UNITED
      STATESSECURITIES AND EXCHANGE
      COMMISSIONWASHINGTON, D.C.
      20549





Form
10-K





[X]
            Annual report pursuant to
      Section 13 or 15(d) of the Securities Exchange Act of
      1934For the fiscal year ended
      December 31, 2007or[   ]
            Transition report pursuant to
      Section 13 or 15(d) of the Securities Exchange Act of
      1934For the transition period
      from__________ to__________





Commission File Number
001-31898


PINNACLE
AIRLINES CORP.


(Exact name of registrant as
specified in its charter)







Delaware
              (State or other jurisdiction of
      incorporation or organization)
            03-0376558
              (I.R.S. Employer
      Identification No.)1689 Nonconnah Blvd, Suite
      111
              Memphis,
      Tennessee
              (Address of principal
      executive offices)
            38132
              (Zip
    Code)





901-348-4100


(Registrant's telephone number,
including area code)


Securities
      registered pursuant to Section 12(b) of the Act:Title
      of each class:
            Name
      of each exchange on which registered:Common
      Stock, $.01 par value
            Nasdaq
      National MarketSecurities
      registered pursuant to section 12 (g) of the Act:
  None





Indicate
by check mark whether the registrant is a well-known seasoned issuer, as defined
in Rule 405 of the Securities Act.


Yes   [ 
       ]
            
            No   [ X ]





Indicate
by check mark whether the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.


Yes   [ 
       ]
            
            No   [ X ]





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




Yes   [ X ]
            
            No   [   ]





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





Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer, or a smaller reporting company.
See definition of “large accelerated filer,” “accelerated filer,” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.




Large
      accelerated filer [   ]
            Accelerated
      filer [ X
      ]
            Non-accelerated
      filer [   ]
            Smaller
      reporting company [   ]





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




Yes   [ 
       ]
            
            No   [ X ]





The
aggregate market value of the voting and non-voting common equity stock held by
non-affiliates of the registrant was $377 million as of June 30,
2007.




As of
March 14, 2008, 17,952,907 shares of common stock were outstanding.





Documents Incorporated by
Reference





Certain
information called for by Part III of Form 10-K is incorporated by reference to
the Proxy Statement for our 2008 Annual Meeting of Stockholders to be filed with
the Commission within 120 days after December 31, 2007.





Table of
Contents
 Part
IItem 1.
      BusinessOur Company
                  
                  1Operating Strategy
                  
                  1Our Operating Contracts
                  
                  2Pinnacle’s Agreements with Major
      Airlines
                  
                  4Colgan’s Agreements with Major
      Airlines
                  
                  6Employees
                  
                  7Aircraft Maintenance
                  
                  9Training
                  
                  9Safety and Security
                  
                  9Insurance
                  
                  10Regulations
                  
                  10Markets and Routes
                  
                  10Competitive Environment
                  
                  10Seasonality
                  
                  11Website
                  
                  11Item 1A. Risk Factors
                  
                  12Item 1B. Staff Comments
                  
                  16Item 2.
      PropertiesFlight Equipment
                  
                  17Facilities
                  
                  18Item 3. Legal
      ProceedingsEnvironmental Matters
                  
                  19Regulatory Matters
                  
                  19Item 4.
      Submission of Matters to a Vote of Security
    Holders
                  19Part IIItem 5. Market
      for Registrant’s Common Equity, Related Stockholder matters and Issuer
      Purchases of Equity Securities
                  20Performance Graph
                  
                  21Item 6.
      Selected Financial Statements
                  22
 
  
  Table of Contents
 (continued)
  Item 7.
      Managements’ Discussion and Analysis of financial Condition and Results of
      OperationsOverview
                  
                  25Outlook
                  
                  26Critical Accounting Policies
                  
                  28Basis of Presentation
                  
                  32Consolidated Results of Operations
                  
                  33Segmented Results of Operations
                  
                  36Liquidity and Capital Resources
                  
                  37Forward-Looking Statements
                  
                  42Items 7A. Quantitative and Qualitative Disclosures About
      Market Risk
                  43Commodity Price Risk
                  
                  43Interest Rate Risk
                  
                  43Item 8.
      Financial Statements and Supplementary Data
                  45Item 9.
      Changes in and Disagreements with Accountants on Accounting and Financial
      Disclosure
                  85Item 9A. Controls
      and Procedures
                  86Item 9B. Other Information
                  88Part
  IIIItem 10.
      Directors and Executive Officers of the
    Registrants
                  89Item 11.
      Executive Compensation
                  89Item 12.
      Security Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters
                  89Item 13.
      Certain Relationships and Related Transaction
                  89Item 14
      Principal Accountant Fees and Services
                  89Part
  IVItem 15
      Exhibits and Financial Statement Schedules
                  90SIGNATURES
                  91


Part I
 Item 1.
Business




Pinnacle
Airlines Corp. and its wholly owned subsidiaries, Pinnacle Airlines, Inc. and
Colgan Air, Inc., are collectively referred to in this report as the “Company,”
“we”, and “us” except as otherwise noted.  Pinnacle Airlines Corp.
will be referred to as “PNCL.”  Our subsidiaries will be referred to
as “Pinnacle” for Pinnacle Airlines, Inc. and “Colgan” for Colgan Air, Inc., and
collectively as “our subsidiaries.”  Northwest Airlines Corporation
and its subsidiaries are collectively referred to as “Northwest.”  US
Airways Group, Inc. and its subsidiaries are collectively referred to as “US
Airways.”  Continental Airlines, Inc. and its subsidiaries are
collectively referred to as “Continental.”  United Air Lines, Inc. and
its subsidiaries are collectively referred to as “United.”  Delta Air
Lines, Inc. and its subsidiaries are collectively referred to as
“Delta.”





