amounts owed, an allowance isrecorded to adjust the trade receivable to management’s best estimate of theamount that will ultimately be collected.

*Aircraft Property and Equipment*– Estimated lives are used to record depreciation on aircraft property andequipment.  Aircraft utilization,technology and changes in business strategy may affect the economic lives usedto record depreciation by Big Sky.  Theforegoing may also affect depreciation rates, impairment or both.  Management of Big Sky regularly reviews theestimated useful lives and salvage values for aircraft property and equipment.

*Excess and Obsolete Inventories*– Estimated recovery percentages are used to record obsolescence reserves forparts inventories.  Aircraft utilization,parts availability and changes in parts cost may affect the valuation of partsinventories and obsolescence reserve levels. Management of Big Sky regularly reviews recovery percentages, reservelevels and inventory valuations for parts inventories.

*Aircraft Maintenance*– Estimated maintenance costs and anticipated aircraft activity are used todetermine maintenance reserves.  Changesin maintenance contracts, parts and labor costs and aircraft activity mayaffect the maintenance reserves. Management of Big Sky regularly reviews aircraft activity, expectedaircraft return dates, changes in maintenance contracts and parts and laborcosts for maintenance reserves.

*Intangible Assets*– The excess of the Big Sky purchase price over the fair market value of thenet assets acquired was allocated to certain identifiable intangible assets,including Big Sky’s pilot labor contract and air carrier certificate.  The recoverability of intangible assets isevaluated annually, at a minimum, or on an interim basis if events orcircumstances indicate a possible inability to realize the carryingamounts.  The evaluation includes futurecash flow projections, strategic modeling and other management assumptions.

*Income Taxes* –The Company’s effective tax rate was (21.2%), (24.4%) and 32.9% in fiscal 2007,2006 and 2005, respectively.  In fiscal2007 and 2006, the Company has reflected a valuation allowance against its netdeferred tax assets in the amount of $6.9 and $3.6 million, respectively.  The Company’s effective tax rate is based onexpected income, statutory tax rates and tax planning opportunities availablein the various jurisdictions in which the Company operates.  In the event that there is a significantunusual or one-time item recognized, or expected to be recognized, in theCompany’s operating results, the tax attributable to that item would beseparately calculated and recorded at the same time as the unusual or one-timeitem.  Significant judgment is requiredin determining the Company’s effective tax rate and in evaluating its taxpositions.  The Company establishesreserves when, despite its belief that the tax return positions are fullysupportable, certain positions are likely to be challenged and may notsucceed.  The Company adjusts thesereserves in light of changing facts and circumstances, such as the closing of atax audit.  The effective tax rateincludes the impact of reserve provisions and changes to reserves that areconsidered appropriate, as well as related interest.  This rate is then applied to the Company’squarterly operating results.

Significant managementjudgment is required in determining the provisions for income taxes, deferredtax assets and liabilities and any valuation allowance recorded against netdeferred tax assets.  For financialreporting purposes, a valuation allowance is recorded to offset deferred taxassets that, more likely than not, will not be realized based on the Company’sprojected future taxable income, the timing of expiring net operating lossesand the Company’s tax planning strategies. In the future, subsequent revisions to the estimated net realizablevalue of these deferred tax assets could cause the Company to record avaluation allowance on all or a portion of the deferred tax assets.  This could cause the provision for incometaxes to vary significantly from period to period, although the Company’s cashpayments would remain unaffected until the benefit of the net operating lossesis completely utilized or expires unused.

24

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*Workers’ Compensation Insurance*– Big Sky estimates the ultimate cost of an on-the-job injury atthe time of the injury to determine its workers’ compensation insurancereserves.  Big Sky uses the services ofits insurance carriers and outside brokers to assist in determining the reservelevels.  Injury severity, cost of careand the insurance contract affect the ultimate cost and ultimate reservesrecorded.  Management of Big Skyregularly reviews workers’ compensation activity with outside consultants forany changes in the workers’ compensation reserve.

*Property Taxes* –Estimated property tax values and assessments are used to record property taxreserves for the various jurisdictions in which Big Sky operates.  Aircraft and parts values, aircraft flightactivity, ground equipment values and the location of personnel may affect theultimate property tax obligation.  Managementof Big Sky periodically reviews the above items for any changes in the propertytax reserves.

**New Accounting Pronouncements**

See “Item 8. FinancialStatements and Supplementary Data – Note 2 – Summary of Significant AccountingPolicies” for information pertaining to recently adopted accounting standardsor accounting standards to be adopted in the future.

## **Item 7A.  QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

The Company’s principalmarket risks are the availability and price of jet fuel and changes in interestrates, as discussed below.

*Aircraft Fuel*

Big Sky is subject tofluctuations in fuel prices.  Ahypothetical 10% increase in the March 31, 2007 cost per gallon of fuel,assuming projected fiscal 2008 usage at Big Sky, would result in an increase toaircraft fuel expense of approximately $1.0 million in fiscal 2008.  As of March 31, 2007, Big Sky had no fuelhedges in place for fiscal 2008.

*Interest Rates*

The Company’s earningsare affected by changes in interest rates due to the impact those changes haveon its interest income from cash equivalents and short and long-terminvestments.  If interest rates were toincrease by 100 basis points for a full year, based on the Company’s cashequivalents, short-term and long-term investments balance at March31, 2007, the Company’s interest income from cash equivalents, short-termand long-term investments would increase by approximately $0.7 million.

The Company does notpurchase or hold any derivative financial instruments for trading or speculativepurposes.

## **Item 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA**

The consolidatedfinancial statements of the Company and the related reports of management andthe Company’s independent registered public accounting firm are included inthis Annual Report on Form 10-K on the pages indicated below.
| Report of Independent  Registered Public Accounting Firm                                                |
|---------------------------------------------------------------------------------------------------------|
| Consolidated Balance Sheets as of March 31, 2007 and  2006                                              |
| Consolidated Statements of Operations for the Years  Ended March 31, 2007, 2006 and 2005                |
| Consolidated Statements of Shareholders’ Equity for  the Years Ended March 31, 2007, 2006 and 2005 |
| Consolidated Statements of Cash Flows for the Years  Ended March 31, 2007, 2006 and 2005                |
| Notes to  the Consolidated Financial Statements                                                         |

 

25

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**REPORT OFINDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

To theBoard of Directors and Shareholders MAIR Holdings, Inc. Minneapolis, Minnesota

We haveaudited the accompanying consolidated balance sheets of MAIR Holdings, Inc. andsubsidiaries (the “Company”) as of March 31, 2007 and 2006, and the relatedconsolidated statements of operations, shareholders’ equity, and cash flows foreach of the three years in the period ended March 31, 2007.  Thesefinancial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements basedon our audits.

Weconducted our audits in accordance with the standards of the Public CompanyAccounting Oversight Board (United States).  Those standards require thatwe plan and perform the audit to obtain reasonable assurance about whether thefinancial statements are free of material misstatement.  An audit includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements.  An audit also includes 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 ouropinion, such consolidated financial statements present fairly, in all materialrespects, the financial position of the Company as of March 31, 2007 and 2006,and the results of its operations and its cash flows for each of the threeyears in the period ended March 31, 2007 in conformity with accountingprinciples generally accepted in the United States of America.

Asdiscussed in Note 1 to the financial statements, on April 9, 2007, the MesabaAviation, Inc. (Debtor-in-Possession), a wholly-ownedsubsidiary of the Company, Bankruptcy Court entered an order confirming theplan of reorganization which became effective after the close of business onApril 24, 2007.  Under the plan ofreorganization, the Company is required to comply with certain terms andconditions as more fully described in Note 14.

Asdiscussed in Note 2 to the consolidated financial statements, in 2007, theCompany changed its method of accounting for stock-based compensation.

We havealso audited, in accordance with the standards of the Public Company AccountingOversight Board (United States), the effectiveness of the Company’s internalcontrol over financial reporting as of March 31, 2007, based on the criteriaestablished in*Internal Control – IntegratedFramework* issued by the Committee of Sponsoring Organizations of theTreadway Commission and our report dated June 15, 2007, expressed anunqualified opinion on management’s assessment of the effectiveness of theCompany’s internal control over financial reporting and an unqualified opinionon the effectiveness of the Company’s internal control over financialreporting.

Minneapolis,Minnesota June 15, 2007

26

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**MAIR HOLDINGS, INC. ANDSUBSIDIARIES**

**ConsolidatedBalance Sheets**

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

**(inthousands, except per share information)**
| ** **                                                                                                            | ** ** | **2007** | ** ** | **2006** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| ASSETS                                                                                                                |       |     |       |     |       |
| CURRENT ASSETS:                                                                                                       |       |     |       |     |       |
| Cash and cash  equivalents                                                                                            |       | $        | 28,593     |     | $          | 47,135 |   |
| Short-term  investments                                                                                               |       | 26,068   |       | 44,117   |       |
| Accounts  receivable, net of reserves of $570 and $33                                                                 |       | 2,882    |       | 3,043    |       |
| Income tax  receivable                                                                                                |       | —   |       | 941      |       |
| Inventories, net                                                                                                      |       | 650      |       | 589      |       |
| Prepaid expenses  and deposits                                                                                        |       | 4,592    |       | 2,611    |       |
| Restricted Cash                                                                                                       |       | 554      |       | —   |       |
| Total current  assets                                                                                                 |       | 63,339   |       | 98,436   |       |
| PROPERTY AND EQUIPMENT,  net (Note 2)                                                                                 |       | 1,680    |       | 1,423    |       |
| NONCURRENT ASSETS:                                                                                                    |       |     |       |     |       |
| Investment in  Mesaba Aviation, Inc.                                                                                  |       | —   |       | —   |       |
| Long-term  investments                                                                                                |       | 11,357   |       | 19,484   |       |
| Restricted Cash                                                                                                       |       | 13,110   |       | —   |       |
| Other intangible  assets, net                                                                                         |       | 2,007    |       | 2,413    |       |
| Other assets,  net                                                                                                    |       | 197      |       | 186      |       |
|                                                                                                                  |       | $        | 91,690     |     | $          | 121,942 |   |
| LIABILITIES AND SHAREHOLDERS’ EQUITY                                                                             |       |     |       |     |       |
| CURRENT LIABILITIES:                                                                                                  |       |     |       |     |       |
| Intercompany  payable to Mesaba Aviation, Inc.                                                                        |       | $        | 813        |     | $          | 54 |   |
| Accounts payable                                                                                                      |       | 3,063    |       | 2,745    |       |
| Stock repurchase  payable to Northwest Airlines, Inc.                                                                 |       | 10,905   |       | —   |       |
| Accrued  liabilities:                                                                                                 |       |     |       |     |       |
| Payroll                                                                                                               |       | 1,575    |       | 1,421    |       |
| Deferred income                                                                                                       |       | 737      |       | 716      |       |
| Other current  liabilities                                                                                            |       | 6,310    |       | 7,635    |       |
| Total current  liabilities                                                                                            |       | 23,403   |       | 12,571   |       |
|                                                                                                                  |       |     |       |     |       |
| OTHER NONCURRENT  LIABILITIES                                                                                         |       | 1,081    |       | 772      |       |
|                                                                                                                  |       |     |       |     |       |
| COMMITMENTS AND CONTINGENCIES  (Notes 7,8 and 13)                                                                     |       |     |       |     |       |
|                                                                                                                  |       |     |       |     |       |
| SHAREHOLDERS’ EQUITY:                                                                                            |       |     |       |     |       |
| Undesignated  preferred stock, no specified par value; 1,000,000 shares authorized, no  shares issued and outstanding |       | —   |       | —   |       |
| Common stock,  $.01 par value; 60,000,000 shares authorized, 15,008,285 and 20,591,840  shares issued and outstanding |       | 150      |       | 206      |       |
| Paid-in capital                                                                                                       |       | 35,438   |       | 69,546   |       |
| Accumulated  other comprehensive loss                                                                                 |       | —   |       | (176     | )          |
| Retained  earnings                                                                                                    |       | 31,618   |       | 39,023   |       |
| Total  shareholders’ equity                                                                                      |       | 67,206   |       | 108,599  |       |
|                                                                                                                  |       | $        | 91,690     |     | $          | 121,942 |   |

 

27

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**MAIR HOLDINGS, INC. ANDSUBSIDIARIES**

**ConsolidatedStatements of Operations**

**Years Ended March 31, 2007, 2006and 2005**

**(inthousands, except share information)**
| ** **                                                                                             | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
|--------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| OPERATING  REVENUES:                                                                                   |       |     |       |     |       |     |       |
| Passenger                                                                                              |       | $        | 14,185     |     | $          | 228,920  |       | $ | 400,398 |   |
| Freight and other                                                                                      |       | 9,747    |       | 27,359   |       | 42,212   |       |
| Total operating revenues                                                                               |       | 23,932   |       | 256,279  |       | 442,610  |       |
| OPERATING  EXPENSES:                                                                                   |       |     |       |     |       |     |       |
| Wages and benefits                                                                                     |       | 11,189   |       | 88,666   |       | 148,652  |       |
| Aircraft fuel                                                                                          |       | 5,434    |       | 4,826    |       | 2,471    |       |
| Aircraft maintenance                                                                                   |       | 3,785    |       | 49,940   |       | 84,276   |       |
| Aircraft rents                                                                                         |       | 1,812    |       | 56,251   |       | 102,478  |       |
| Landing fees                                                                                           |       | 347      |       | 5,781    |       | 10,208   |       |
| Insurance and taxes                                                                                    |       | 1,900    |       | 5,368    |       | 7,383    |       |
| Depreciation and amortization                                                                          |       | 697      |       | 8,127    |       | 14,634   |       |
| Administrative and other                                                                               |       | 13,390   |       | 49,818   |       | 63,869   |       |
| Impairment and other charges                                                                           |       | —   |       | 50,203   |       | —   |       |
| Total operating expenses                                                                               |       | 38,554   |       | 318,980  |       | 433,971  |       |
| Operating (loss) income                                                                                |       | (14,622  | )          | (62,701  | )          | 8,639    |       |
| NONOPERATING  INCOME (EXPENSE):                                                                        |       |     |       |     |       |     |       |
| Interest income and other                                                                              |       | 5,447    |       | 6,039    |       | 2,381    |       |
| Interest expense                                                                                       |       | (227     | )          | (75      | )          | (61      | )          |
| Other nonoperating income, net                                                                         |       | 5,220    |       | 5,964    |       | 2,320    |       |
| (Loss) income before benefit (provision) for income  taxes and equity in loss of Mesaba Aviation, Inc. |       | (9,402   | )          | (56,737  | )          | 10,959   |       |
|                                                                                                   |       |     |       |     |       |     |       |
| BENEFIT  (PROVISION) FOR INCOME TAXES                                                                  |       | 1,997    |       | 13,842   |       | (3,604   | )          |
| (Loss) income before equity in loss of Mesaba  Aviation, Inc.                                          |       | (7,405   | )          | (42,895  | )          | 7,355    |       |
|                                                                                                   |       |     |       |     |       |     |       |
| EQUITY IN LOSS  OF MESABA AVIATION, INC., net of tax                                                   |       | —   |       | (39,953  | )          | —   |       |
|                                                                                                   |       |     |       |     |       |     |       |
| NET (LOSS)  INCOME                                                                                     |       | $        | (7,405     | )        | $          | (82,848  | )          | $ | 7,355 |   |
|                                                                                                   |       |     |       |     |       |     |       |
| NET (LOSS)  INCOME PER SHARE:                                                                          |       |     |       |     |       |     |       |
| (Loss) earnings per common share - basic                                                               |       | $        | (0.36      | )        | $          | (4.02    | )          | $ | 0.36 |   |
| (Loss) earnings per common share - diluted                                                             |       | $        | (0.36      | )        | $          | (4.02    | )          | $ | 0.35 |   |
|                                                                                                   |       |     |       |     |       |     |       |
| WEIGHTED AVERAGE  SHARES OUTSTANDING:                                                                  |       |     |       |     |       |     |       |
| Basic                                                                                                  |       | 20,333   |       | 20,584   |       | 20,505   |       |
| Diluted                                                                                                |       | 20,333   |       | 20,584   |       | 21,050   |       |

                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                

The accompanyingnotes are an integral part of these consolidated financial statements.