Our
Company





PNCL, a
Delaware corporation, is a holding company that operates two independent, wholly
owned subsidiaries, Pinnacle Airlines, Inc. and Colgan Air, Inc.  As
of December 31, 2007, we had two reportable segments consisting of Pinnacle
Airlines, Inc. and Pinnacle Airlines Corp. (the “Pinnacle Segment”) and Colgan
Air, Inc. (the “Colgan Segment”).





Pinnacle
operates an all-regional jet fleet providing regional airline capacity to
Northwest as a Northwest Airlink carrier at its hub airports in Detroit,
Minneapolis/St. Paul and Memphis, and to Delta as a Delta Connection carrier at
its hub airport in Atlanta.  At December 31, 2007, Pinnacle operated a
jet fleet of 137 Canadair Regional Jet (‘‘CRJ’’)-200 aircraft as a Northwest
Airlink carrier with approximately 770 daily departures to 115cities in 36
states and four Canadian provinces.  Pinnacle operated one CRJ-900
aircraft as a Delta Connection carrier with approximately six daily departures
to four cities in four states.





Colgan
operates an all turboprop fleet under revenue pro-rate agreements with
Continental, United and US Airways, and also provides regional airline capacity
to Continental under a capacity purchase agreement.  Colgan’s
operations are focused primarily in the northeastern United States and in
Texas.  As of December 31, 2007, Colgan offered approximately 270daily departures and
operated 11 Saab 340 aircraft as Continental Connection from Continental’s hub
airport in Houston, six Saab 340 aircraft as United Express at
Washington-Dulles, and six Beech 1900 aircraft and 20 Saab 340 aircraft as US
Airways Express, with hub locations at New York–LaGuardia, Pittsburgh and
Washington–National.





Operating
Strategy





Pinnacle serves as our platform for
regional jet operations.  Historically, we have operated CRJ-200
aircraft as Northwest Airlink, providing Northwest with cost-efficient, highly
reliable operations.  During 2007, we entered into an agreement with
Delta to operate 16 CRJ-900 aircraft as a Delta Connection
carrier.  We began these operations December 1, 2007 and will continue
taking delivery of CRJ-900s throughout 2008 and early
2009.  Pinnacle’s unit cost continues to be one of the most
competitive in the regional airline industry.





PNCL
acquired Colgan in January 2007, which now serves as our platform for turboprop
operations.  Colgan has traditionally operated as US Airways, United
and Continental under revenue pro-rate agreements, and utilized smaller
turboprop aircraft such as the Saab 340 and Beech 1900.  Shortly after
acquiring Colgan, we entered into a capacity purchase agreement with Continental
to begin flying the next generation Q400 turboprop aircraft as Continental
Connection out of Continental’s global gateway hub at Newark Liberty
International Airport.  The Q400 offers superior operating performance
while operating more efficiently than most regional jets.  Colgan
began Q400 operations in February 2008.

















1
 Item 1.
Business





Our Operating
Contracts





Our operating contracts fall under two
categories: capacity purchase agreements (“CPA”) and revenue pro-rate
agreements.  The following represents the percentage of our regional
airline services revenue for the year ended December 31, 2007 derived under each
contract type and by code-share partner:





Percentage of Regional Airline
      Services RevenueCode-Share
      Partner
            
            Capacity Purchase
      Agreements
            
            Pro-Rate
      Agreements
            
            TotalNorthwest
      Airlines
            
            75.1%
            
            -
            
            75.1%US
      Airways
            
            -
            
            12.3%
            
            12.3%Continental
      Airlines
            
            -
            
            6.8%
            
            6.8%United
      Air Lines
            
            -
            
            3.8%
            
            3.8%Delta
      Air Lines
            
            0.2%
            
            -
            
            0.2%Essential
      Air Services
            
            -
            
            1.8%
            
            1.8%Total
            
            75.3%
            
            24.7%
            
            100.0%





Capacity Purchase
Agreements.Our preferred contractual relationships with major
airlines are structured as capacity purchase arrangements.  Under
capacity purchase agreements, our major airline partners purchase our flying
capacity by paying pre-determined rates for specified flying, regardless of the
number of passengers on board or the amount of revenue
collected.  These arrangements typically include incentive payments
that are paid if we meet certain operational performance
measures.  Additionally, certain operating costs such as fuel,
insurance premiums, ground handling and others are reimbursed or provided
directly by the partner, which eliminates our risk associated with a change in
the price of these goods or services.  We believe the capacity purchase
model reduces our financial risk and enables us to focus on operating our
business with the highest standards, while maximizing the efficiencies of the
business that we provide to our partners.  Therefore, we plan to grow
the percentage of our revenue derived from these types of agreements by working
to structure new business with capacity purchase terms.





Pinnacle’s
Amended and Restated Airline Services Agreement with Northwest (the “ASA”) and
its Delta Connection Agreement (the “DCA”) are both structured as capacity
purchase agreements.  In addition, Colgan’s Q400 operations for
Continental are under a capacity purchase agreement (the “Continental
CPA”).





Under our
CPA’s, most costs we incur are classified as one of the following:





·
            Reimbursed
      – Those costs that are reimbursed to the full extent of the actual cost,
      plus any applicable margin.


·
            Rate-based
      – We receive payments for each block hour and departure we
      provide.  These payments are designed to cover all of our
      expenses incurred with respect to the CPA that are not covered by the
      reimbursement payments, including overhead
  costs.


·
            Excluded
      – Services that are provided by or paid for directly by the code-share
      partner.  These costs do not appear on our financial
      statements.





2
 Item 1.
Business





The following
is a summary of the treatment of certain costs under the three
CPA’s.




Continental
      CPA
                
                Delta
DCA
                
                Northwest
      ASALabor
      costs
                Rate-Based
                
                Rate-Based
                
                Rate-BasedLine
      maintenance
                Rate-Based
                
                Rate-Based
                
                Rate-BasedHeavy
      maintenance
                Rate-Based
                
                Reimbursed(2)
                
                ReimbursedLanding
      fees / station costs
                Reimbursed
                
                Reimbursed
                
                Rate-BasedOther
      (G&A and training)
                Rate-Based
                
                Rate-Based
                
                Rate-BasedNon-aircraft
      depreciation
                Rate-Based
                
                Rate-Based
                
                Rate-BasedProperty
      taxes
                Rate-Based
                
                Reimbursed
                
                ReimbursedFuel
                Excluded
                
                Excluded
                
                ExcludedFacility
      rentals
                Excluded(1)
                
                Excluded(1)
                
                Rate-BasedGround
      handling
                Excluded(1)
                
                Excluded(1)
                
                Rate-BasedAircraft
      ownership
                Rate-Based
                
                Reimbursed(2)
                
                ReimbursedAviation
      insurance
                Reimbursed
                
                Reimbursed
                
                Reimbursed


(1)
            Ground handling and airport
      facilities are provided free of charge unless Delta or Northwest asks us
      to perform ground handling in a station.  In these instances, we
      are compensated based upon negotiated ground handling
      rates.


(2)
            These costs are both subject to a
      cap and adjusted downward should actual expenses incurred be less than the
      rate–based payments received.  Aircraft ownership cost include
      principal and interest payments on
debt.





Revenue Pro-rate
Agreements.  When PNCL purchased Colgan in January 2007, its
existing contracts were structured as revenue pro-rate code-share agreements,
which allowed for Colgan to market its operations under its partners’
brands.  Under these agreements, Colgan generally manages its own inventory
of unsold capacity and sets fare levels in the local markets that it
services.  Colgan retains all of the revenue for passenger flying
within Colgan’s local markets and not connecting to its partners’
flights.  For connecting passengers, the passenger fare is pro-rated
between Colgan and its major airline partner, generally based on the distance
traveled by the passenger on each segment of the passenger’s trip.  Under
these agreements, Colgan bears the risk associated with fares, passenger demand,
and competition within its markets.  Colgan incurs all of the costs
associated with operating these flights, including those costs typically
reimbursed or paid directly by the major airline under a capacity purchase
agreement. In some instances, Colgan has the ability to earn incentive-based
revenue should it achieve specified performance metrics.





Colgan’s
revenue pro-rate agreement with Continental also contains a connecting passenger
incentive designed to maintain a base level of profitability in the Houston
markets that Colgan serves.  The connect incentive can be a payment
from or a payment to Continental, depending on load factors, and is designed to
create a more stable income level in these markets that could otherwise not be
supported under a traditional revenue pro-rate agreement.  The connect
incentives are adjusted twice a year for changes in fuel prices and
station/passenger related costs.





In
addition to operating its flights under revenue pro-rate code-share agreements,
Colgan also operates some flights within its United Express and US Airways
Express networks under its Essential Air Service (“EAS”) contracts with the
Department of Transportation (“DOT”).  The EAS program provides a
federal government subsidy within certain small markets that could not otherwise
sustain commercial air service because of limited passenger demand.





3
 Item 1.
Business





Pinnacle’s
Agreements with Major Airlines





Northwest Airlink Airline Services
Agreement





Pinnacle
provides regional jet service to Northwest as a Northwest Airlink carrier under
the ASA.  The ASA was amended and restated effective January 1, 2007
and expires in December 2017.  At the end of its term in 2017, the ASA
automatically extends for additional five-year periods unless Northwest provides
notice to us two years prior to the termination date that it does not plan to
extend the term.





Our ASA
with Northwest provides for the following payments:





Reimbursement payments: We
receive monthly reimbursements for all expenses relating to: basic aircraft and
engine rentals; aviation liability, war risk and hull insurance; third-party
deicing services; CRJ third-party engine and airframe maintenance; hub and
maintenance facility rentals; passenger security costs; ground handling in
cities where Northwest has ground handling operations; Detroit landing fees and
property taxes.  Other than credit risk with respect to Northwest’s
reimbursement of these costs, we have no financial risk associated with cost
fluctuations in these items.





Payments based on pre-set
rates: We are entitled to receive semi-monthly payments for each block
hour and departure we provide to Northwest and a monthly fixed cost payment
based on the size of Pinnacle’s fleet under the ASA.  The term “block
hours” refers to the elapsed time between an aircraft leaving a gate and
arriving at a gate.  These payments are designed to cover all of our
expenses incurred with respect to the ASA that are not covered by the
reimbursement payments, including overhead costs.  The substantial
majority of these expenses relate to labor costs, ground handling costs in
cities where Northwest does not have ground handling operations, landing fees in
cities other than Detroit, overhead and depreciation. These rates will be in
effect (subject to indexed annual inflation adjustments) until 2013, when the
rates will be reset.





Margin payments:We receive a
monthly margin payment based on the revenues described above calculated to
achieve a target operating margin. The target operating margin is 8% for 2007
and future years, and was 10% for 2006 and 2005. Our margin payments for 2007,
2006, and 2005 were subject to a ceiling and a floor.  Beginning
January 1, 2008, Northwest will not guarantee Pinnacle’s minimum operating
margin, although we will still be subject to a margin ceiling above the revised
target operating margin.  If Pinnacle’s actual operating margin for
any year beginning with 2008 exceeds the 8% target operating margin but is less
than 13%, Pinnacle will make a year-end adjustment payment to Northwest in an
amount equal to half of the excess above 8%.  If Pinnacle’s actual
operating margin for any year beginning with 2008 exceeds 13%, Pinnacle will pay
Northwest all of the excess above 13%.





The ASA
provides that we will be required to allocate our overhead to the extent that we
establish operations with another major airline.  Upon reaching a
certain level of operations outside of our ASA, and to the extent that we have
realized a cost savings benefit from combining overhead in such outside
operations, we will negotiate an overhead sharing rate reduction  The
method of allocation, timing and extent of Northwest’s rate reduction have not
yet been determined.  To the extent that we cannot agree on the amount
of a rate reduction with Northwest to share any overhead, the parties have
agreed to pursue binding arbitration to determine the rate
reduction.