28

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**MAIR HOLDINGS, INC. ANDSUBSIDIARIES**

**ConsolidatedStatements of Shareholders’ Equity**

**Years Ended March 31, 2007, 2006and 2005**

**(inthousands, except share information)**
| ** **                                        | ** ** | ** **            | ** ** | ** **  | ** ** | ** **        | ** ** | **Accumulated**        | ** ** | ** **             | ** ** | ** ** | ** ** | ** **        | ** ** |
|---------------------------------------------------|------------|-----------------------|------------|-------------|------------|-------------------|------------|------------------------|------------|------------------------|------------|------------|------------|-------------------|------------|
| ** **                                        | ** ** | ** **            | ** ** | ** **  | ** ** | ** **        | ** ** | **Other**              | ** ** | ** **             | ** ** | **Total**  | ** ** | **Comprehensive** | ** ** |
| ** **                                        | ** ** | **Common Stock** | ** ** | **Paid-In** | ** ** | **Comprehensive** | ** ** | **Retained**           | ** ** | **Shareholders’** | ** ** | **Income** | ** ** |
| ** **                                        | ** ** | **Shares**            | ** ** | **Amount**  | ** ** | **Capital**       | ** ** | **Income (Loss)** | ** ** | **Earnings**           | ** ** | **Equity** | ** ** | **(Loss)**        | ** ** |
| Balance, March  31, 2004                          |       | 20,375,372            |       | 204         |       | 69,495            |       | 46                     |       | 114,516                |       | 184,261    |       |              |       |
|                                              |       |                  |       |        |       |              |       |                   |       |                   |       |       |       |              |       |
| Net income                                        |       |                  |       |        |       |              |       |                   |       | 7,355                  |       | 7,355      |       | 7,355             |       |
| Exercise of  stock options                        |       | 198,968               |       | 2           |       | 1,201             |       |                   |       |                   |       | 1,203      |       |              |       |
| Compensation  (benefit) expense for stock options |       |                  |       |        |       | (13               | )          |                   |       |                   |       | (13        | )          |              |       |
| Tax benefit on  stock options exercised           |       |                  |       |        |       | 173               |       |                   |       |                   |       | 173        |       |              |       |
| Unrealized loss  on investments, net of tax       |       |                  |       |        |       |              |       | (300                   | )          |                   |       | (300       | )          | (300              | )          |
| Balance, March  31, 2005                          |       | 20,574,340            |       | 206         |       | 70,856            |       | (254                   | )          | 121,871                |       | 192,679    |       | $                 | 7,055      |   |
|                                              |       |                  |       |        |       |              |       |                   |       |                   |       |       |       |              |       |
| Net loss                                          |       |                  |       |        |       |              |       |                   |       | (82,848                | )          | (82,848    | )          | (82,848           | )          |
| Exercise of  stock options                        |       | 17,500                |       |        |       | 114               |       |                   |       |                   |       | 114        |       |              |       |
| Compensation  (benefit) expense for stock options |       |                  |       |        |       | (1,436            | )          |                   |       |                   |       | (1,436     | )          |              |       |
| Tax benefit on  stock options exercised           |       |                  |       |        |       | 12                |       |                   |       |                   |       | 12         |       |              |       |
| Unrealized gain  on investments                   |       |                  |       |        |       |              |       | 78                     |       |                   |       | 78         |       | 78                |       |
| Balance, March  31, 2006                          |       | 20,591,840            |       | 206         |       | 69,546            |       | (176                   | )          | 39,023                 |       | 108,599    |       | $                 | (82,770    | ) |
|                                              |       |                  |       |        |       |              |       |                   |       |                   |       |       |       |              |       |
| Net loss                                          |       |                  |       |        |       |              |       |                   |       | (7,405                 | )          | (7,405     | )          | (7,405            | )          |
| Exercise of  stock options                        |       | 73,558                |       | 1           |       | 466               |       |                   |       |                   |       | 467        |       |              |       |
| Repurchase and  cancellation of Northwest stock   |       | (5,657,113            | )          | (57         | )          | (34,891           | )          |                   |       |                   |       | (34,948    | )          |              |       |
| Compensation  (benefit) expense for stock options |       |                  |       |        |       | 317               |       |                   |       |                   |       | 317        |       |              |       |
| Unrealized gain  on investments                   |       |                  |       |        |       |              |       | 176                    |       |                   |       | 176        |       | 176               |       |
| Balance, March 31, 2007                           |       | 15,008,285            |       | $           | 150        |              | $          | 35,438                 |       | $                      | —     |       | $          | 31,618            |       | $ | 67,206 |   | $ | (7,229 | ) |
|                                                   |            |                       |            |             |            |                   |            |                        |            |                        |            |            |            |                   |            |  |  |  |  |  |  |

 

The accompanyingnotes are an integral part of these consolidated financial statements.

29

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**MAIR HOLDINGS, INC. ANDSUBSIDIARIES**

**ConsolidatedStatements of Cash Flows**

**Years Ended March 31, 2007, 2006and 2005**

**(inthousands)**
| ** **                                                                                          | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| CASH FLOWS FROM  OPERATING ACTIVITIES:                                                              |       |     |       |     |       |     |       |
| Net (loss) income                                                                                   |       | $        | (7,405     | )        | $          | (82,848  | )          | $ | 7,355 |   |
| Adjustments to reconcile net (loss) income to net  cash (used in) provided by operating activities: |       |     |       |     |       |     |       |
| Equity in loss of Mesaba Aviation, Inc.                                                             |       | —   |       | 39,953   |       | —   |       |
| Depreciation and amortization                                                                       |       | 697      |       | 8,127    |       | 14,634   |       |
| Amortization of deferred credits                                                                    |       | (108     | )          | (813     | )          | (1,399   | )          |
| Stock-based compensation                                                                            |       | 317      |       | (1,436   | )          | (13      | )          |
| Deferred income taxes                                                                               |       | 352      |       | (10,500  | )          | 426      |       |
| Amortization of investment (premiums) discounts                                                     |       | (1,158   | )          | 141      |       | 2,081    |       |
| Impairment and other charges                                                                        |       | —   |       | 50,203   |       | —   |       |
| Changes in current operating items:                                                                 |       |     |       |     |       |     |       |
| Accounts receivable                                                                                 |       | 161      |       | (36,671  | )          | (1,682   | )          |
| Income tax receivable                                                                               |       | 941      |       | —   |       | —   |       |
| Inventories                                                                                         |       | (61      | )          | (791     | )          | (2,370   | )          |
| Prepaid expenses and deposits                                                                       |       | (1,981   | )          | (2,279   | )          | (2,366   | )          |
| Accounts payable and other                                                                          |       | (803     | )          | 15,433   |       | 5,450    |       |
| Net cash (used in) provided by operating activities                                                 |       | (9,048   | )          | (21,481  | )          | 22,116   |       |
|                                                                                                |       |     |       |     |       |     |       |
| CASH FLOWS FROM  INVESTING ACTIVITIES:                                                              |       |     |       |     |       |     |       |
| Purchases of investments                                                                            |       | (36,270  | )          | (145,613 | )          | (105,702 | )          |
| Sales of investments                                                                                |       | 63,768   |       | 181,496  |       | 97,482   |       |
| Purchases of property and equipment                                                                 |       | (577     | )          | (6,482   | )          | (9,659   | )          |
| Sale of property and equipment                                                                      |       | —   |       | 617      |       | —   |       |
| Increase in restricted cash                                                                         |       | (13,664  | )          | (7,100   | )          | —   |       |
| Net decrease in cash and cash equivalents from  deconsolidation of Mesaba Aviation, Inc.  |       | —   |       | (12,479  | )          | —   |       |
| Net cash provided by (used in) investing activities                                                 |       | 13,257   |       | 10,439   |       | (17,879  | )          |
|                                                                                                |       |     |       |     |       |     |       |
| CASH FLOWS FROM  FINANCING ACTIVITIES                                                               |       |     |       |     |       |     |       |
| Net tax refund payable to Mesaba Aviation, Inc.                                                     |       | 759      |       | —   |       | —   |       |
| Purchase (repayment) of other noncurrent liabilities                                                |       | 66       |       | (150     | )          | (133     | )          |
| Net borrowings on line of credit                                                                    |       | —   |       | 245      |       | —   |       |
| Repurchase of common stock                                                                          |       | (24,043  | )          |     |       |     |       |
| Proceeds from exercise of stock options                                                             |       | 467      |       | 114      |       | 1,203    |       |
| Net cash (used in) provided by financing activities                                                 |       | (22,751  | )          | 209      |       | 1,070    |       |
|                                                                                                |       |     |       |     |       |     |       |
| NET (DECREASE)  INCREASE IN CASH AND CASH EQUIVALENTS                                               |       | (18,542  | )          | (10,833  | )          | 5,307    |       |
| CASH AND CASH  EQUIVALENTS:                                                                         |       |     |       |     |       |     |       |
| Beginning of year                                                                                   |       | 47,135   |       | 57,968   |       | 52,661   |       |
| End of year                                                                                         |       | $        | 28,593     |     | $          | 47,135   |       | $ | 57,968 |   |

 

The accompanyingnotes are an integral part of these consolidated financial statements.

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**MAIR HOLDINGS, INC. ANDSUBSIDIARIES**

**Notes toConsolidated Financial Statements**

**YearsEnded March 31, 2007, 2006 and 2005**

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

*Basis of Presentation andCorporate Organization*

MAIR is the holding companyfor Big Sky, a regional air carrier based in Billings, Montana.  As of March 31, 2007, MAIR was also theholding company for Mesaba, a regional air carrier based in Minneapolis,Minnesota.  The Company’s consolidatedfinancial statements include the accounts of MAIR and Big Sky, as well asMesaba until Mesaba’s bankruptcy filing on the Petition Date.  All intercompany transactions and balanceshave been eliminated in consolidation. As discussed below, the accounts of Mesaba have been deconsolidated fromthe Company’s consolidated financial statements effective as of the PetitionDate.

Mesaba filed a voluntarypetition for relief under Chapter 11 of the Bankruptcy Code in the BankruptcyCourt on the Petition Date, after which Mesaba operated its business as adebtor-in-possession pursuant to the Bankruptcy Code.  Mesaba filed its plan of reorganization onJanuary 22, 2007, which provided for Mesaba to exit bankruptcy as awholly-owned subsidiary of Northwest. The plan of reorganization was approved by the Bankruptcy Court on April9, 2007.  On April 24, 2007, the plan ofreorganization became effective and Mesaba exited bankruptcy as a wholly-ownedsubsidiary of Northwest, and, therefore, is no longer owned by MAIR.   As a result, Mesaba’s financial statementsfor fiscal 2007 are reported in Note 18 on a condensed basis.

Due to Mesaba’sbankruptcy and the uncertainties surrounding the nature, timing, and specificsof the bankruptcy proceedings, MAIR deconsolidated Mesaba’s financial resultseffective as of the Petition Date.  As aresult, Mesaba’s assets and liabilities have been removed from the Company’sconsolidated balance sheets as of the Petition Date and through March 31,2007.  Mesaba’s results of operationshave been removed from the Company’s consolidated results of operations andcash flows since the Petition Date, but continue to be included in suchconsolidated financial statements for periods prior to the Petition Date.  

MAIR has accounted forMesaba’s financial results under the equity method of accounting since Mesaba’sbankruptcy filing on the Petition Date. In accordance with APB Opinion No. 18, **The Equity Method of Accounting forInvestments in Common Stock****, MAIR** evaluated whether its investment inMesaba had experienced an other-than-temporary impairment as of March 31,2006.  MAIR’s evaluation utilized amarket and income approach, including a discounted cash flow analysis.  After analyzing Mesaba’s actual losses infiscal 2006, projected losses in fiscal 2007 as it transitioned to a Saab-onlyoperation, Mesaba’s five-year Saab business plan and Mesaba’s liabilitiessubject to compromise as of March 31, 2006, MAIR concluded that its remaininginvestment in Mesaba had experienced an other-than-temporary impairment.  Accordingly, effective March 31, 2006, MAIRrecorded an $8.9 million impairment charge to write off its remaining equityinvestment in Mesaba.  The impairmentcharge was recorded in “Impairment and other charges” in the fiscal 2006consolidated statement of operations.

As of March 31,2007, Mesaba reported a net loss of $71.3 million.  MAIR did not record any additional losses inits consolidated financial statements due to MAIR not having any furtherobligations to fund any of Mesaba’s additional losses.

The provisions of SOP 90-7,apply to Mesaba’s financial statements while Mesaba operates under theprovisions of Chapter 11 of the Bankruptcy Code.  SOP 90-7 does not change the applicationof GAAP in the preparation of financial statements.  However, SOP 90-7 does require that thefinancial statements, for periods including and subsequent to the filing of theChapter 11 petition, distinguish transactions and events that are directlyassociated with the reorganization from the ongoing operations of the business.  See Note 18 for the condensed financialstatements of Mesaba presented in accordance with SOP 90-7 on a stand-alonebasis as of March 31, 2007 and 2006, and its results of operations for each ofthe three years in the period ended March 31, 2007.

Since the Petition Date,intercompany balances between MAIR and Mesaba have not been eliminated. As ofMarch 31, 2007 and 2006, MAIR had an intercompany payable to Mesaba of $0.8million and $0.1 million, respectively, and Mesaba had equal intercompanyamounts receivable from MAIR.  During thethird quarter of fiscal 2007, 

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MAIR received $5.5million in tax refunds related to net operating loss carryback claims forfiscal 2006 and 2005, of which $2.9 million was payable to Mesaba in accordancewith the Company’s tax sharing agreement. During the fourth quarter of fiscal 2007, MAIR, Mesaba and the IRSreached a settlement regarding Mesaba’s accounting for per diem allowancesduring fiscal years 2001 through 2004.  Under the settlement agreement MAIR agreed to pay the IRS $1.7 millionin taxes and interest on behalf of Mesaba for adjustments to taxable income forthe reclassification of per diem amounts for fiscal years 2002 and 2003.  The IRS adjustment and NOL carryback forfiscal 2004 created an additional $0.2 million receivable from Mesaba toMAIR.  The tax return for fiscal 2005 wasamended to incorporate the IRS adjustments and also netted an additional $0.2million receivable from Mesaba to MAIR. 

As a result of the April2007 settlement of MAIR’s proof of claim in Mesaba’s bankruptcy proceedings,MAIR may be responsible for certain of Mesaba’s tax obligations incurredthrough April 24, 2007, the effective date of Mesaba’s plan of reorganization,for those states in which MAIR and Mesaba historically filed a unitary tax return.Although management does not believe there is any remaining exposure, 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 Mesaba tax obligations that taxing authorities seek to collect from MAIR.  

**Operations**

*Big Sky*

Big Sky operates as aregional air carrier based in Billings, Montana, providing scheduled passenger,freight, express package and charter services. As of March 31, 2007, Big Sky provided scheduled air service to 18communities in Montana, Colorado, Idaho, Illinois, Oregon, Wyoming andWisconsin.  Big Sky operates dailyscheduled flights providing interline and online connecting services and localmarket services.  Big Sky also hascode-sharing agreements with Alaska Airlines, Horizon Air, US Air andNorthwest, where its services are marketed jointly with those air carriers forconnecting flights.