To the
extent that Pinnacle operates regional jets on behalf of another major airline,
Northwest may remove one aircraft for every two aircraft that Pinnacle operates
for another partner above an initial base of 20 regional
jets.  Northwest may remove no more than 20 aircraft subject to this
option and no more than five aircraft in any 12-month
period.  Northwest may only exercise this option if the removed
aircraft are not operated by or on behalf of Northwest after their
removal.





4
 Item 1.
Business





Northwest
may terminate the ASA at any time for cause, which is defined as:





·
            our
      failure to make any payment under any aircraft lease or sublease with
      Northwest;


·
            an
      event of default by us under any aircraft lease or sublease with
      Northwest;


·
            an
      event of default under any of our other agreements with
      Northwest;


·
            our
      failure to maintain required insurance
  coverages;


·
            our
      failure to comply with Northwest’s inspection
  requirements;


·
            suspension
      or revocation of our authority to operate as an airline by the FAA or the
      DOT;


·
            our
      failure to operate more than 50% of our aircraft for more than seven
      consecutive days or our failure to operate more than 25% of our aircraft
      for more than 21 consecutive days, other than as a result
    of:


1)
            an
      FAA order grounding all commercial flights or all air carriers or
      grounding a specific aircraft type of all
  carriers,


2)
            a
      scheduling action by Northwest or


3)
            Northwest’s
      inability to perform its obligations under the ASA as a result of a strike
      by Northwest employees.





Northwest
may also terminate the agreement at any time upon our bankruptcy or for any
breach of the agreement by us that continues uncured for more than 30 days after
we receive notice of the breach.  Provided that in the case of a
non-monetary default, Northwest may not terminate the agreement if the default
would take more than 30 days to cure and we are diligently attempting to cure
the default.  In addition, both Northwest and we are entitled to seek
an injunction and specific performance for a breach of the
agreement.  In addition, in the case of any other termination of the
ASA, Northwest will have the right to require us:





·
            to
      terminate all leases, subleases and agreements with
    Northwest;


·
            to
      assign, or use our best efforts to assign to Northwest, subject to some
      exceptions, any leases with third parties for facilities at airports to
      which we primarily fly scheduled flights on behalf of
      Northwest;


·
            to
      sell or assign to Northwest facilities and inventory then owned or leased
      by us and used primarily for the services we provide to Northwest for an
      amount equal to the lesser of fair market value or depreciated book value
      of those assets.





In
general, we have agreed to indemnify Northwest and Northwest has agreed to
indemnify us for any damages caused by any breaches of our respective
obligations under the ASA or caused by our respective actions or inaction under
the ASA.





Delta Connection
Agreement





On April
27, 2007, we entered into the DCA, a ten-year capacity purchase agreement with
Delta Air Lines to operate 16 CRJ-900 aircraft as a Delta Connection
Carrier.  The first aircraft was delivered in October 2007 and
scheduled service began December 1, 2007.  We currently operate five
CRJ-900 aircraft under the DCA.  The remaining CRJ-900 aircraft will
continue to be delivered through January 2009.  The DCA allows Delta
to have the option to add an additional seven CRJ-900 aircraft to the
fleet.





The DCA
provides for Delta to pay pre-set rates based on the capacity we provide to
Delta.  We are responsible for the costs of flight crews, maintenance,
dispatch, aircraft ownership and general and administrative costs.  In
addition, Delta reimburses us for certain pass-through costs, including landing
fees, most station-related costs and aircraft hull and general liability
insurance.  In most instances, Delta will provide fuel and ground
handling services free of charge.  We earn incentive payments
(calculated as a percentage of the payments received from Delta) if we meet
certain performance targets.  The DCA also provides for reimbursements
to Delta annually to the extent that our actual pre-tax margin on our Delta
Connection operations exceeds certain thresholds.





5
 Item 1.
Business





Colgan’s
Agreements with Major Airlines





Continental Connection Capacity
Purchase Agreement





On
February 5, 2007, we entered into the Continental CPA under which Colgan will
operate 15 Q400 turboprop aircraft predominantly out of Continental’s hub at
Newark Liberty International Airport.  The Q400 is configured with 74
passenger seats.  We began operations on February 4, 2008, and
currently operate four Q400 aircraft under the Continental CPA.  We
will take delivery of the remaining Q400 aircraft through June
2008.  Continental also has the option to elect by April 1, 2008 to
cause us to purchase 15 additional Q400 aircraft to be operated under the
Continental CPA at a future date.  The term of the Continental CPA is
ten years.





The
Continental CPA provides that we are compensated at pre-set rates for the
capacity that we provide to Continental.  We are responsible for our
own expenses associated with flight crews, maintenance, dispatch, aircraft
ownership and general and administrative costs.  In addition,
Continental reimburses us without a markup for certain reconciled costs, such as
landing fees, most other station-related costs, aircraft hull and passenger
liability insurance (provided that our insurance rates do not exceed those
typically found at other Continental regional airline partners) and passenger
related costs.  Continental will also provide fuel and ground handling
services at its stations to us at no charge.  Continental may request
that we provide ground handling for our flights at certain stations; in this
event we will be compensated at a predetermined rate for these ground handling
services.  The Continental CPA also provides for the ability to earn
additional incentive-based revenue based upon achieving operational and
financial performance targets.





The
Continental CPA provides for a rate reduction to Continental to the extent that
we begin operating Q400 aircraft for another major airline.  The rate
reduction is designed to share the overhead burden associated with the Q400
aircraft across all of our potential Q400 operations and is only applicable for
the first 15 aircraft that we add with another airline.





Continental Connection Pro-Rate
Agreement





We
operate 11 Saab 340 aircraft based in Houston, Texas under a code-share
agreement with Continental (the “Continental Agreement”).  Colgan
entered into the Continental Agreement in January 2005 for a term of five
years.  The Continental Agreement is structured as a pro-rate
agreement for which we receive all of the fares associated with local passengers
and an allocated portion of the connecting passengers’ fares.  We pay
all of the costs of operating the flights, including sales and distribution
costs.  However, we also receive connect incentive payments from
Continental for passengers connecting from Colgan operated flights to any
flights operated by Continental or its other code-share partners at
Houston/George Bush Intercontinental Airport.  The connect incentive
payments are designed to maintain a base level of profitability in the markets
that we fly out of Houston, and can result in a payment to us or from us
depending on our passenger load factor in these markets.  The connect
incentives are modified every six months to adjust for prospective modifications
in fuel price and certain station expenses.





US Airways Express
Agreement





We
operate 20 Saab 340 aircraft and six Beech 1900D aircraft under a code-share
agreement with US Airways (the “US Airways Agreement”).  Colgan
entered into the US Airways Agreement in 1999 to provide passenger service and
cargo service under the name “US Airways Express.”  The US Airways
Agreement provides us use of the US Airways flight designator code to identify
flights and fares in computer reservations systems, permits use of logos,
service marks, aircraft paint schemes, and uniforms similar to US Airways and
coordinated scheduling and joint advertising.  The US Airways
Agreement is structured as a revenue pro-rate agreement for which we receive all
of the fares associated with our local passengers and an allocated portion of
connecting passengers’ fares.  We pay all of the costs of operating
the flights, including sales and distribution costs.  We control all
scheduling, inventory and pricing for each local market we serve.  The
current US Airways Agreement became effective on October 1, 2005 under terms
similar to the 1999 agreement and has a three-year term.





6
 Item 1.
Business





The US
Airways Agreement provides US Airways first right of initial refusal should the
Company receive an offer to purchase or lease slots at Ronald Reagan National
Airport in Washington, D.C. or LaGuardia International Airport in New York, New
York or an offer to purchase any portion of an equity interest in Colgan, except
for stock sale or transfer between former Colgan shareholders and their
families.  US Airways waived its right of first refusal to purchase
Colgan prior to PNCL’s acquisition of Colgan.





United Express
Agreement





In
October 2003, Colgan entered into a code-share agreement with United Air Lines
to include the United Air Lines flight designator code on all United flights
operated by Colgan.  In October 2005, Colgan entered into a separate
code-share agreement with United to provide services as a United Express carrier
(the “United Agreement”).  Colgan currently operates six Saab 340
aircraft under the name “United Express.” We are in the process of transitioning
nine markets currently operated from Pittsburgh under our US Airways agreement
to markets originating from Washington/Dulles under the United
Agreement.  The United Agreement expires on December 31, 2008 and is
structured as a pro-rate agreement for which we receive all of the fares
associated with local passengers and an allocated portion of the connecting
passengers’ fares.  We pay all of the costs of operating the flights,
including sales and distribution costs.  We control all scheduling,
inventory and pricing for each local market we serve.





Employees





As of
December 31, 2007, PNCL, Pinnacle and Colgan had 106, 4,008 and 1,202 employees,
respectively.  Flight attendants and ground operations agents included
203 and 941 part-time employees, respectively. The part-time employees work
varying amounts of time, but typically are half-time or less employees. The
follow table details the number of employees by group:








Employee
      Group
            
            Pinnacle Airlines
      Corp.
            
            Pinnacle Airlines,
      Inc.
            
            Colgan Air,
      Inc.
            
            TotalPilots
            
            -
            
            1,197
            
            397
            
            1,594Flight
      attendants
            
            -
            
            697
            
            193
            
            890Ground
      operations personnel
            
            -
            
            1,412
            
            268
            
            1,680Mechanics
      and other maintenance personnel
            
            -
            
            430
            
            212
            
            642Dispatchers
      and crew resource personnel
            
            -
            
            90
            
            29
            
            119Management
      and support personnel
            
            106
            
            182
            
            103
            
            391Total
            
            106
            
            4,008
            
            1,202
            
            5,316





Labor
costs are a significant component of airline expenses and can substantially
affect our results, though we believe we generally have high labor productivity.
Approximately 77% and 16% of Pinnacle Airlines, Inc. and Colgan Air, Inc.
employees, respectively, are represented by unions.





7
 Item 1.
Business





The
following table reflects our principal collective bargaining agreements and
their respective amendable dates:





Employee
      Group
            
            Employees
      Represented
            
            Representing
      Union
            
            Contract Amendable
      DatePinnacle’s
      pilots
            
            1,197
            
            Air
      Line Pilots Association
            
            April
      30, 2005Pinnacle’s
      flight attendants
            
            697
            
            United
      Steel Workers of America
            
            February
      1, 2011Pinnacle’s
      ground operations agents
            
            1,254
            
            United
      Steel Workers of America
            
            March
      19, 2010Pinnacle’s
      flight dispatchers
            
            37
            
            Transport
      Workers Union of America
            
            December
      31, 2013Colgan’s
      flight attendants
            
            193
            
            United
      Steel Workers of America
            
            Initial
      contract currently being negotiated





The
Railway Labor Act, which governs labor relations for unions representing airline
employees, contains detailed provisions that must be exhausted before work
stoppage can occur once a collective bargaining agreement becomes
amendable.





The
collective bargaining agreement between Pinnacle and the Air Line Pilots
Association (“ALPA”) became amendable in April 2005.  Pinnacle has
been actively negotiating with ALPA since that time.  In August 2006,
Pinnacle filed for mediation with the National Mediation Board.  Since
then, Pinnacle has met with the mediator assigned to its case and with ALPA, but
has not reached resolution on an amended collective bargaining
agreement.





On
November 5, 2007, ALPA filed suit in the U.S. District Court in Minneapolis,
Minnesota against Pinnacle.  The suit seeks an injunction prohibiting
Pinnacle from paying certain bonuses to its pilots, asserting that such an
action would violate the Railway Labor Act.  Pinnacle believes that
the lawsuit lacks merit, and accordingly, Pinnacle will vigorously defend its
position in this case.  Pinnacle does not believe that it will incur
any material loss with respect to this lawsuit. On January 8, 2008, Pinnacle
filed suit in the U.S. District Court for the Western District of Tennessee
against ALPA, alleging bad faith bargaining.  The primary intent of
this lawsuit is to encourage ALPA to negotiate in good faith so that Pinnacle
can reach agreement for an amended collective bargaining agreement as soon as
possible.  Pinnacle’s pilots are currently paid at rates less than the
industry average for similarly sized aircraft, and an amended agreement is
expected to contain higher rates of pay for Pinnacle’s pilots.