Big Sky participates inthe EAS program with the DOT.  The EASprogram subsidizes air carriers to provide air service to designated ruralcommunities throughout the country that could not otherwise economicallyjustify that service based on their passenger traffic.  The DOT pays EAS subsidies for each departurein a covered market. During the years ended March 31, 2007, 2006 and 2005, BigSky recognized revenue from EAS subsidies of $7.9 million, $8.0 million, and$7.3 million, respectively.

On March 12, 2007, BigSky and Delta executed a Hosted Prorate Agreement governing the Bostonoperation.  On the same date, Big Skyentered into a purchase agreement with CommutAir to purchase eight Beechcraft1900D aircraft, with a right of first refusal to purchase an additional fouraircraft. Big Sky will take ownership of these aircraft in the last half ofcalendar year 2007.  Additionally, BigSky was awarded a two year contract from the DOT to provide EAS service betweenMassena, Ogdensburg and Watertown, New York to Boston, Massachusetts.  This service began in April 2007 and is apart of Big Sky’s Delta operations.  Thetotal annual subsidy for this flying is approximately $2.1 million.  As of April 8, 2007, Big Sky provided DeltaConnection service to six cities in New York, Maine and Massachusetts with afleet of three Beechcraft 1900D aircraft. During the remainder of fiscal year 2008, Big Sky is scheduled toincrease this operation by adding five additional aircraft and providingservice to other similar communities.

*Recent Developments*

As disclosed in Note 14,in January 2007, Mesaba and Northwest entered into a SPRA by which Mesabaexited bankruptcy as a wholly-owned operating subsidiary of Northwest. TheBankruptcy Court approved Mesaba’s plan of reorganization on April 9,2007.  Mesaba’s plan of reorganization became effective on April 24, 2007,at which time Mesaba exited bankruptcy.  Thus, on April 24, 2007, MAIR’sownership of Mesaba ceased.

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

The accounting policies ofthe Company conform to accounting principles generally accepted in the UnitedStates of America.  Significant policiesare described below.

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*Use of Estimates*

The preparation offinancial statements in conformity with GAAP 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 the allowance for doubtfulaccounts, accrued maintenance expenses, aircraft property and equipment lives,inventory obsolescence reserves, valuation of other intangible assets andaccounting for income taxes.  Ultimateresults could differ from those estimates.

*Reclassification*

Certain amounts withinaccounts receivable and other current liabilities previously reported in theconsolidated balance sheet as of March 31, 2006 have been reclassified toconform to the fiscal 2007 presentation. The reclassification had no effect on previously reported total currentassets.

*Cash and Cash 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 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 shareholders’ 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).  Big Sky uses the average costmethod.  Expendable parts are charged to maintenance as used.  Aprovision is recorded to reduce inventories to the estimated net realizablevalue, if required.  Big Sky’s reserve balance as of March 31, 2007 and2006 was immaterial to the consolidated financial statements. 

*Property and 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 40 years.  Leaseholdimprovements are amortized over the shorter of the life of the lease or theremaining estimated useful life of the asset. The Company’s depreciation and amortization expense on property andequipment was $0.3 million, $7.7 million and $14.2 million in fiscal 2007, 2006and 2005, respectively.

The Company’sconsolidated property and equipment and related accumulated depreciation andamortization were as follows as of March 31, in thousands:
|                                                  | ** ** | **2007** | ** ** | **2006** | ** ** |
|--------------------------------------------------|------------|----------|------------|----------|------------|
| Flight equipment                                 |       | $        | 847        |     | $          | 650 |   |
| Ground services  equipment                       |       | 297      |       | 240      |       |
| Office and  general equipment                    |       | 238      |       | 192      |       |
| Buildings and  leasehold improvements            |       | 558      |       | 569      |       |
| Maintenance shop  equipment                      |       | 247      |       | 73       |       |
| Other                                            |       | 384      |       | 327      |       |
|                                             |       | 2,571    |       | 2,051    |       |
| Less:  Accumulated depreciation and amortization |       | (891     | )          | (628     | )          |
| Net property and  equipment                      |       | $        | 1,680      |     | $          | 1,423 |   |

 

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*Valuationof Long-Lived Assets*

The Company evaluates long-lived assets for potentialimpairments in compliance with SFAS No. 144, *Accountingfor the Impairment or Disposal of Long-Lived Assets*.  TheCompany records impairment losses on long-lived assets when events andcircumstances indicate the assets might be impaired and the undiscounted cashflows estimated to be generated by those assets are less than their carryingamounts.  Impairment losses are measured by comparing the fair value ofthe assets to their carrying amounts.  In determining the need to recordimpairment charges, the Company is required to make certain estimates regardingsuch things as the current fair market value of the assets and future net cashflows to be generated by the assets.  The current fair market value isdetermined by independent appraisal or published sales values of similar assetsand the future net cash flows are based on assumptions such as assetutilization, expected remaining useful lives, future market trends andprojected salvage values. Impairment charges are recorded in “Impairment and othercharges” on the Company’s statements of operations.  If there aresubsequent changes in these estimates, or if actual results differ from theseestimates, additional impairment charges may be required.

*Identifiableintangible assets*

The Company’s identifiable intangible assets includeBig Sky’s air carrier certificate and pilot labor contract. Under theprovisions of SFAS No. 142, *Goodwill and OtherIntangible Assets*, identifiable intangibles with finite lives areamortized, and those identifiable intangibles with indefinite lives are notamortized. Identifiable intangible assets that are subject to amortization areevaluated for impairment whenever events or changes in circumstances indicatethat the carrying amount may not be recoverable. Identifiable intangible assetsnot subject to amortization are tested for impairment annually, or morefrequently if events warrant. The impairment test consists of a comparison ofthe fair value of the intangible asset with its carrying amount. During thefourth quarter of fiscal 2007, the Company completed its annual impairment testfor those identifiable assets not subject to amortization and determined therewas no impairment.

*Other Assets*

In connection with prior agreements between Mesaba andNorthwest, 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”).  As of March 31, 2006, the Amended Warrantremained unvested.  When the Amended Warrant was issued, Mesaba wrote off$2.1 million, which amount represented the remaining unamortized portion of theprior warrants issued in connection with Mesaba’s and Northwest’s prioragreements.  On March 12, 2007, MAIRpurchased from Northwest all shares of MAIR stock owned by Northwest.  At that time, the Amended Warrant was alsocancelled.

*Airframe and Engine Maintenance*

Routine airframe andengine maintenance is charged to expense as incurred.  Modifications that enhance the operatingperformance or extend the useful lives of airframes or engines are capitalizedand amortized over the shorter of the remaining estimated useful life of theasset or the lease term.

*Other Current Liabilities*

The Company’sconsolidated other current liabilities were as follows as of March 31, inthousands:
|                                        | ** ** | **2007** | ** ** | **2006** | ** ** |
|----------------------------------------|------------|----------|------------|----------|------------|
| Cincinnati  hangar guarantee (Note 13) |       | $        | 3,429      |     | $          | 4,759 |   |
| Other accrued  expenses                |       | 1,715    |       | 1,308    |       |
| Taxes payable                          |       | 796      |       | 1,198    |       |
| Line of credit  (Note 8)               |       | 370      |       | 370      |       |
|                                   |       | $        | 6,310      |     | $          | 7,635 |   |

 

*Other Noncurrent Liabilities*

In order to assistthe Company in integrating new aircraft into its fleets, certain manufacturersprovided Big Sky with spare parts or rent deferrals.  The Company has deferred these amounts andamortizes them over the terms of the lease agreements as a reduction ofaircraft rent expense.  The Company’samortization of these credits resulted in 

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a reduction ofrent expense of $0.1 million, $0.6 million and $1.2 million during fiscal 2007,2006 and 2005, respectively.  The Company’sconsolidated other noncurrent liabilities were as follows as of March 31, inthousands:
|                                   | ** ** | **2007** | ** ** | **2006** | ** ** |
|-----------------------------------|------------|----------|------------|----------|------------|
| Deferred rent                     |       | $        | 39         |     | $          | 37 |   |
| Manufacturers  credits            |       | 213      |       | 323      |       |
| Deferred tax  liability           |       | 352      |       | —   |       |
| Long-term debt  and capital lease |       | 477      |       | 412      |       |
|                              |       | $        | 1,081      |     | $          | 772 |   |

 

*Stock Options*

Effective April 1, 2006,the Company 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 the Company 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,*theCompany elected to account for forfeitures when awards are actually forfeited,at which time all previous pro forma expense will be reversed to reduce proforma expense for that period.

The fair value of eachoption grant is estimated on the date of grant using the Black-Scholes optionpricing model with the following assumptions: risk-free interest rate, stock price volatility and expected life.  The Company establishes the risk-freeinterest rate 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 options granted, the Company amortizesthe fair value on a straight-line basis over the vesting period of the options.

The weighted average fairvalue of options granted during fiscal 2007 was $2.61.  The weighted average fair value of optionsgranted during fiscal 2005 was $3.41. Weighted average assumptions used in the valuation for the years endedMarch 31 are summarized below:
|                                           | ** ** | **2007** | ** ** | **2006*** | ** ** | **2005**    | ** ** |
|-------------------------------------------|------------|----------|------------|-----------|------------|-------------|------------|
| Risk free  interest rate (%)              |       | 4.7      |       | N/A       |       | 1.8  to 3.2 |       |
| Expected life of  option grants (years)   |       | 6.3      |       | N/A       |       | 4.0  to 4.6 |       |
| Expected  volatility of option grants (%) |       | 36.6     |       | N/A       |       | 46.7        |       |
| Expected dividend yield  (%)              |       | 0.0      |       | 0.0       |       | 0.0         |       |

 

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* There were no optionsgranted in fiscal 2006.

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*Pro FormaResults*

Prior to April 1, 2006, the Company accounted forshare-based payments using the intrinsic value method prescribed by APB 25 andSFAS 123. Under APB 25, if the exercise price of the Company’s employee stockoptions equaled the market price of the underlying stock on the date of thegrant, no compensation expense was recognized. Because the Company’s stockoptions were granted with exercise prices at the market price of the underlyingstock on the date of grant, no compensation expense had been recognized underAPB 25. The following table illustrates the effect on net (loss) income and(loss) earnings per share assuming the compensation costs for the Company’sstock option plan had been recorded in fiscal 2006 and 2005 based on the fairvalue method under SFAS 123R, in thousands: 
|                                                                                                                                         | ** ** | **2006** | ** ** | **2005** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| Net (loss)  income as reported                                                                                                          |       | $        | (82,848    | )        | $          | 7,355 |   |
| Add: Stock-based  employee compensation reduction included in reported net income, net of  related tax effects                          |       | (1,436   | )          | (13      | )          |
| Deduct:  Stock-based employee compensation expense determined under fair value based  method for all awards, net of related tax effects |       | (808     | )          | (1,187   | )          |
|                                                                                                                                    |       | $        | (85,092    | )        | $          | 6,155 |   |
| (Loss) earnings  per share - basic:                                                                                                     |       |     |       |     |       |
| As reported                                                                                                                             |       | $        | (4.02      | )        | $          | 0.36 |   |
| Pro forma                                                                                                                               |       | $        | (4.13      | )        | $          | 0.30 |   |
|                                                                                                                                    |       |     |       |     |       |
| (Loss) earnings  per share - diluted:                                                                                                   |       |     |       |     |       |
| As reported                                                                                                                             |       | $        | (4.02      | )        | $          | 0.35 |   |
| Pro forma                                                                                                                               |       | $        | (4.13      | )        | $          | 0.29 |   |

 

*Revenue Recognition*

Big Sky recognizes revenue when transportation hasbeen provided, including scheduled passenger, airfreight, express package andcharter services.  Tickets sold, but notyet used, are reported as deferred income. Estimates are used to determinedeferred income due to complex pricing structures, refund and exchangepolicies, and interline agreements with other airlines.  These estimates are reviewed monthly and arebased on the Company’s historical data. 

*Income Taxes*

The Company 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 basis 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, the Company’s financial performance, the market environment inwhich the Company operates, the utilization of past tax credits, and the lengthof relevant carryback and carryforward periods. Sufficient negative evidence,such as cumulative net losses during a three-year period that includes thecurrent year and the prior two years, may require that a valuation allowance beestablished with respect to existing and future deferred tax assets.  A valuation allowance is recorded when deferredtax assets are not considered more likely than not to be realized.

*Fair Value of FinancialInstruments*

The Company’s financialinstruments consist primarily of cash, cash equivalents, accrued liabilitiesand other noncurrent liabilities of which carrying amounts do not significantlydiffer from fair value due to their short-term nature or variable interestrates.  See Note 6 for additionalinformation regarding the Company’s investments.  

*New Accounting 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 the Company recognize in its financial statements the impact of atax position if that 

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position is more likelythan not to be sustained on audit, based on the technical merits of theposition. The accounting provisions of FIN 48 will be effective for the Companybeginning April 1, 2007. The Company is in the process of determining whateffect, if any, the adoption of FIN 48 will have on its 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 the Company beginning April 1, 2008. The Company is in theprocess of determining what effect, if any, the adoption of SFAS No. 157 willhave on its financial statements.

In September 2006, theFASB issued 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 the Company beginning April 1, 2007 and requiresretrospective application to all financial statements presented unless doing sois impractical.  The Company expects thatthe adoption and implementation of the FSP will not have a material impact onthe Company’s financial statements. 

In September 2006, theSEC issued SAB No. 108, *Considering the Effects ofPrior Year Misstatements when Quantifying Misstatements in Current YearFinancial Statements*(“SAB No. 108”). SAB No. 108 provides guidanceon how prior year misstatements should be taken into consideration whenquantifying misstatements in current year financial statements for purposes ofdetermining whether the financial statements are materially misstated. SAB No. 108 is effective for annual financial statements covering the firstfiscal year ending after November 15, 2006, or with respect to the Company’sfiscal year ending March 31, 2007. The implementation of SAB No. 108 did nothave a material impact on the Company’s financial statements. 

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 manyfinancial instruments and certain other items at fair value that are notcurrently required to be measured at fair value. SFAS 159 is effective forfiscal years beginning April 1, 2008. The Company is in the process ofdetermining what effect, if any, the adoption of SFAS 159 will have on itsfinancial statements.

**3.****              Intangible Assets**

The Company purchased BigSky in December 2002.  The excess of theBig Sky purchase price over the fair market value of the net assets acquiredwas allocated to certain identifiable intangible assets, including Big Sky’spilot labor contract and its air carrier certificate, and to goodwill.  Goodwill and the intangible assets areevaluated for impairment annually, at a minimum, or on an interim basis ifevents or circumstances indicate a possible inability to realize the carryingamounts.  Based on the results of aninterim test performed at September 30, 2005, the Company determined that allof its goodwill was impaired and recorded an impairment charge of $2.5 millionin the second quarter of fiscal 2006.

Intangible assetsand related accumulated amortization were as follows for the years ended March31, in thousands:
| ** **                           | ** ** | **2007**   | ** ** | **2006**         | ** ** |
|--------------------------------------|------------|------------|------------|------------------|------------|
| ** **                           | ** ** | ** ** | ** ** | **Accumulated**  | ** ** | ** ** | ** ** | ** ** | ** ** | **Accumulated** | ** ** | ** ** | ** ** |
| ** **                           | ** ** | **Gross**  | ** ** | **Amortization** | ** ** | **Net** | ** ** | **Gross** | ** ** | **Amortization** | ** ** | **Net** | ** ** |
| Indefinite-lived  intangible assets: |       |       |       |             |       |   |   |   |   |   |   |   |   |
| Air carrier certificate              |       | $          | 925        |             |       |   | $ | 925 |   | $ | 925 |   |   |   | $ | 925 |   |
| Amortizable  intangible asset:       |       |       |       |             |       |   |   |   |   |   |   |   |   |
| Pilot labor contract                 |       | 2,840      |       | (1,758           | )          | 1,082 |   | 2,840 |   | (1,352 | ) | 1,488 |   |
|                                 |       | $          | 3,765      |             | $          | (1,758 | ) | $ | 2,007 |   | $ | 3,765 |   | $ | (1,352 | ) | $ | 2,413 |   |
|                                      |            |            |            |                  |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

The amortizableintangible asset is being amortized over its estimated period of benefit.  Based on the current amount of intangibleassets subject to amortization, estimated amortization expense for each of thesucceeding three fiscal years will be $0.4 million per year.  During the fourth quarter of fiscal 2007, theCompany completed its annual impairment test of intangible assets anddetermined that no additional impairment charge was necessary.