On March
1, 2007, we announced that Pinnacle had entered into a new four-year contract
with the United Steel Workers (“USW”), the union that represents Pinnacle’s
flight attendants.  Pinnacle had been in negotiations with the USW
since July 2006, when its most recent contract with its flight attendants
expired. In September 2007, Colgan recognized the United Steel Workers of
America (“USW”) to represent its flight attendants.  Negotiations will
begin shortly for a flight attendant collective bargaining agreement with the
United Steel Workers.  The Company does not expect this new collective
bargaining agreement to have a material impact on its financial results, as
Colgan’s flight attendants are currently compensated at rates approximating
industry average.





In August
2005, Pinnacle’s flight dispatchers elected representation by the Transport
Workers Union of America AFL-CIO, Air Transport Division (“TWU”).  In
December 2007, an agreement was negotiated and ratified by the TWU membership
and Pinnacle.





8
 Item 1.
Business





Aircraft
Maintenance





Using a
combination of FAA-certified maintenance vendors and our own personnel and
facilities, we maintain our aircraft on a scheduled and ‘‘as-needed’’
basis.  We perform preventive maintenance and inspect our engines and
airframes in accordance with our FAA-approved preventive maintenance policies
and procedures.





The
maintenance performed on our aircraft can be divided into three general
categories: line maintenance, heavy maintenance checks, and engine and component
overhaul and repair. Line maintenance consists of routine daily and weekly
scheduled maintenance checks on our aircraft, including pre-flight, daily,
weekly and overnight checks and any diagnostic and routine repairs.





Pinnacle
contracts with an affiliate of the original equipment manufacturer of its
CRJ-200s to perform certain routine heavy maintenance checks on its
aircraft.  Pinnacle also contracts with a third-party to perform
engine overhauls on its CRJ-200 fleet.  These maintenance checks are
regularly performed on a schedule approved by the manufacturer and the
FAA.  The average age of the CRJ-200 regional jets in our fleet is
approximately 4.5 years. In general, both the CRJ-200 and CRJ-900 aircraft do
not require their first heavy maintenance checks until they have flown
approximately 8,000 hours.  Therefore, we do not expect our CRJ-900s
to require such heavy maintenance checks for several years.





Colgan
performs its own heavy maintenance airframe checks for its Saab fleet at its
maintenance facility in Houston, Texas.  Colgan contracts with third
parties to perform engine overhauls and propeller maintenance on its Saab fleet,
and utilizes a combination of internal and third-party resources to perform
heavy maintenance on its Beech 1900 fleet.  Colgan also plans to use a
combination of internal and third-party resources to complete heavy maintenance
requirements on its Q400 fleet.





Component
overhaul and repair involves sending parts, such as engines, landing gear and
avionics to a third-party, FAA-approved maintenance facility.  We are
party to maintenance agreements with various vendors covering our aircraft
engines, avionics, auxiliary power units and brakes.





Training





Pinnacle
performs the majority of its flight personnel training in Memphis, Tennessee
both at its Corporate Education Center and the simulator center operated by
FlightSafety International. FlightSafety International, at Pinnacle’s request,
provides some overflow training at various other simulator centers throughout
the U.S.  The Memphis simulator center currently includes three CRJ
full-motion simulators. Under Pinnacle’s agreement with FlightSafety
International, Pinnacle has first priority on all of the simulator time
available in the Memphis center.  Instructors used in the Memphis
center are typically Pinnacle employees who are either professional instructors
or trained line pilot instructors.





Colgan’s
flight personnel are trained at various simulator centers throughout the U.S.
under a contract with FlightSafety International.  Non-simulator
training is conducted near its corporate headquarters in Manassas,
Virginia.





We
provide both in-house and outside training for our maintenance
personnel.  To control costs and to ensure our employees receive the
best training, we take advantage of manufacturers’ training programs offered,
particularly when acquiring new aircraft.  We employ professional
instructors to conduct training of mechanics, flight attendants and ground
operations personnel in Memphis and Manassas.





Safety and
Security





We are
committed to the safety and security of our passengers and employees. Since the
September 11, 2001 terrorist attacks, Pinnacle and Colgan have taken many
steps to increase the safety and security of their operations. Some of the
safety and security measures we have taken, along with our code-share partners,
include: aircraft security and surveillance, positive bag matching procedures,
enhanced passenger and baggage screening and search procedures, and securing of
cockpit doors.  We will continue to comply with future safety and
security requirements.





9
 Item 1.
Business





Insurance





As
required by our code-share agreements, we currently maintain insurance policies
with necessary coverage levels for: aviation liability, which covers public
liability, passenger liability, hangar keepers’ liability, baggage and cargo
liability and property damage; war risk, which covers losses arising from acts
of war, terrorism or confiscation; hull insurance, which covers loss or damage
to our flight equipment; directors’ and officers’ insurance; property and
casualty insurance for our facilities and ground equipment; and workers’
compensation insurance. Our code-share agreements require that we maintain
specified coverage levels for these types of policies.





Our
aviation liability and hull insurance coverage is obtained through a combined
placement with five other airlines.  We are reimbursed in full, along
with margin, for aviation insurance under our three CPAs.





We were
given the option under the Air Transportation Safety and Stabilization Act,
signed into law on September 22, 2001, to purchase certain third-party war risk
liability insurance from the U.S. government on an interim basis at rates that
are more favorable than those available from the private market. As provided
under this Act, we have purchased from the Federal Aviation Administration
(“FAA”) this war risk liability insurance, which is currently set to expire on
March 30, 2008.