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**4.****              Impairment and OtherCharges**

Impairment andother charges for the year ended March 31, 2006 were as follows, in thousands:
|                                                                 | ** ** | ** ** | ** ** | **Refer to** | ** ** |
|-----------------------------------------------------------------|------------|------------|------------|-------------------|------------|
| ** **                                                      | ** ** | **2006**   | ** ** | **Note**          | ** ** |
| Cancellation of  Northwest warrants                             |       | $          | 2,106      |              | 2          |   |
| Provision for  loss associated with Northwest bankruptcy filing |       | 31,900     |       | see below         |       |
| Impairment of  Big Sky goodwill                                 |       | 2,503      |       | 3                 |       |
| Provision for  guaranty of Cincinnati hangar lease              |       | 4,759      |       | 13                |       |
| Impairment of  equity investment in Mesaba                      |       | 8,935      |       | 1                 |       |
|                                                            |       | $          | 50,203     |              |       |   |

 

At the time ofNorthwest’s bankruptcy filing on September 14, 2005, Mesaba estimated thatNorthwest owed Mesaba approximately $31.9 million under the ASA and relatedagreements, net of amounts that Mesaba owed to Northwest under theseagreements.  After analyzing thecollectibility of the prepetition receivables due to Mesaba from Northwest, theCompany concluded that it was necessary to establish a reserve of $31.9 millionfor amounts that Mesaba may not ultimately collect. 

Mesaba reduced impairmentand other charges $2.8 million in the last six months of fiscal 2006 to adjust theNorthwest bad debt reserve to $29.1 million from $31.9 million primarily due toadditional offsetting liabilities owed by Mesaba to Northwest.  The $2.8 million reduction was determinedafter the deconsolidation of Mesaba on the Petition Date and is reflected inMesaba’s condensed financials statements (See Note 18).

**5.****              MAIR’s Proof ofClaim in Mesaba’s Bankruptcy**

On February 28,2006, as a part of Mesaba’s bankruptcy proceedings, MAIR filed a proof of claimagainst Mesaba for $55.2 million, with no recognition of this claim in theCompany’s consolidated financial statements due to the significant uncertaintyof any amount being ultimately collected. The following table summarizes MAIR’s claim against Mesaba in thousands:
| Management fees                                                        |   | $      | 2,875  |   |
|------------------------------------------------------------------------|--------|--------|--------|--------|
| Guaranty of  principal and accrued interest on Cincinnati hangar bonds |   | 13,015 |   |
| Guaranty of  Cincinnati hangar lease                                   |   | 4,501  |   |
| Capital  contribution to Mesaba made in connection with ASA            |   | 31,755 |   |
| Federal and  state income taxes                                        |   | 3,080  |   |
|                                                                   |   | $      | 55,226 |   |

 

In conjunction with thedeconsolidation of Mesaba’s results following the Petition Date, the Companyreviewed all intercompany guaranties. The Company identified liabilities of approximately $6.0 million for theguaranty of Mesaba’s Cincinnati/Northern Kentucky International Airportfacility and certain Mesaba income tax obligations payable to MAIR as the filerof the Company’s consolidated tax returns. These liabilities recorded on MAIR’sfinancial statements are duplicative of similar amounts included in liabilitiessubject to compromise recorded in Mesaba’s condensed financial statements (seeNote 18) and have been eliminated from MAIR’s March 31, 2006 consolidatedfinancial statements.  

Under guidance of SOP90-7 and APB Opinion No. 18, the Company determined that it was probable thatthe duplicative liabilities would be allowed into the claim pool by theBankruptcy Court.  Mesaba accrued $6.0million as reorganization items related to these duplicative liabilities.  Therefore, the $40.0 million of equity inloss of Mesaba that MAIR recognized at March 31, 2006 did not include the $6.0million in duplicative liabilities Mesaba recorded in fiscal 2006.

In April 2007, theBankruptcy Court approved a compromise for MAIR’s $55.2 million damage claimunder which Mesaba allowed MAIR a claim of up to $6.2 million relating torepayment of the guaranty of the Cincinnati hangar lease and managementfees.  Additionally, pursuant to the SPAbetween MAIR and Northwest, Northwest assigned 

38

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its allowed claim of $7.3million to MAIR.  Accordingly, MAIR couldreceive up to $13.5 million for its claim in Mesaba’s bankruptcy.  As of March 31, 2007, MAIR has not recordedany of these claims in the consolidated financial statements.

**6.****              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.  The Company 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$66.0 million and $110.7 million, respectively. 

Amortized cost,gross unrealized gains and losses and fair value of short and long-terminvestments classified as securities available for sale were as follows as ofMarch 31, in thousands:
|                          | ** ** | **2007** | ** ** | **2006** | ** ** |
|--------------------------|------------|----------|------------|----------|------------|
| Amortized cost           |       | $        | 37,409     |     | $          | 63,761 |   |
| Gross unrealized  gains  |       | 50       |       | 4        |       |
| Gross unrealized  losses |       | (34      | )          | (164     | )          |
| Fair value               |       | $        | 37,425     |     | $          | 63,601 |   |

 

In fiscal 2006, grossrealized losses were $0.2 million as the Company incurred some losses when itchanged its investment profile focus from tax-exempt municipal securities totaxable securities.  In fiscal 2007 and2005, the gross realized gains and losses were insignificant, as the Companygenerally held the investments until maturity. 

**7.****              Leases**

*Aircraft Leases*

Big Sky

Big Sky’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)**      | ** ** |
| Operating:                     |       |               |       |         |       |                   |       |                      |       |
| Beechcraft 1900D               |       | 10                 |       | 19           |       | 750                    |       | 325                       |       |
| Nonoperating:                  |       |               |       |         |       |                   |       |                      |       |
| Metro III                      |       | 1                  |       |         |       |                   |       |                      |       |

 

As of March 31, 2007, BigSky’s fleet of Metro and Beechcraft aircraft had remaining lease terms of 5 to44 months and aggregate monthly lease payments of approximately $0.2 million.On March 12, 2007, Big Sky entered into an agreement with CommutAir to purchaseeight Beechcraft 1900D aircraft and related spare parts with delivery scheduledduring the last half of calendar 2007. Big Sky is in the process of obtainingfinancing for these aircraft. 

Although Big Sky’sairline fleet operating leases contain standard return conditions, theoperating leases do not contain any other guaranteed lease residual provisionsor purchase options for which there would be a potential contingency at thetermination of the lease period.  

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As of March 31,2007, the aircraft operating leases for Big Sky require future minimum rentalpayments as follows, in thousands:
| Year Ending March 31 | ** ** | **Amount** | ** ** |
|-------------------------------------|------------|------------|------------|
| 2008                                |       | $          | 1,860      |   |
| 2009                                |       | 1,810      |       |
| 2010                                |       | 1,719      |       |
| 2011                                |       | 392        |       |
| 2012                                |       | —     |       |
| Thereafter                          |       | —     |       |
|                                |       | $          | 5,781      |   |

 

Consolidated rent expensefor aircraft operating leases, excluding Mesaba after its deconsolidation onthe Petition Date, was $1.8 million, $56.3 million and $102.5 million in fiscal2007, 2006 and 2005, respectively.

*Non-Aircraft Leases*

The Company leasesland, offices, hangar facilities, equipment and certain terminal facilitiesunder operating leases through 2019, which provide for approximate futureminimum rental payments as follows as of March 31, in thousands:
| Year Ending March 31 | ** ** | **Amount** | ** ** |
|-------------------------------------|------------|------------|------------|
| 2008                                |       | $          | 1,510      |   |
| 2009                                |       | 1,496      |       |
| 2010                                |       | 1,426      |       |
| 2011                                |       | 1,384      |       |
| 2012                                |       | 1,339      |       |
| Thereafter                          |       | 20,319     |       |
|                                |       | $          | 27,474     |   |

 

The Company’sconsolidated rent expense for non-aircraft operating leases was approximately$1.5 million, $1.1 million and $15.4 million in fiscal 2007, 2006 and 2005,respectively.

Separately, as describedin Note 13, MAIR has guaranteed Mesaba’s obligations with respect to Mesaba’sfacility at the Cincinnati/Northern Kentucky International Airport.  Since Mesaba’s bankruptcy filing, MAIR hasmade the payments owed by Mesaba under the ground lease and facilities lease,which payments total approximately $1.2 million annually.  These guaranty payments are reflected in thetable above.

*Capital Lease*

Future minimumlease payments under Big Sky’s capital lease for its hangar facility and thepresent value of future minimum capital lease payments as of March 31, were asfollows, in thousands:
| Year Ending March 31      | ** ** | **Amount** | ** ** |
|------------------------------------------|------------|------------|------------|
| 2008                                     |       | $          | 68         |   |
| 2009                                     |       | 68         |       |
| 2010                                     |       | 68         |       |
| 2011                                     |       | 68         |       |
| 2012                                     |       | 68         |       |
| Thereafter                               |       | 474        |       |
| Total minimum  lease payments            |       | $          | 814        |   |
| Less interest                            |       | (303       | )          |
| Present value of  minimum lease payments |       | $          | 511        |   |

 

The carrying value of thefacility under capital lease net of accumulated depreciation was $0.4 and $0.5million at March 31, 2007 and 2006, respectively.

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**8.****              Notes Payable andLong-Term Debt**

Long-term debt isrecorded in other noncurrent liabilities in the consolidated balance sheet andconsists of the following as of March 31, in thousands:
| ** **                                                                                                              | ** ** | **2007** | ** ** | **2006** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| Variable rate  installment note (10.75% at March 31, 2007) due May 2007 secured by  substantially all assets of Big Sky |       | $        | 5          |     | $          | 27 |   |
|                                                                                                                    |       |     |       |     |       |
| 7.5% installment  note due May 2007 secured by substantially all assets of Big Sky                                      |       | 25       |       | 106      |       |
|                                                                                                                    |       | 30       |       | 133      |       |
|                                                                                                                    |       |     |       |     |       |
| Capitalized  lease obligation, at imputed interest rate of 8.5%, secured by Big Sky leased  assets                      |       | 511      |       | 423      |       |
|                                                                                                                    |       | 541      |       | 556      |       |
| Less current  portion                                                                                                   |       | (64      | )          | (144     | )          |
|                                                                                                                    |       | $        | 477        |     | $          | 412 |   |

 

Long-term debt maturitieswere as follows as of March 31, 2007, in thousands:
| Year Ending March 31 | ** ** | **Amount** | ** ** |
|-------------------------------------|------------|------------|------------|
| 2008                                |       | $          | 64         |   |
| 2009                                |       | 28         |       |
| 2010                                |       | 31         |       |
| 2011                                |       | 36         |       |
| 2012                                |       | 34         |       |
| Thereafter                          |       | 348        |       |
|                                |       | $          | 541        |   |

 

*Line of Credit*

In February 2005,Big Sky obtained a revolving line of credit in the principal amount of $250,000from First Interstate Bank of Billings. In March 2006, the principal amount available under the line increasedto $370,000.  The line of credit chargesa variable interest rate based on the prime rate published in the *Wall Street Journal*. At March 31, 2007, the rate was 8.25%. The line of credit is collateralized by Big Sky’s inventory, accountsreceivable and equipment and is scheduled to mature in June 2007.  The balance of the line of credit was$370,000 as of March 31, 2007 and 2006.

**9.****              Income Taxes**

The Company’sconsolidated (benefit) provision for income taxes was comprised of thefollowing elements for the years ended March 31, in thousands:
|          | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
|----------|------------|----------|------------|----------|------------|----------|------------|
| Current: |       |     |       |     |       |     |       |
| Federal  |       | $        | (1,929     | )        | $          | (2,418   | )          | $ | 2,328 |   |
| State    |       | (420     | )          | —   |       | 850      |       |
| Deferred |       |     |       |     |       |     |       |
| Federal  |       | 324      |       | (10,453  | )          | 390      |       |
| State    |       | 28       |       | (971     | )          | 36       |       |
|     |       | $        | (1,997     | )        | $          | (13,842  | )          | $ | 3,604 |   |

 

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The actual incometax (benefit) expense differs from the statutory tax expense as follows for theyears ended March 31, in thousands:
| ** **                                                       | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
|------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Computed tax  (benefit) expense at Federal statutory rate of 35% |       | $        | (3,291     | )        | $          | (19,858  | )          | $ | 3,830 |   |
| Increase  (decrease) in income taxes resulting from:             |       |     |       |     |       |     |       |
| State taxes, net of federal tax benefit                          |       | (282     | )          | (1,845   | )          | 553      |       |
| Non-deductible meals and entertainment expenses                  |       | 14       |       | 264      |       | 393      |       |
| Non-deductible goodwill impairment                               |       | —   |       | 957      |       | —   |       |
| Non-deductible loss in subsidiary                                |       | —   |       | 3,418    |       | —   |       |
| Favorable IRS audit settlement                                   |       | (1,472   | )          | —   |       | (1,200   | )          |
| Valuation allowance                                              |       | 3,450    |       | 3,630    |       | —   |       |
| Other, net                                                       |       | (416     | )          | (408     | )          | 28       |       |
|                                                             |       | $        | (1,997     | )        | $          | (13,842  | )          | $ | 3,604 |   |

 

The following is atable of the significant components of the Company’s deferred tax assets andliabilities as of March 31, in thousands:
|                                 | ** ** | **2007** | ** ** | **2006** | ** ** |
|---------------------------------|------------|----------|------------|----------|------------|
| Deferred tax  assets:           |       |     |       |     |       |
| Maintenance                     |       | $        | —     |     | $          | 1 |   |
| NOL carryforwards               |       | 6,117    |       | 2,871    |       |
| Other accruals                  |       | 2,020    |       | 2,327    |       |
| Gross deferred  tax assets      |       | $        | 8,137      |     | $          | 5,199 |   |
|                            |       |     |       |     |       |
| Deferred tax  liabilities:      |       |     |       |     |       |
| Property and equipment          |       | $        | 189        |     | $          | 142 |   |
| Other accruals                  |       | 1,360    |       | 1,427    |       |
| Gross deferred  tax liabilities |       | 1,549    |       | 1,569    |       |
| Less valuation  allowance       |       | (6,940   | )          | (3,630   | )          |
| Net deferred tax  liabilities   |       | $        | (352       | )        | $          | — |   |

 

The net deferredtax liability was classified as follows as of March 31, in thousands:
|           | ** ** | **2007** | ** ** | **2006** | ** ** |
|-----------|------------|----------|------------|----------|------------|
| Current   |       | $        | —     |     | $          | — |   |
| Long term |       | (352     | )          | —   |       |
|      |       | $        | (352       | )        | $          | — |   |

 

SFAS No. 109, *Accounting for Income Taxes*, requires that all availableevidence, both positive and negative, be considered to determine whether, basedon the weight of that evidence, a valuation allowance is needed.  Future realization of the tax benefits of anexisting deductible temporary difference or carryforward ultimately depends onthe existence of sufficient taxable income of the appropriate character withinthe carryback or carryforward periods available under the tax law.

The Company has performedsuch an analysis, and a valuation allowance has been provided against deferredtax assets to the extent they cannot be used to offset future income arisingfrom the expected reversal of taxable differences.  A valuation allowance of $6.9 million and$3.6 million as of March 31, 2007 and March 31, 2006, respectively, has beenprovided due to the significance of the Company’s losses and significantuncertainties of its ability to realize these assets.  The Company will be required to update itsestimates of future taxable income based upon additional information managementobtains, and the Company will continue to evaluate the realizability of thedeferred tax assets on a quarterly basis.

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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, the Company’s federal deferred tax assets included $15.7million of NOL carryforwards (excluding Mesaba’s NOL carryforwards discussedbelow).  Of these NOL carryforwards, $3.7million are federal NOLs related to Big Sky and are subject to Section 382 ofthe Internal Revenue Code, which restricts the annual utilization of certainNOLs incurred prior to a change in ownership. These Big Sky NOL carryforwards expire through 2022.  The remaining $12.0 million balance is forMAIR’s federal NOLs which expire in 2026 and 2027.  MAIR and Big Sky also has $21.0 million instate NOLs (excluding Mesaba’s state NOL carryforwards discussed below) whichexpire over the next four to twenty years. 

During the fourth quarterof fiscal 2007, the Company received verification of a final settlement withthe IRS concerning the IRS’ examination of the Company’s income tax returns forfiscal 2001 through 2004.  As a result ofthis favorable settlement, the Company reduced its income tax payable and taxprovision by $1.5 million in the fourth quarter of fiscal 2007.    

As a result of thedeconsolidation of Mesaba in the third quarter of fiscal 2006, all of Mesaba’snet deferred tax assets are no longer presented in the accompanyingconsolidated balance sheet at March 31, 2007 and March 31, 2006 but remain apart of Mesaba’s condensed financial statements at March 31, 2006 (see Note18).  MAIR owned 100% of Mesaba untilApril 24, 2007, at which time Northwest became the sole owner of Mesaba throughMesaba’s bankruptcy plan of reorganization (see Note 14).  MAIR will include Mesaba in its consolidatedtax return filings as of March 31 2007. Mesaba’s short period ending April 24, 2007 will be included in MAIR’sconsolidated tax return filings for the period ending March 31, 2008.

As a result of the April2007 settlement of MAIR’s proof of claim in Mesaba’s bankruptcy proceedings,MAIR may be responsible for certain of Mesaba’s tax obligations incurred throughApril 24, 2007, the effective date of Mesaba’s plan of reorganization, forthose states in which MAIR and Mesaba historically filed a unitary tax return.Although management does not believe there is any remaining exposure, 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 Mesaba tax obligations that taxing authorities seek to collect from MAIR.

**10.****       Shareholders’ Equity**

*Capital Stock*

The Company’s authorizedcapital stock consists of 60,000,000 shares of common stock, par value $0.01per share, and 1,000,000 shares of undesignated preferred stock, having nospecified par value.  As of March 31,2007, there were 15,008,285 shares of common stock issued and outstanding.  No shares of preferred stock have beenissued.

Holders of common stockare entitled to one vote per share on any matter presented to shareholders forapproval.  The common stock has nospecial voting rights or dividend preferences. Holders of common stock are not allowed cumulative voting and do notpossess any preemptive rights to acquire any new or additional shares of stockof the Company.  Dividends are paid ifand when declared by the Company’s board of directors.  In the event of a liquidation of the Company,holders of common stock would be entitled to a pro rata distribution of anyproceeds remaining after payment to all of the Company’s creditors.  

The Company’s board ofdirectors has the authority to designate one or more series of preferred stock,and to fix the designations, powers, preferences, rights, qualifications,limitations and restrictions of such series. If so designated by the board of directors, the shares of any series ofpreferred stock could be senior to the common stock with respect todistributions.

In January 2007,MAIR and Northwest entered into the SPA under which MAIR agreed to repurchaseall of Northwest’s common stock of MAIR, subject to approval by Northwest’sBankruptcy Court.  MAIR agreed topurchase 5,657,113 shares of stock from Northwest at a purchase price of $6.25per share, payable in two tranches.   Theclosing for the stock purchase occurred on March 12, 2007, at which time MAIRpaid Northwest $4.25 per share, or approximately $24 million, and Northwestreturned all of the shares to MAIR for cancellation.  Northwest’s Amended Warrant to purchaseadditional shares of MAIR’s stock was also cancelled on that date.  MAIR will be required to pay to Northwest theremaining $2.00 per share, or approximately $11.3 million, the 

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earlier of October22, 2007 or the date on which MAIR receives at least $25 million indistributions from Mesaba’s bankruptcy estate on account of MAIR’s equityinterest in Mesaba.  The remainingpayment is recorded as a liability on the balance sheet.

*Stock Option Plans*

The Company has approvedstock option plans for key employees, directors, consultants and advisors tothe Company.  Options have been granted and are presently outstandingunder the Company’s 1994 Stock Option Plan, 1996 Director Stock Option Plan and2000 Stock Incentive Plan.  The 2000 Stock Incentive Plan has a provisionthat automatically increases the authorized shares available for grant onSeptember 1 of each year by the lesser of 300,000 or 1% of the then outstandingcommon shares.  Under the plans, the compensation committee of the boardof directors grants the options and determines the vesting and exercise periodsat the time of the award.  The purchase price of the stock fornon-qualified and incentive stock options is determined at the time of theaward and is equal to the fair market value at the time of the award.

During fiscal 2007, theadoption of SFAS 123R has resulted in additional expense in the amount of $0.3million related to stock options.  Theseamounts are included in the “Wages and benefits” caption in the accompanyingconsolidated statements of operations for the fiscal year ended March 31,2007.  SFAS 123R also requires thebenefits of tax deductions in excess of recognized compensation cost to bereported as a financing cash flow, rather than as an operating cash flow asrequired prior to SFAS 123R.  As theCompany currently has no excess tax benefits related to SFAS 123R, its adoptionhas not affected the Company’s consolidated statement of cash flows. The impactof adopting SFAS 123R on future results will depend on, among other things,levels of stock options granted in the future, actual forfeiture rates and thetiming of option exercises. 

Stock optiontransactions for the above three plans for the three years ended March 31 wereas follows:
| ** **                                    | ** ** | ** **      | ** ** | ** **   | ** ** | **Weighted**    | ** ** | ** **              | ** ** | ** **      | ** ** | ** **   | ** ** | **Weighted**    | ** ** | ** **              | ** ** |
|-----------------------------------------------|------------|-----------------|------------|--------------|------------|-----------------|------------|-------------------------|------------|-----------------|------------|--------------|------------|-----------------|------------|-------------------------|------------|
| ** **                                    | ** ** | ** **      | ** ** | **Weighted** | ** ** | **Average**     | ** ** | ** **              | ** ** | ** **      | ** ** | **Weighted** | ** ** | **Average**     | ** ** | ** **              | ** ** |
| ** **                                    | ** ** | ** **      | ** ** | **Average**  | ** ** | **Remaining**   | ** ** | **Aggregate**           | ** ** | ** **      | ** ** | **Average**  | ** ** | **Remaining**   | ** ** | **Aggregate**           | ** ** |
| ** **                                    | ** ** | **Options**     | ** ** | **Exercise** | ** ** | **Contractual** | ** ** | **Intrinsic**           | ** ** | **Options**     | ** ** | **Exercise** | ** ** | **Contractual** | ** ** | **Intrinsic**           | ** ** |
| ** **                                    | ** ** | **Outstanding** | ** ** | **Price**    | ** ** | **Term**        | ** ** | **Value**               | ** ** | **Exercisable** | ** ** | **Price**    | ** ** | **Term**        | ** ** | **Value**               | ** ** |
| ** **                                    | ** ** | ** **      | ** ** | ** **   | ** ** | ** **      | ** ** | **(in thousands)** | ** ** | ** **      | ** ** | ** **   | ** ** | ** **      | ** ** | **(in thousands)** | ** ** |
| Balance at March  31, 2004                    |       | 1,784,519       |       | $            | 6.88       |            |       |                    |       |            | 1,203,519  |         | $          | 6.90            |       |                    |       |   |   |
| Granted                                       |       | 330,000         |       | 8.28         |       |            |       |                    |       |            |       |         |       |            |       |                    |       |
| Exercised                                     |       | (198,968        | )          | 6.04         |       |            |       |                    |       |            |       |         |       |            |       |                    |       |
| Expired / Cancelled                           |       | (17,000         | )          | 23.00        |       |            |       |                    |       |            |       |         |       |            |       |                    |       |
| Balance at March  31, 2005                    |       | 1,898,551       |       | 7.07         |       |            |       |                    |       | 1,272,426       |       | 6.85         |       |            |       |                    |       |
| Exercised                                     |       | (17,500         | )          | 6.54         |       |            |       |                    |       |            |       |         |       |            |       |                    |       |
| Expired / Cancelled                           |       | (321,875        | )          | 8.04         |       |            |       |                    |       |            |       |         |       |            |       |                    |       |
| Balance at March  31, 2006                    |       | 1,559,176       |       | 6.87         |       |            |       |                    |       | 1,341,676       |       | 6.74         |       |            |       |                    |       |
| Granted                                       |       | 45,000          |       | 5.62         |       |            |       |                    |       |            |       |         |       |            |       |                    |       |
| Exercised                                     |       | (73,558         | )          | 6.35         |       |            |       |                    |       |            |       |         |       |            |       |                    |       |
| Expired / Cancelled                           |       | (72,500         | )          | 6.53         |       |            |       |                    |       |            |       |         |       |            |       |                    |       |
| Balance at March  31, 2007                    |       | 1,458,118       |       | 6.87         |       | 4.3             |       | $                       | 434        |            | 1,308,118  |         | 6.80       |            | 3.9        |                    | $          | 391 |   |
|                                          |       |            |       |         |       |            |       |                    |       |            |       |         |       |            |       |                    |       |
| Vested or expected to  vest at March 31, 2007 |       | 1,238,118       |       | 6.64         |       | 5.1             |       | $                       | 431        |            |       |         |       |            |       |                    |       |   |
|                                               |            |                 |            |              |            |                 |            |                         |            |                 |            |              |            |                 |            |                         |            |  |  |  |  |

 

Theaggregate intrinsic value of options outstanding at March 31, 2007 iscalculated as the difference between the exercise price of the underlyingoption and the market price of the common stock.  The aggregate intrinsic value of options exercisedduring fiscal 2007 and 2006 was immaterial. The aggregate intrinsic value of options exercised during fiscal 2005was $0.6 million.  The total fair valueof options vested was $0.4 million in each of the years ended March 31, 2007,2006 and 2005.

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Optionsoutstanding as of March 31, 2007 were as follows:
| ** **               | ** ** | **Options Outstanding** | ** ** | **Options Exercisable** | ** ** |
|--------------------------|------------|------------------------------|------------|------------------------------|------------|
| ** **               | ** ** | ** **                   | ** ** | **Average Remaining**   | ** ** | **Weighted** | ** ** | ** ** | ** ** | **Weighted** | ** ** |
| **Range of**        | ** ** | **Number**                   | ** ** | **Contract Life**       | ** ** | **Average** | ** ** | **Number** | ** ** | **Average** | ** ** |
| **Exercise Prices** | ** ** | **of Shares**           | ** ** | **(in years)**          | ** ** | **Exercise Price** | ** ** | **of Shares** | ** ** | **Exercise Price** | ** ** |
| $5.62 - $6.57            |       | 1,033,118                    |       | 3.8                          |       | $ | 6.18 |   | 988,118 |   | $ | 6.17 |   |
| $6.58 - $9.20            |       | 375,000                      |       | 6.0                          |       | 8.45 |   | 270,000 |   | 8.49 |   |
| $9.21 - $11.50           |       | 50,000                       |       | 1.2                          |       | 10.00 |   | 50,000 |   | 10.00 |   |
| $5.62 - $11.50           |       | 1,458,118                    |       | 4.3                          |       | 6.87 |   | 1,308,118 |   | 6.80 |   |
|                          |            |                              |            |                              |            |  |  |  |  |  |  |  |  |

 

As of March 31,2007, there were 1,685,883 shares available for grant under the Company’s 2000Stock Incentive Plan.  No shares areavailable for future grants under either the 1994 Stock Option Plan or the1996 Director Stock Option Plan.

*UnrecognizedCompensation*

As of March 31, 2007, the Company had $0.3 million oftotal unrecognized compensation cost related to non-vested stock optioncompensation arrangements granted under all equity compensation plans.  Total unrecognized compensation will beadjusted for future changes in estimated forfeitures.  The Company expects to recognize the costover a weighted average period of two years.

**11.****       Earnings (Loss) Per Share**

Basic earnings per commonshare is computed by dividing net income (loss) by the weighted average numberof shares of common stock outstanding during the year.  Diluted earnings per share is computed bydividing net income (loss) by the sum of the weighted average number of sharesof common stock outstanding plus all additional common stock that would havebeen outstanding if potentially dilutive common shares related to stock optionsand warrants had been exercised.  Stockoptions and warrants with an exercise price exceeding the fair market value ofthe Company’s common stock at year-end are considered antidilutive and areexcluded from the calculation.  

The following tablereconciles the number of shares utilized in the earnings per share calculationsfor the years ended March 31, in thousands, except per share data:
| ** **                                                                                | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
|-------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Net (loss)  income                                                                        |       | $        | (7,405     | )        | $          | (82,848  | )          | $ | 7,355 |   |
| For earnings per  share - basic:                                                          |       |     |       |     |       |     |       |
| Weighted average number of issued shares outstanding                                      |       | 20,333   |       | 20,584   |       | 20,505   |       |
| Effect of  dilutive securities:                                                           |       |     |       |     |       |     |       |
| Computed shares outstanding under stock option plans  utilizing the treasury stock method |       | —   |       | —   |       | 388      |       |
| Computed shares outstanding under warrants issued utilizing  the treasury stock method    |       | —   |       | —   |       | 157      |       |
| For earnings per  share - diluted:                                                        |       |     |       |     |       |     |       |
| Weighted average common and potentially dilutive common  shares outstanding               |       | 20,333   |       | 20,584   |       | 21,050   |       |
|                                                                                      |       |     |       |     |       |     |       |
| Earnings (loss)  per share - basic                                                        |       | $        | (0.36      | )        | $          | (4.02    | )          | $ | 0.36 |   |
| Earnings (loss)  per share - diluted                                                      |       | $        | (0.36      | )        | $          | (4.02    | )          | $ | 0.35 |   |
|                                                                                      |       |     |       |     |       |     |       |
| Antidilutive options  and warrants                                                        |       | 1,458    |       | 5,672    |       | 3,505    |       |

 

**12.****       Segment Information**

The Companyfollows the provisions of SFAS No. 131, *Disclosures about Segmentsof an Enterprise and Related Information*.  SFAS No. 131 establishes annual and interimreporting standards for an enterprise’s business segments 

45

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and relateddisclosures about its products, services, geographic areas and majorcustomers.  The method for determiningwhat information to report is based upon the way management organizes theoperating segments within the Company for making operating decisions andassessing financial performance. Although Mesaba has been deconsolidated from the Company’s consolidatedfinancial statements as of the Petition Date, the segment information presentedbelow continues to include Mesaba in accordance with SFAS No. 131 and relatedguidance for equity-method investees. Mesaba’s results of operations after the Petition Date are included inthe “Eliminations” column.