Regulations





Our
subsidiaries operate under air carrier certificates issued by the FAA and
certificates of convenience and necessity issued by the DOT.  The DOT
may alter, amend, modify or suspend these authorizations if the DOT determines
that we are no longer fit to continue operations.  The FAA may suspend
or revoke the air carrier certificates if our subsidiaries fail to comply with
the terms and conditions of the certificates. The DOT has established
regulations affecting the operations and service of the airlines in many areas,
including consumer protection, non-discrimination against disabled passengers,
minimum insurance levels and others. Failure to comply with FAA or DOT
regulations can result in civil penalties, revocation of the right to operate or
criminal sanctions. FAA regulations are primarily in the areas of flight
operations, maintenance, ground facilities, security, transportation of
hazardous materials and other technical matters. The FAA requires each airline
to obtain an operating certificate authorizing the airline to operate at
specific airports using specified equipment.  Under FAA regulations,
our subsidiaries have established, and the FAA has approved, a maintenance
program for each type of aircraft they operate that provides for the ongoing
maintenance of these aircraft, ranging from frequent routine inspections to
major overhauls.





Markets and
Routes





As
previously discussed, the majority of our business is conducted under capacity
purchase agreements.  Therefore, our markets and routes are chosen by
the major airlines with whom we partner.  As of December 31, 2007,
Pinnacle operated 137 CRJ-200s and one CRJ-900 serving 115 cities in 36 states
and four Canadian provinces out of Northwest’s three hubs and out of Delta’s
Atlanta hub.  Colgan operated 42 Saab 340s and six Beech 1900 aircraft
serving 53 cities in 12 states.  Our route network primarily spans the
entire eastern half of the United States.  Our aircraft fly as far
west as Salt Lake City, Utah, as far east as Bangor, Maine, as far north as
Regina, Saskatchewan and as far south as Fort Lauderdale, Florida.





Competitive
Environment





The
airline industry is highly competitive.  Major airlines award contract
flying to regional airlines based upon three main areas of competition: costs,
customer service, and operational reliability.  We compete not only
with other regional airlines, but also with regional carriers that are wholly
owned subsidiaries of major airline holding companies.





In
addition, we face competition from other airlines within the markets that we
service under revenue pro-rate code-share agreements.  These markets
are served with our Saab 340 fleet by our Colgan subsidiary, and are primarily
concentrated in New England, the mid-Atlantic, and Texas.





10
 Item 1.
Business





Seasonality





As with most airlines, we are subject
to seasonality, though seasonality has historically had a lesser effect on our
capacity purchase operations than it has on our pro-rate operations. 
Mainline carriers use capacity purchase agreements because these arrangements
allow them to expand their operations at lower fixed costs by using regional’s
lower cost structure for operating aircraft.  Because regional aircraft are
more fuel efficient and economical to operate than larger aircraft, mainline
carriers tend to maintain regional aircraft utilization during seasons of
reduced demand. Conversely, our financial results can be materially affected by
the level of passenger demand for our services operated under pro-rate
agreements under which we more directly bear the risk of decreased demand for
our services.  Our results can materially vary due to seasonality and
cyclicality.  For example, Colgan has historically reported significant
losses or significantly lower income during the first and fourth quarters of
each year, when demand for air travel is generally lower, and higher income
during the second and third quarters of each year when demand for air travel
increases.





Website





PNCL’s
website address is www.pncl.com.  All
of our filings with the U.S. Securities and Exchange Commission (“SEC”) are
available free of charge through our website on the same day, or as soon as
reasonably practicable after we file them with, or furnish them to, the
SEC.  Printed copies of our Annual Report on Form 10-K, Quarterly
Reports on Form 10-Q, and Current Reports on Form 8-K may be obtained by
submitting a request at PNCL’s website.  PNCL’s website also contains
our Code of Conduct, which contains the code of business conduct and ethics
applicable to all of our directors and employees.  Any amendments made
in the future to the code of business conduct will be promptly posted to our
website.





11
 Item 1A. Risk
Factors





Our ASA with Northwest generated approximately 77% of
our consolidated 2007 revenues.  Termination by Northwest of our ASA
would result in material declines in our revenues and earnings, and the size of
our regional jet fleet.





If
Northwest terminates the ASA for cause, it will have the right to terminate our
regional jet aircraft leases covered by the agreement and take possession of
these aircraft. As a result, we would lose our most significant source of
revenue and earnings, and likely would not have an immediate source of revenue
or earnings to offset such a loss.  Northwest may also terminate the
agreement at any time upon our bankruptcy or for any breach of the agreement by
us that continues uncured for more than 30 days after we receive notice of the
breach.  A termination of our ASA would have a material adverse effect
on our financial condition, operating revenues, and net income unless we are
able to enter into satisfactory substitute arrangements whereby we would acquire
aircraft to operate in conjunction with a regional airline service agreement
with another major airline.  In addition, we would be required to
obtain the necessary airport facilities and gates, and provided the same variety
of third-party services presently provided by Northwest, or alternatively, take
the necessary steps to operate as an independent airline.  We may not
be able to enter into substitute code-share arrangements, and any such
arrangements we might secure may not be as favorable to us as our current
agreements.  Operating this airline independently from major partners
would be a significant departure from our business plan, and would require
significant time and resources, which may not be available to us at such
time.





Reduced utilization levels of our
aircraft under our capacity purchase code-share agreements would reduce our
revenues and earnings.




A
significant portion of the revenues from our capacity purchase code-share
agreements are derived from block hours, departures and certain reimbursable
expenses that we incur only when we fly.  During 2007, approximately
40% of our regional airline services revenue stemmed from these
activities.  If our code-share partners reduce the utilization of our
fleet or decrease the size of our fleet, our revenues and profits would
decrease.