Operating segmentinformation for Mesaba, Big Sky and MAIR were as follows, in thousands:
| ** **                                | ** ** | **Mesaba** | ** ** | **Big Sky** | ** ** | **MAIR** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|-------------------------------------------|------------|------------|------------|------------------|------------|----------|------------|------------------|------------|------------------|------------|
| *Year  Ended March 31, 2007:*             |       |       |       |             |       |     |       |             |       |             |       |
| Operating revenues                        |       | $          | 268,303    |             | $          | 23,932   |       | $                | 234        |             | $          | (268,537 | ) | $ | 23,932 |   |
| Operating expenses                        |       | 290,230    |       | 28,843           |       | 9,945    |       | (290,464         | )          | 38,554           |       |
| Depreciation and amortization             |       | 9,021      |       | 676              |       | 21       |       | (9,021           | )          | 697              |       |
| Interest expense                          |       | 220        |       | 599              |       | 35       |       | (627             | )          | 227              |       |
| Reorganization items, net                 |       | 40,060     |       | —           |       | —   |       | (40,060          | )          | —           |       |
| Loss before income taxes                  |       | (68,596    | )          | (5,505           | )          | (3,897   | )          | 68,596           |       | (9,402           | )          |
| Capital expenditures                      |       | 2,319      |       | 567              |       | 10       |       | (2,319           | )          | 577              |       |
| Current assets                            |       | 46,457     |       | 7,090            |       | 57,807   |       | (48,015          | )          | 63,339           |       |
| Total assets                              |       | 72,120     |       | 10,942           |       | 105,838  |       | (97,210          | )          | 91,690           |       |
| Current liabilities                       |       | 44,320     |       | 6,638            |       | 18,323   |       | (45,878          | )          | 23,403           |       |
| Total stockholders’ (deficit) equity |       | (68,310    | )          | 3,223            |       | 87,515   |       | 44,778           |       | 67,206           |       |
| *Year  Ended March 31, 2006:*             |       |       |       |             |       |     |       |             |       |             |       |
| Operating revenues                        |       | $          | 408,814    |             | $          | 20,441   |       | $                | 3,184      |             | $          | (176,160 | ) | $ | 256,279 |   |
| Operating expenses                        |       | 448,939    |       | 28,225           |       | 21,086   |       | (179,270         | )          | 318,980          |       |
| Depreciation and amortization             |       | 12,243     |       | 878              |       | 18       |       | (5,012           | )          | 8,127            |       |
| Interest expense                          |       | —     |       | 390              |       | —   |       | (315             | )          | 75               |       |
| Reorganization items, net                 |       | 22,650     |       | —           |       | —   |       | (22,650          | )          | —           |       |
| (Loss) income before income taxes         |       | (62,326    | )          | 8,090            |       | (12,106  | )          | 9,605            |       | (56,737          | )          |
| Capital expenditures                      |       | 8,101      |       | 743              |       | 20       |       | (2,382           | )          | 6,482            |       |
| Current assets                            |       | 78,284     |       | 3,926            |       | 98,437   |       | (82,211          | )          | 98,436           |       |
| Total assets                              |       | 118,441    |       | 7,918            |       | 169,716  |       | (174,133         | )          | 121,942          |       |
| Current liabilities                       |       | 52,984     |       | 9,591            |       | 6,908    |       | (56,912          | )          | 12,571           |       |
| Total stockholders’ equity (deficit) |       | 2,937      |       | (2,445           | )          | 169,716  |       | (61,609          | )          | 108,599          |       |
| *Year  Ended March 31, 2005:*             |       |       |       |             |       |     |       |             |       |             |       |
| Operating revenues                        |       | $          | 427,533    |             | $          | 15,077   |       | $                | 4,774      |             | $          | (4,774 | ) | $ | 442,610 |   |
| Operating expenses                        |       | 413,077    |       | 19,991           |       | 5,677    |       | (4,774           | )          | 433,971          |       |
| Depreciation and amortization             |       | 13,844     |       | 774              |       | 16       |       | —           |       | 14,634           |       |
| Interest expense                          |       | —     |       | 278              |       | —   |       | (217             | )          | 61               |       |
| Income (loss) before income taxes         |       | 14,715     |       | (5,182           | )          | 1,426    |       | —           |       | 10,959           |       |
| Capital  expenditures                     |       | 9,390      |       | 264              |       | 5        |       | —           |       | 9,659            |       |

 

**13.****       Commitments andContingencies**

*Workforce*

Approximately 53% of BigSky’s workforce consists of members of unions representing pilots, mechanicsand dispatchers.  The CBAs for the pilots,mechanics and dispatchers become amendable December 2009, August 2010 andDecember 2009, respectively.

*Benefit Plan*

Big Sky maintains a401(k) benefit plan covering substantially all of its employees whereby Big Skywill match 30% of employee contributions to the plan, up to 5% of each employee’seligible earnings.  Big Sky’scontribution to the plan was not significant in fiscal 2007, 2006 or 2005.

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During fiscal 2007, MAIRmaintained a 401(k) benefit plan covering all of its employees whereby MAIRmatched 50%, 75% or 100%, depending on length of employment, of employeecontributions to the plan, up to 8% of each employee’s eligible earnings.  MAIR’s contribution to the plan was notsignificant in fiscal 2007, 2006 or 2005.

Beginning April 30, 2007,MAIR began participating in Big Sky’s 401(k) benefit plan.

*Regulatory Matters*

From time to time, BigSky is party to ongoing FAA proceedings arising in the ordinary course ofbusiness.  In the opinion of management,the resolution of these matters will not have a material adverse effect on theCompany’s consolidated financial position, results of operations or cash flows.

*Litigation*

The Company is a party toongoing legal and tax proceedings arising in the ordinary course ofbusiness.  In the opinion of management,the resolution of these matters will not have a material adverse effect on theCompany’s consolidated financial position, results of operations or cash flows.

*Saab Leasing Litigation*

In 2002, FairbrookLeasing, Inc., Lambert Leasing, Inc. and Swedish Aircraft MAIR 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 340A aircraft. Although Mesaba appealed this ruling, while the appeal was pending, SaabLeasing (relying on the District Court’s declaratory judgment ruling) filed aseparate action in the District Court alleging approximately $35 million indamages for past due and future aircraft lease obligations.  While thedamages action was pending, the U.S. Court of Appeals for the Eighth Circuitaffirmed the District Court’s declaratory judgment ruling.  On July 6, 2006, the District Court in thedamages action granted Mesaba’s motion for partial summary judgment, rulingthat Saab Leasing is not eligible to receive damages for the majority of itsclaims 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.  Mesabawas unable to reach a settlement with Saab Leasing within the context of Mesaba’sbankruptcy proceedings; thus, Mesaba consented to lift the automatic stay andallow Saab Leasing to appeal the District Court’s July 2006 ruling to theEighth Circuit Court of Appeals.  Mesaba’sbankruptcy estate will now be required to fund any litigation expenses and anyamounts that may be due to Saab Leasing if the District Court’s ruling isreversed.  Any such payments by Mesaba’sbankruptcy estate would ultimately reduce the distribution MAIR is entitled toreceive from the estate.  

*Goldman Bankruptcy Claim*

Goldman 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’s disputedclaims are for aircraft and equipment leases that were rejected byMesaba.  Goldman has asserted that the stipulated loss provisions of theapplicable leases, under which liquidated damages are calculated, should applyto determine the total claim amount due to Goldman.  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 shouldreflect actual damages suffered, which is the amount related to Goldman’s claimthat is recorded in Mesaba’s liabilities subject to compromise.  Mesaba’sbankruptcy estate will be funding the litigation expenses related to theGoldman claim and will be responsible for making a distribution to Goldmanfollowing resolution of the claim.  Any such payments by Mesaba’s bankruptcyestate would ultimately reduce the distribution MAIR is entitled to receivefrom the estate.  

*Guaranty*

Priorto its bankruptcy, Mesaba leased a facility at the Cincinnati/Northern KentuckyInternational Airport, but vacated the facility and ceased making the requiredlease payments on it in November 2005.  In 1999, MAIR unconditionallyguaranteed full and prompt payment of the ground lease and the bonds associatedwith the initial financing of the facility.  In accordance with this guaranty,MAIR has made the required bond and ground lease payments due since November2005.  In April 2006, in exchange for the bondholders forbearingacceleration of the bonds, MAIR delivered a letter of credit to the bondholdersto assure payment of the bonds.  Subsequently, Mesaba

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rejectedthe facilities lease associated with the facility, but assumed and assigned therelated ground lease to MAIR.  The Airport Board consented to theassignment of the ground lease.  SinceMesaba vacated the hangar in October 2005, MAIR has been seeking othersublessors to lease the facility.  Anyrent MAIR receives from a future sublessor would offset the lease payments thatMAIR is required to make. 

MAIR and the bondholdersare negotiating an amendment to the original forbearance that provides for thebondholders’ continued forbearance to allow MAIR a specified number of monthsto identify a new tenant and execute a sublease for the property.  As ofDecember 31, 2005, MAIR recorded a $4.8 million liability with respect to thelease and guaranty, which assumed that the facility would remain vacant for twoyears, during which time MAIR would continue to make the bond and leasepayments, and that thereafter MAIR would be able to sublease the facility at a20% discount.  At March 31, 2007, this accrued liability totaled $3.4million.  If MAIR is unable to find an alternate sublessee for thefacility, the bondholders have the right to call the bonds, and MAIR may berequired to record an additional charge and liability of up to $9.4 million.  MAIR continues to reassess this reserve asmaterial developments occur.

The letter of credit wasissued by First Interstate Bank of Billings (“UMB”) and is currently fullycollateralized by MAIR’s cash account held at First Interstate Bank. Under the agreement with UMB, MAIR is obligated to maintain the letter ofcredit until all obligations under the bonds are satisfied.  MAIR’s annualobligations with respect to the bonds and the ground lease for the facilitytotal approximately $1.2 million, and those obligations will continue throughJuly 2029 and will increase at scheduled intervals in accordance with the termsof the bond documents.  The UMB agreement and the letter of credit providethat the amount of the letter of credit will automatically decrease each Julyin accordance with the redemption schedule for the bonds. 

UMB may draw on theletter of credit upon the occurrence of an event of default under its agreementwith MAIR, including if MAIR fails to make any payment when due to UMB, if MAIRfails to provide evidence that the letter of credit has been renewed annually(or if MAIR fails to renew the letter of credit), if UMB receives notice fromFirst Interstate Bank of the bank’s intent not to renew the letter of credit,if the bonds become subject to mandatory redemption, if MAIR fails to complywith the terms of its agreement with UMB or if MAIR commits any event ofdefault under its guaranty of Mesaba’s bond obligations.  The cashsupporting the letter of credit was classified as “Restricted cash” on theCompany’s consolidated balance sheet at March 31, 2007 and 2006.

*Other Guarantees*

In February 2005, Big Skyobtained a revolving line of credit in the principal amount of $250,000 fromFirst Interstate Bank of Billings.  InMarch 2006, the principal amount available under the line increased to$370,000.  The line of credit charges avariable interest rate based on the prime rate published in the *Wall Street Journal*. At March 31, 2007, the rate was 8.25%. The line of credit is collateralized by Big Sky’s inventory, accountsreceivable and equipment and is scheduled to mature in June 2007. 

Big Sky recorded $0.6million of restricted cash in fiscal 2007 for certificates of depositsupporting letters of credit of $0.4 million for workers’ compensationinsurance and $0.2 million for aircraft fuel and airport lease agreements.

In May 2007 Big Skyestablished a $0.1 million certificate of deposit supporting a customs bondrequired for the June 2007 service between Boston, Massachusetts and QuebecCity and Fredericton, Canada.

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*MAIR Pledge for Big Sky*

In August 2006, MAIRentered into a pledge agreement with U.S. Bank, pursuant to which MAIR pledged$0.8 million in exchange for U.S. Bank reducing the amount of funds that itholds back from Big Sky when credit card payments are processed.  U.S.Bank processes payments for Big Sky tickets made with various creditcards.  In the past, and consistent with industry practice, U.S. Bank heldback a specified portion of those credit card payments until the tickets hadbeen used.  MAIR agreed to pledge its cash in lieu of the required holdback, which subsequently freed up those funds for Big Sky’s use.  Underthe pledge agreement, MAIR is free to request a release of its collateral atany time.  Following such a request, U.S. Bank would again begin holdingback amounts from Big Sky, and MAIR’s collateral would be returned 90 daysafter the held back amounts total the requisite level pursuant to U.S. Bank’scredit card processing policies.  Because MAIR has the right to request arelease of its collateral and to terminate the pledge agreement, the amount ofcash pledged is not recorded as restricted cash.

**14.****       Mesaba Plan ofReorganization**

On January 22, 2007,Mesaba and Northwest entered into the SPRA, under which Northwest agreed toallow Mesaba a $145 million claim in Northwest’s bankruptcy case.  In exchange, Mesaba agreed to file a plan ofreorganization under which Mesaba’s existing equity would be cancelled and newequity would be issued to Northwest, making Mesaba a wholly-owned operatingsubsidiary of Northwest.    

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 Goldman Sachs and Mesaba entered intoa forward contract by which Goldman Sachs purchased the $145 million claim forapproximately $125 million.  The closingof the sale to Goldman Sachs was contingent upon Northwest’s bankruptcy courtallowing the $145 million claim and upon Mesaba’s plan of reorganization beingapproved by its own Bankruptcy Court. Following Northwest’s bankruptcy court’s February 27, 2007 orderallowing the $145 million claim and Mesaba’s Bankruptcy Court’s April 9, 2007approval of Mesaba’s plan of reorganization, Goldman Sachs funded the $125million purchase price.  Mesaba exitedbankruptcy on April 24, 2007, and all the outstanding stock of Mesaba is nowowned by Northwest.

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, MAIR worked with Mesaba’s creditors’committee to resolve the majority of Mesaba’s creditors’ claims.  The two remaining significant unresolvedclaims are held by Goldman and Saab and are discussed more fully in Note13.  Mesaba currently estimates that theallowed creditors’ claims will total approximately $94 million, which amountincludes MAIR’s $13.1 million claim.  IfMesaba’s estimate is correct, Mesaba’s creditors would be paid in full,including interest, and MAIR could receive an additional $31 million for itsequity interest in Mesaba.  However, inthe event the total allowed creditors’ claims exceed $125 million, MAIR wouldnot receive any distributions for its equity ownership of Mesaba.  In such event, the trust assets would bedistributed pro-rata to all of Mesaba’s unsecured creditors, includingMAIR.  

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. MAIR expects that the remaining creditors’ claims should be resolved inthe next nine months and that it will receive distributions for its claim andfor its equity interest by the end of fiscal 2008.  

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**15.****       Valuation and QualifyingAccount**

The following is theactivity within the Company’s consolidated valuation and qualifying account forfiscal 2007, 2006 and 2005, in thousands:
| ** **                        | ** ** | **Balances at** | ** ** | **Additions**       | ** ** | **Deductions** | ** ** | **Balances at** | ** ** |
|-----------------------------------|------------|----------------------|------------|---------------------|------------|----------------|------------|----------------------|------------|
| ** **                        | ** ** | **Beginning**        | ** ** | **Charged**         | ** ** | **from**       | ** ** | **End**              | ** ** |
| ** **                        | ** ** | **of Year**     | ** ** | **to Expense** | ** ** | **Reserve**    | ** ** | **of Year**     | ** ** |
| Allowance for  doubtful accounts: |       |                 |       |                |       |           |       |                 |       |
| Year ended March 31, 2007         |       | $                    | 33         |                | $          | 541            |       | $                    | 4          |   | $ | 570 |   |
| Year ended March 31, 2006         |       | 601                  |       | 31,985              |       | 32,553         | *          | 33                   |       |
| Year ended March  31, 2005        |       | 926                  |       | 694                 |       | 1,019          |       | 601                  |       |
|                                   |            |                      |            |                     |            |                |            |                      |            |  |  |  |  |

 

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* $31.9 million ofdeductions was due to the deconsolidation of Mesaba (see Note 1).

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**16.****       Quarterly Financial Data(Unaudited)**

The following isquarterly financial data for the fiscal year ended March 31, 2007, inthousands, except per share data:
| ** **                                      | ** ** | **Quarter Ended**      | ** ** | **Fiscal**                       | ** ** |
|-------------------------------------------------|------------|-----------------------------|------------|----------------------------------|------------|
| ** **                                      | ** ** | **June 30, 2006** | ** ** | **September 30, 2006** | ** ** | **December 31, 2006** | ** ** | **March 31, 2007** | ** ** | **Year** | ** ** |
|                                            |       |                        |       |                             |       |   |   |   |   |   |   |
| Operating  revenues                             |       | $                           | 6,043      |                             | $          | 6,183 |   | $ | 5,952 |   | $ | 5,754 |   | $ | 23,932 |   |
| Total operating  expenses                       |       | 9,837                       |       | 9,603                            |       | 8,387 |   | 10,727 |   | 38,554 |   |
| Operating (loss)  income                        |       | (3,794                      | )          | (3,420                           | )          | (2,435 | ) | (4,973 | ) | (14,622 | ) |
| (Loss) income  before provision of income taxes |       | (2,494                      | )          | (2,195                           | )          | (1,121 | ) | (3,592 | ) | (9,402 | ) |
| (Loss) net  income                              |       | (2,494                      | )          | (2,536                           | )          | (1,131 | ) | (1,244 | ) | (7,405 | ) |
| (Loss) earnings  per common share:              |       |                        |       |                             |       |   |   |   |   |   |   |
| Basic                                           |       | $                           | (0.12      | )                                | $          | (0.12 | ) | $ | (0.05 | ) | $ | (0.06 | ) | $ | (0.36 | )(2) |
| Diluted                                         |       | $                           | (0.12      | )                                | $          | (0.12 | ) | $ | (0.05 | ) | $ | (0.06 | ) | $ | (0.36 | )(2) |
| Weighted average  common shares outstanding:    |       |                        |       |                             |       |   |   |   |   |   |   |
| Basic                                           |       | 20,592                      |       | 20,592                           |       | 20,592 |   | 19,556 |   | 20,333 |   |
| Diluted                                         |       | 20,592                      |       | 20,592                           |       | 20,592 |   | 19,556 |   | 20,333 |   |

 

The following isquarterly financial data for the fiscal year ended March 31, 2006, inthousands, except per share data:
| ** **                                                                                  | ** ** | **June 30, 2005** | ** ** | **September 30, 2005** | ** ** | **December 31, 2005 (1)** | ** ** | **March 31, 2006 (1)** | ** ** | **Fiscal  Year** | ** ** |
|---------------------------------------------------------------------------------------------|------------|-----------------------------|------------|----------------------------------|------------|------------------------------------------|------------|---------------------------------------|------------|------------------|------------|
| ** **                                                                                  | ** ** | ** **                  | ** ** | ** **                       | ** ** | ** **                               | ** ** | ** **                            | ** ** | ** **       | ** ** |
| Operating  revenues                                                                         |       | $                           | 114,683    |                             | $          | 114,906                                  |       | $                                     | 21,247     |             | $          | 5,443 |   | $ | 256,279 |   |
| Total operating  expenses                                                                   |       | 115,601                     |       | 155,132                          |       | 28,307                                   |       | 19,940                                |       | 318,980          |       |
| Operating income  (loss)                                                                    |       | (918                        | )          | (40,226                          | )          | (7,060                                   | )          | (14,497                               | )          | (62,701          | )          |
| Income (loss)  before provision of income taxes and equity in loss of Mesaba Aviation, Inc. |       | 1,878                       |       | (39,139                          | )          | (6,393                                   | )          | (13,083                               | )          | (56,737          | )          |
| Equity in Loss  of Mesaba Aviation, Inc.                                                    |       | —                      |       | —                           |       | (334                                     | )          | (39,619                               | )          | (39,953          | )          |
| Net income  (loss)                                                                          |       | 1,202                       |       | (25,504                          | )          | (4,458                                   | )          | (54,088                               | )          | (82,848          | )          |
| Earnings (loss)  per common share:                                                          |       |                        |       |                             |       |                                     |       |                                  |       |             |       |
| Basic                                                                                       |       | $                           | 0.06       |                             | $          | (1.24                                    | )          | $                                     | (0.22      | )                | $          | (2.63 | ) | $ | (4.02 | )(2) |
| Diluted                                                                                     |       | $                           | 0.06       |                             | $          | (1.24                                    | )          | $                                     | (0.22      | )                | $          | (2.63 | ) | $ | (4.02 | )(2) |
| Weighted average common  shares outstanding:                                                |       |                        |       |                             |       |                                     |       |                                  |       |             |       |
| Basic                                                                                       |       | 20,574                      |       | 20,577                           |       | 20,592                                   |       | 20,592                                |       | 20,584           |       |
| Diluted                                                                                     |       | 21,194                      |       | 20,577                           |       | 20,592                                   |       | 20,592                                |       | 20,584           |       |

 

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(1) As discussed in Note 1, MAIR deconsolidated Mesaba’s financialsresults under the equity method of accounting effective October 13, 2005, thedate of Mesaba’s bankruptcy filing.  As aresult, Mesaba’s results of operation have been removed from the Company’sconsolidated results of operations since October 13, 2005.

(2) The sum of theearnings (loss) per share for each of the individual quarters does not equalearnings per share for the fiscal year due to rounding.

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**17.****       Subsequent Events**

In January 2007, Mesabaand Northwest entered into a SPRA by which Mesaba exited bankruptcy as awholly-owned operating subsidiary of Northwest.  The Bankruptcy Courtapproved Mesaba’s plan of reorganization on April 9, 2007.  Mesaba’s planof reorganization became effective on April 24, 2007, at which time Mesabaexited bankruptcy.  Thus, on April 24, 2007, MAIR’s ownership of Mesabaceased.  See Note 14 for a discussion ofMesaba’s plan of reorganization.

**18.****       Financial Information ofMesaba**

As discussed in Note 1,MAIR has accounted for Mesaba’s financial results under the equity method ofaccounting since the Petition Date.  Inaccordance with APB Opinion No. 18, **The Equity Method of Accounting for Investments inCommon Stock****,MAIR** evaluated whether its investment in Mesaba hasexperienced an other-than-temporary impairment as of March 31, 2006.  MAIR’s evaluation utilized a market andincome approach, including a discounted cash flow analysis.  After analyzing Mesaba’s actual losses infiscal 2006, projected losses in fiscal 2007 as it transitioned to a Saab-onlyoperation, Mesaba’s five-year Saab business plan and Mesaba’s liabilitiessubject to compromise as of March 31, 2006, MAIR concluded that its remaininginvestment in Mesaba had experienced an other-than-temporary impairment.  Accordingly, effective March 31, 2006, MAIRrecorded an $8.9 million impairment charge to write off its remaining equity investmentin Mesaba.  The impairment charge wasrecorded in “Impairment and other charges” in the fiscal 2006 consolidatedstatement of operations.

As of March 31, 2007,Mesaba reported a net loss of $71.3 million. MAIR did not record any additional Mesaba equity method losses in MAIR’sconsolidated financial statements because MAIR did not have any furtherobligations to fund any of Mesaba’s additional losses.

The following condensedfinancial statements of Mesaba have been prepared in conformity with SOP 90-7,which requires that the liabilities subject to compromise by the BankruptcyCourt be segregated from liabilities not subject to compromise, and that alltransactions directly associated with the reorganization be identified.  Liabilities subject to compromise includeprepetition unsecured claims that may be settled at amounts that differ fromthose recorded in Mesaba’s condensed financial statements.

The financial informationis also prepared on a going concern basis, which contemplates the realizationof assets and the liquidation of liabilities in the ordinary course ofbusiness.  However, as a result of thebankruptcy filing, such realization of assets and liquidation of liabilities issubject to significant uncertainty.

MAIR has deconsolidatedMesaba, its wholly-owned subsidiary, from the Company’s March 31, 2007 and 2006consolidated balance sheets and the consolidated statements of operations andcash flows since Mesaba’s bankruptcy filing on October 13, 2005 through March31, 2007.  All of MAIR’s previouslyreported consolidated balance sheets, statements of operations and cash flowsprior to October 13, 2005 continue to include Mesaba’s financial position,results of operations and cash flows.

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**MESABA AVIATION, INC.**

**(Debtor-in-Possession)**

**Condensed Balance Sheets**

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

**(inthousands)**
| ** **                                             | ** ** | **2007** | ** ** | **2006** | ** ** |
|--------------------------------------------------------|------------|----------|------------|----------|------------|
|                                                   |       |     |       |     |       |
| ASSETS:                                                |       |     |       |     |       |
| Cash, cash  equivalents and short-term investments     |       | $        | 12,961     |     | $          | 20,718 |   |
| Other current  assets                                  |       | 33,496   |       | 57,566   |       |
| Net property and  equipment                            |       | 19,697   |       | 32,532   |       |
| Other long-term  assets, net                           |       | 5,966    |       | 7,625    |       |
|                                                   |       | $        | 72,120     |     | $          | 118,441 |   |
|                                                   |       |     |       |     |       |
| LIABILITIES AND  SHAREHOLDER’S (DEFICIT) EQUITY : |       |     |       |     |       |
| Current  liabilities                                   |       | $        | 44,320     |     | $          | 52,984 |   |
| Other  liabilities and deferred credits                |       | 1,713    |       | 2,547    |       |
| Liabilities  subject to compromise (A)                 |       | 94,397   |       | 59,973   |       |
| Shareholder’s  (deficit) equity                   |       | $        | (68,310    | )        | 2,937      |   |
|                                                   |       | $        | 72,120     |     | $          | 118,441 |   |

 

**MESABA AVIATION, INC.**

**(Debtor-in-Possession)**

**Condensed Statements ofOperations**

**Years Ended March 31, 2007, 2006and 2005**

**(inthousands)**
| ** **                                                                | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
|---------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| OPERATING  REVENUES:                                                      |       |     |       |     |       |     |       |
| Passenger                                                                 |       | $        | 238,195    |     | $          | 373,031  |       | $ | 392,808 |   |
| Freight and other                                                         |       | 30,108   |       | 35,783   |       | 34,725   |       |
| Total operating revenues                                                  |       | 268,303  |       | 408,814  |       | 427,533  |       |
|                                                                      |       |     |       |     |       |     |       |
| OPERATING  EXPENSES:                                                      |       |     |       |     |       |     |       |
| Wages and benefits                                                        |       | 120,237  |       | 145,495  |       | 140,871  |       |
| Aircraft maintenance                                                      |       | 49,212   |       | 83,368   |       | 81,860   |       |
| Aircraft rents                                                            |       | 50,261   |       | 92,948   |       | 100,502  |       |
| Administrative and other                                                  |       | 70,520   |       | 127,128  |       | 89,844   |       |
| Total operating expenses                                                  |       | 290,230  |       | 448,939  |       | 413,077  |       |
|                                                                      |       |     |       |     |       |     |       |
| Operating (loss) income                                                   |       | (21,927  | )          | (40,125  | )          | 14,456   |       |
|                                                                      |       |     |       |     |       |     |       |
| NONOPERATING  (EXPENSE) INCOME:                                           |       |     |       |     |       |     |       |
| Interest (expense) income and other                                       |       | (6,102   | )          | 449      |       | 259      |       |
| Reorganization items, net                                                 |       | (40,060  | )          | (22,650  | )          | —   |       |
| Nonoperating (expense) income, net                                        |       | (46,162  | )          | (22,201  | )          | 259      |       |
| (Loss) income before income taxes                                         |       | (68,089  | )          | (62,326  | )          | 14,715   |       |
|                                                                      |       |     |       |     |       |     |       |
| PROVISION FOR  INCOME TAXES                                               |       | (2,666   | )          | (8,408   | )          | (6,611   | )          |
| (Loss) income  before cumulative effect of change in accounting principle |       | (70,755  | )          | (70,734  | )          | 8,104    |       |
|                                                                      |       |     |       |     |       |     |       |
| Cumulative  effect of change in accounting principle (B)                  |       | 507      |       | —   |       | —   |       |
|                                                                      |       |     |       |     |       |     |       |
| NET (LOSS) INCOME                                                         |       | $        | (71,262    | )        | $          | (70,734  | )          | $ | 8,104 |   |

 

53

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The following tablepresents Mesaba’s condensed results of operations for the period April 1, 2005to October 13, 2005 (the date of Mesaba’s Chapter 11 bankruptcy filing) whichare included in Mesaba’s results of operations for the year ended March 31,2006 above and within the Company’s consolidated results of operations prior todeconsolidation:
| Operating revenues                      |   | $       | 235,763 |   |
|-----------------------------------------|--------|---------|---------|--------|
| Operating  expenses                     |   | 272,778 |    |
| Operating loss                          |   | (37,015 | )       |
| Other non  operating income             |   | 474     |    |
| Loss before  provision for income taxes |   | (36,541 | )       |
| Benefit for  income taxes               |   | 11,732  |    |
| Net loss                                |   | $       | (24,809 | )      |

 

**(A)****       Liabilities Subject toCompromise**

Liabilities subject tocompromise in Mesaba’s condensed balance sheets at March 31, 2007 and March 31,2006 refers to both secured and unsecured obligations that will be accountedfor under a plan of reorganization, including claims incurred prior to thePetition Date.  They represent theestimated amount expected to be allowed on known or potential claims to beresolved through the Chapter 11 bankruptcy process and remain subject to futureadjustments arising from negotiated settlements, actions of the BankruptcyCourt, rejection of executory contracts and unexpired leases, the determinationas to the value of any collateral securing claims, proofs of claim or otherevents.

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 (See Note 14). The determination of how those liabilities will ultimately be treatedwill not be known 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.

Liabilitiessubject to compromise at March 31, 2007 and 2006 were as follows, in thousands:
|                                         | ** ** | **March 31 2007** | ** ** | **March 31 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 |   |

 

**(B) Cumulative Effect of Changein Accounting Principle**

Upon adoption on April 1,2006, in accordance with SFAS 123R, Mesaba recorded $0.5 million for thecumulative effect of a change in accounting principle during the first quarterof fiscal 2007 as a result of valuing stock appreciation rights under the fairvalue method.

54

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**19.****       Supplemental Cash FlowInformation**

The followingtables present supplementary cash flow information and non-cash activity forthe years ended March 31, in thousands:
| ** **                                                | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
|-----------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| SUPPLEMENTARY  CASH FLOW INFORMATION:                     |       |     |       |     |       |     |       |
| Cash paid (refund received) during the year for:          |       |     |       |     |       |     |       |
| Interest                                                  |       | $        | 64         |     | $          | 76       |       | $ | 61 |   |
| Income taxes                                              |       | (4,768   | )          | (1,735   | )          | 5,073    |       |
| Repurchase of Northwest’s outstanding shares in MAIR |       | 10,905   |       | —   |       | —   |       |
|                                                           |            |          |            |          |            |          |            |  |  |  |

 
| ** **                                         | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
|----------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| SUPPLEMENTAL  NON-CASH ACTIVITY:                   |       |     |       |     |       |     |       |
| Effect of deconsolidation of Mesaba Aviation, Inc: |       |     |       |     |       |     |       |
| Short-term investments                             |       | $        | —     |     | $          | 2,799    |       | $ | — |   |
| Restricted cash and cash equivalents               |       | —   |       | 6,921    |       | —   |       |
| Accounts receivable, net                           |       | —   |       | 31,817   |       | —   |       |
| Inventories, net                                   |       | —   |       | 11,236   |       | —   |       |
| Prepaid expenses and deposits                      |       | —   |       | 5,476    |       | —   |       |
| Deferred income taxes and other                    |       | —   |       | 22,446   |       | —   |       |
| Property and equipment, net                        |       | —   |       | 35,608   |       | —   |       |
| Long-term investments and other                    |       | —   |       | 11,587   |       | —   |       |
| Accounts payable and accrued liabilities           |       | —   |       | (87,560  | )          | —   |       |
| Other noncurrent  liabilities                      |       | —   |       | (3,936   | )          | —   |       |
|                                                    |            |          |            |          |            |          |            |  |  |  |

 

## **Item 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTSON ACCOUNTING AND FINANCIAL DISCLOSURE**

None.

## **Item 9A.  CONTROLS AND PROCEDURES**

*Evaluation of Disclosure Controlsand Procedures*

As of March 31, 2007, theCompany conducted an evaluation under the supervision and with theparticipation of the Company’s management, including the Company’s ChiefExecutive Officer and Chief Financial Officer, regarding the effectiveness ofthe design and operation of the Company’s disclosure controls and procedurespursuant to Rule 13a-15(b) of the Securities Exchange Act of 1934 (the “ExchangeAct”).  Based upon that evaluation, theChief Executive Officer and Chief Financial Officer concluded that the Company’sdisclosure controls and procedures were effective as of the date of suchevaluation.

*Management’s Report on InternalControl Over Financial Reporting*

The Company’s managementis responsible for establishing and maintaining adequate internal control overfinancial reporting, as such term is defined in Exchange Act Rule13a-15(f).  Because of its inherentlimitations, internal control over financial reporting may not prevent ordetect misstatements.  Also, projectionsof any evaluation of effectiveness to future periods are subject to risk thatcontrols may become inadequate because of changes in conditions, or that thedegree of compliance with the policies or procedures may deteriorate.  Under the supervision and with theparticipation of management, including the Chief Executive Officer and theChief Financial Officer, an evaluation was conducted of the effectiveness ofthe internal control over financial reporting based on criteria established in *Internal Control – Integrated Framework* issued by theCommittee of Sponsoring Organizations of the Treadway Commission.  Management concluded that the Companymaintained effective internal control over financial reporting as of March 31,2007.  Management’s assessment of theeffectiveness of internal control over financial reporting as of March 31, 2007has been audited by Deloitte & Touche LLP, an independent registered publicaccounting firm, as stated in its report below.

55

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*Changes in Internal Controls*

During the fourth quarterof fiscal 2007, there were no changes in internal control over financialreporting that had a material effect on internal control over financialreporting or were reasonably likely to have a material effect on internalcontrol over financial reporting.

*Report ofIndependent Registered Public Accounting Firm on Internal Control OverFinancial Reporting*

To theBoard of Directors and Shareholders MAIR Holdings, Inc. Minneapolis, Minnesota

We haveaudited management’s assessment, included in the accompanying Management’s Reporton Internal Control Over Financial Reporting, that MAIR Holdings, Inc. andsubsidiaries (the “Company”) maintained effective internal control overfinancial reporting as of March 31, 2007, based on criteria established in*Internal Control – Integrated Framework*issued by the Committee of Sponsoring Organizations of the TreadwayCommission.  The Company’s management is responsible for maintainingeffective internal control over financial reporting and for its assessment ofthe effectiveness of internal control over financial reporting.  Ourresponsibility is to express an opinion on management’s assessment and anopinion on the effectiveness of the Company’s internal control over financialreporting based on our audit.

Weconducted our audit in accordance with the standards of the Public CompanyAccounting Oversight Board (United States).  Those standards require thatwe plan and perform the audit to obtain reasonable assurance about whethereffective internal control over financial reporting was maintained in allmaterial respects.  Our audit included obtaining an understanding ofinternal control over financial reporting, evaluating management’s assessment,testing and evaluating the design and operating effectiveness of internalcontrol, and performing such other procedures as we considered necessary in thecircumstances.  We believe that our audit provides a reasonable basis forour opinions.

A company’sinternal control over financial reporting is a process designed by, or underthe supervision of, the company’s principal executive and principal financialofficers, or persons performing similar functions, and effected by the company’sBoard of Directors, management, and other personnel to provide reasonableassurance regarding the reliability of financial reporting and the preparationof financial statements for external purposes in accordance with accountingprinciples generally accepted in the United States of America (“generalaccepted accounting principles”).  A company’s internal control over financialreporting includes those policies and procedures that (1) pertain to themaintenance of records that, in reasonable detail, accurately and fairlyreflect the transactions and dispositions of the assets of the company; (2)provide reasonable assurance that transactions are recorded as necessary topermit preparation of financial statements in accordance with generallyaccepted accounting principles, and that receipts and expenditures of thecompany are being made only in accordance with authorizations of management anddirectors of the company; and (3) provide reasonable assurance regardingprevention or timely detection of unauthorized acquisition, use, or dispositionof the company’s assets that could have a material effect on the financialstatements.

Becauseof the inherent limitations of internal control over financial reporting,including the possibility of collusion or improper management override ofcontrols, material misstatements due to error or fraud may not be prevented ordetected on a timely basis.  Also, projections of any evaluation of theeffectiveness of the internal control over financial reporting to futureperiods are subject to the risk that the controls may become inadequate becauseof changes in conditions, or that the degree of compliance with the policies orprocedures may deteriorate.

In ouropinion, management’s assessment that the Company maintained effective internalcontrol over financial reporting as of March 31, 2007, is fairly stated, in allmaterial respects, based on the criteria established in *Internal Control – Integrated Framework*issued by the Committee of Sponsoring Organizations of the TreadwayCommission.  Also, in our opinion, theCompany maintained, in all material respects, effective internal control overfinancial reporting as of March 31, 2007, based on the criteria established in *Internal Control – Integrated Framework*issued by the Committee of Sponsoring Organizations of the Treadway Commission.

56

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We havealso audited, in accordance with the standards of the Public Company AccountingOversight Board (United States), the consolidated financial statements as ofand for the year ended March 31, 2007 of the Company and our report dated June 15,2007 expressed an unqualified opinion on those financial statements andincluded explanatory paragraphs relating to the Mesaba Aviation, Inc.(Debtor-in-Possession), a wholly-owned subsidiary of the Company, BankruptcyCourt entering an order confirming the plan of reorganization on April 24,2007, and the Company’s change in its method of accounting for stock-basedcompensation.

DELOITTE& TOUCHE LLP

Minneapolis,Minnesota June 15, 2007

## **Item 9B.  OTHER INFORMATION**

None.

# **PART III**

## **Item 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THEREGISTRANT**

Information regarding thedirectors and executive officers of the Company is incorporated herein byreference to the Proxy Statement to be issued in connection with the 2007Annual Meeting of Shareholders (the “2007 Proxy Statement”).

## **Item 11.  EXECUTIVE COMPENSATION**

Information regardingexecutive compensation is incorporated herein by reference to the 2007 ProxyStatement.

## **Item 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIALOWNERS AND MANAGEMENT AND RELATED SHAREHOLDER MATTERS**

Information regardingsecurity ownership of certain beneficial owners and management of the Companyis incorporated herein by reference to the 2007 Proxy Statement.

## **Item 13.  CERTAIN RELATIONSHIPS AND RELATEDTRANSACTIONS**

Information regardingcertain relationships and related transactions with the Company is incorporatedherein by reference to the 2007 Proxy Statement.

## **Item 14.  PRINCIPAL ACCOUNTANT FEES AND SERVICES**

Information regardingprincipal accountant fees and services is incorporated herein by reference tothe 2007 Proxy Statement.

# **PART IV**

## **Item 15.  EXHIBITS AND FINANCIAL STATEMENT SCHEDULES**

**(a)(1) Financial Statements**

Included in Item 8 ofPart II of this Annual Report on Form 10-K are the following:  Report of Independent Registered PublicAccounting Firm, Consolidated Balance Sheets, Consolidated Statements ofOperations, Consolidated Statements of Shareholders’ Equity, ConsolidatedStatements of Cash Flows and Notes to Consolidated Financial Statements.  Included in Item 9A of Part II of this AnnualReport on Form 10-K is

57

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Management’s Report onInternal Control Over Financial Reporting and Report of Independent RegisteredPublic Accounting Firm on Internal Control Over Financial Reporting.

**(a)(2)  Financial Statement Schedules**

The information requiredin Schedule II is included in Item 8 of Part II of this Annual Report on Form10-K.

**(a)(3)  Exhibits**

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

**(b)   Exhibits**

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

**(c)  Financial Statements of Subsidiaries NotConsolidated**

The financial statementsof Mesaba Aviation, Inc. are filed as an exhibit to this Annual Report on Form10-K.

58

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# **SIGNATURES**

Pursuant to therequirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, theregistrant has duly caused this report to be signed on its behalf by theundersigned, thereunto duly authorized.
|                       | **MAIR HOLDINGS, INC.** |
|-----------------------|-------------------------|
| ** **            | ** **              |
| Dated: June 19,  2007 | By:                     |   | /s/ Paul F.  Foley |   |
|                  |                    |   | Paul F. Foley |
|                  |                    |   | President and  Chief Executive Officer |

 

Each of the undersigneddirectors and officers of MAIR Holdings, Inc. whose signature appears belowhereby constitutes and appoints Paul F. Foley and Ruth M. Timm, or either ofthem, with power to act one without the other, his or her true and lawfulattorney-in-fact and agent, with full power of substitution and resubstitution,for such individual and in such individual’s name, place and stead, in any andall capacities, to act on, sign and file with the Securities and ExchangeCommission this Annual Report on Form 10-K, to be filed pursuant to Section 13or 15(d) of the Securities Exchange Act of 1934, as amended, including anyamendment or amendments to such report, together with all exhibits andschedules thereto, granting unto said attorney-in-fact and agent, full powerand authority to do and perform each and every act and thing necessary oradvisable to be done in connection therewith, as fully to all intents andpurposes as he or she might or could do in person, hereby ratifying andconfirming all that said attorney-in-fact and agent, or his or her substituteor substitutes, may lawfully do or cause to be done by virtue hereof.

Pursuant to therequirements of the Securities Exchange Act of 1934, this report has beensigned below by the following persons on behalf of the registrant and in thecapacities and on the dates indicated.
| /s/ PAUL F. FOLEY        |   | President and Chief Executive Officer  (Principal Executive Officer) and Director    | June 19, 2007 |
|--------------------------|--------|--------------------------------------------------------------------------------------|---------------|
| Paul F. Foley            |
|                     |   |                                                                                 |
| /s/ ROBERT E. WEIL       |   | Vice President, Chief Financial Officer and  Treasurer (Principal Financial Officer) | June 19, 2007 |
| Robert E. Weil           |
|                     |   |                                                                                 |
| /s/ JOHN J. AHN          |   | Director                                                                             | June 19, 2007 |
| John J. Ahn              |
|                     |   |                                                                                 |
| /s/ DONALD E. BENSON     |   | Director                                                                             | June 19, 2007 |
| Donald E. Benson         |
|                     |   |                                                                                 |
| /s/ PIERSON M. GRIEVE    |   | Director                                                                             | June 19, 2007 |
| Pierson M.  Grieve       |
|                     |   |                                                                                 |
| /s/ JAMES A. LEE         |   | Director                                                                             | June 19, 2007 |
| James A. Lee             |
|                     |   |                                                                                 |
| /s/ CARL R. POHLAD       |   | Director                                                                             | June 19, 2007 |
| Carl R. Pohlad           |
|                     |   |                                                                                 |
| /s/ ROBERT C. POHLAD     |   | Director                                                                             | June 19, 2007 |
| Robert C. Pohlad         |
|                     |   |                                                                                 |
| /s/ RAYMOND W. ZEHR, JR. |   | Director                                                                             | June 19, 2007 |
| Raymond W. Zehr,  Jr.    |

 

59

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# **EXHIBITINDEX**

| Exhibit  Number | ** ** | **Document Description**                                                                                                                                                                                                                                                                                                                 |
|-----------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|            |       |                                                                                                                                                                                                                                                                                                                                     |
| 3.1             |       | Amended and Restated Articles of Incorporation.  Incorporated by reference to Exhibit 4.1 to the Company’s Form 8-K filed  August 27, 2003.                                                                                                                                                                                         |
| 3.2             |       | Bylaws. Incorporated by reference to the Company’s  Form 10-K filed June 14, 2005.                                                                                                                                                                                                                                                  |
| 4.1             |       | Specimen certificate for shares of the Common Stock  of the Company. Incorporated by reference to Exhibit 4.2 to the Company’s  Form 8-K filed August 27, 2003.                                                                                                                                                                     |
| * 10.1          |       | 1994 Stock Option Plan. Incorporated by reference to  Exhibit 10.1 to the Company’s Form 10-K for the fiscal year ended March 31,  2005.                                                                                                                                                                                            |
| * 10.2          |       | 1996 Directors’ Option Plan. Incorporated by  reference to Exhibit 10.2 to the Company’s Form 10-K for the fiscal year  ended March 31, 2005.                                                                                                                                                                                  |
| * 10.3          |       | 2000 Stock Incentive Plan. Incorporated by reference  to Exhibit 10.3 to the Company’s Form 10-K for the fiscal year ended March  31, 2005.                                                                                                                                                                                         |
| 10.4            |       | Stock Purchase Agreement between the Company and  Carl R. Pohlad dated as of October 18, 1993. Incorporated by reference to  Exhibit 10.10 to the Company’s Form 10-K for the fiscal year ended March 31, 2005.                                                                                                                     |
| 10.5            |       | Lease Agreement, dated as of July 1, 1999, between  Kenton County Airport Board and Mesaba Aviation, Inc. Incorporated by  reference to Exhibit 10AA to the company’s Form 10-K for the fiscal year  ended March 31, 2000.                                                                                                          |
| 10.6            |       | Ground Lease, dated as of September 1, 1999, between  Kenton County Airport Board and Mesaba Aviation, Inc. Incorporated by  reference to Exhibit 10BB to the Company’s Form 10-K for the fiscal year  ended March 31, 2000.                                                                                                        |
| * 10.7          |       | Management Compensation Agreement between the Company  and Paul F. Foley, dated October 1, 2004. Incorporated by reference to  Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on October 22,  2004.                                                                                                                 |
| 10.8            |       | Agreement, dated April 18, 2006, between MAIR  Holdings, Inc. and UMB Bank, N.A. Incorporated by reference to Exhibit 10.17  to the Company’s Form 10-K for the fiscal year ended March 31, 2006.                                                                                                                                   |
| 10.9            |       | Letter of Credit Reimbursement Agreement, dated  April 17, 2006, between MAIR Holdings, Inc. and First Interstate Bank.  Incorporated by reference to Exhibit 10.18 to the Company’s Form 10-K for the  fiscal year ended March 31, 2006.                                                                                           |
| 10.10           |       | Irrevocable Standby Letter of Credit dated April 17,  2006, in the amount of $13,110,000. Incorporated by reference to Exhibit  10.19 to the Company’s Form 10-K for the fiscal year ended March 31, 2006.                                                                                                                          |
| 10.11           |       | Hosted Prorate Agreement dated as of March 12, 2007  between Delta Air Lines, Inc. and Big Sky Transportation Co. Filed herewith.                                                                                                                                                                                                        |
| 10.12           |       | Used Beechcraft 1900D Airliner Purchase Agreement  dated as of March 12, 2007 between Champlain Enterprises, Inc. d/b/a  CommutAir and Big Sky Transportation Co. d/b/a Big Sky Airlines (certain  portions of this document have been deleted pursuant to an application for  confidential treatment under Rule 24b-2). Filed herewith. |
| 21.1            |       | Subsidiaries. Filed herewith.                                                                                                                                                                                                                                                                                                            |
| 23.1            |       | Consent of Independent Registered Public Accounting  Firm. Filed herewith.                                                                                                                                                                                                                                                               |
| 24.1            |       | Powers of Attorney. Included in signature page.                                                                                                                                                                                                                                                                                          |
| 31.1            |       | Chief Executive Officer Certification Pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002. Filed herewith.                                                                                                                                                                                                                        |
| 31.2            |       | Chief Financial Officer Certification Pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002. Filed herewith.                                                                                                                                                                                                                        |
| 32.1            |       | Certification Pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002. Filed herewith.                                                                                                                                                                                                                                                |
| 99.1            |       | Mesaba Aviation, Inc. Financial Statements                                                                                                                                                                                                                                                                                               |

 

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

 

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