Under our
capacity purchase agreements, our code-share partners are solely responsible for
scheduling our flights, but these agreements do not require the code-share
partner to meet any minimum utilization levels for our aircraft.  Our
code-share partners could decide to significantly reduce the utilization levels
of our fleet in the future.  For example after September 11, 2001,
Northwest reduced Pinnacle’s scheduled capacity by approximately 20% on an
available seat mile basis for a short period of time.  More recently,
during construction delays at the Minneapolis/St. Paul airport, Northwest
cancelled numerous Pinnacle flights to allow its own aircraft to utilize the
available airport and runway capacity during the construction
period.  Additionally, any disruption in the operations of one of our
code-share partners, such as may be caused by threatened strike by any of our
code-share partners’ employee groups, could adversely affect our fleet
utilization, and thus reduce our revenue and profits.





We are engaged in discussions with
Northwest, our largest customer, regarding disputes over the interpretation of
various aspects of our ASA, and we may encounter additional ASA interpretation
disputes as our business expands to include other partners.  We may
pursue binding arbitration, which could yield a ruling that negatively affects
our future earnings.





We are
currently engaged in discussions with Northwest involving various disputed items
under the ASA that could impact the rates that we are compensated for our
regional airline services.  Some of these items relate to the period
prior to the execution of the ASA in January 2007.  Two of these items
could affect our operating income in future periods.  The first item
relates to a 2006 adjustment to Pinnacle’s block hour, departure and fixed cost
rates.  Our annual operating income could increase or decrease by
approximately $2.8 million per year based upon differing interpretations of the
relevant ASA terms.  The second issue involves the reclassification of
certain airport and ground handling costs and related ASA revenue in a manner
that could reduce our operating income in future periods by up to approximately
$2.0 million per year.  Also, as our business expands to include other
partners, interpreting certain provisions of our ASA becomes more complex and
subject to different interpretations of various terms.  Additional
disputes with Northwest could develop if we arrive at differing interpretations
of key terms.





12
 Item 1A. Risk
Factors





If we are
unable to resolve these issues directly with Northwest, we may enter into a
binding arbitration process or other form of legal dispute
resolution.  Adverse determinations in these matters could result in a
loss of up to $7.2 million for disputed amounts through December 31,
2007.  We may not be successful in resolving these disputes without
reducing our future income, or without paying Northwest for some or all of the
amount noted above.  We cannot currently predict the timing of the
resolution of these matters.





Increases in our labor costs, which
constitute a substantial portion of our total operating costs, may directly
affect our earnings.





Labor
costs are not directly reimbursed by any of our code-share
partners.  Rather, these costs are intended to be included in the
payments based on pre-set rates for block hours, departures and fixed
costs.  Labor costs constitute a significant portion, ranging from 26%
to 28%, of our total operating costs.  Pressure to increase these
costs beyond standard industry wages, and therefore beyond the limits intended
to be covered by the fixed payments we receive from our code-share partners, is
increased by the high degree of unionization of our workforce (64% unionized at
December 31, 2007) and the ongoing negotiations between Pinnacle and ALPA for a
revised collective bargaining agreement.  An increase in our labor
costs over standard industry wages could result in a material reduction to our
earnings, and could affect our future prospects for additional business
opportunities.





Strikes or labor disputes with our
employees may adversely affect our ability to conduct our business and could
result in the termination, or a significant reduction of the benefit, of our
code-share agreements.  In December 2007, Pinnacle’s pilots voted to
authorize a strike.





If we are
unable to reach an agreement with any of our unionized work groups on the terms
of their collective bargaining agreements, we may be subject to work
interruptions, work stoppages, or a fleet size reduction.  Work
stoppages may adversely affect our ability to conduct our operations and fulfill
our obligations under our code-share agreements.





Pinnacle’s
bargaining agreement with its pilots became amendable on April 30, 2005, and
Pinnacle is currently engaged in discussions with ALPA
representatives.  Both the union and management continue to engage in
labor talks that are governed by the National Mediation Board, and the parties
have not been released from these talks.  While a strike deadline has
not been set and Pinnacle’s pilots are not legally authorized to strike,
Pinnacle’s pilot workforce recently voted affirmatively to authorize a
strike.  Any strike would take place only after a thirty-day
cooling-off period that begins when the parties are released from their talks by
the National Mediation Board.  Under the ASA, adverse consequences
could result from a strike or a work stoppage, including a significant fleet
reduction or possible termination of the ASA.





We are increasingly dependent on
technology in our operations, and if our technology fails, our business may be
adversely affected.





Our
subsidiaries’ systems operations control centers, which oversee daily flight
operations, are dependent on a number of technology systems to operate
effectively.  Large scale interruption in technology infrastructure
that we depend on, such as power, telecommunications or the internet, could
cause a substantial disruption in our operations.





For
example, in December 2004, Pinnacle’s operations were significantly affected
when adverse weather conditions closed or reduced operations at over 60% of the
airports we serve.  The severe weather strained Pinnacle’s operational
systems, and its ability to recover quickly to normal reliability levels was
impaired.  The December 2004 operational conditions were a factor in
Pinnacle’s failure to meet certain operational performance levels under the 2002
ASA for the second half of 2004, and consequently Pinnacle failed to earn $1.4
million of incentive revenue from Northwest.





In
addition, we are transitioning during 2008 to new software for our accounting,
maintenance, inventory and flight statistics functions.  If there are
problems with this integration, our ability to capture critical data could be
affected.





13
 Item 1A. Risk
Factors





If we are unable to attract and
retain key employees, our business could be harmed.





We
compete against the other major and regional U.S. airlines for pilots, some of
which offer wage and benefit packages that exceed ours.  We may be
required to increase wages and/or benefits in order to attract and retain
qualified pilots or risk considerable turnover.  As we grow and add
additional aircraft types to our operating fleets, our need for pilots
increases.  We believe that in the current environment where many of
the major U.S. airlines are emerging from bankruptcy and/or growing their own
operations, it may be increasingly challenging to continue to hire and retain
qualified pilots.





Further
complicating our ability to both attract and retain pilots is Pinnacle’s ongoing
dispute with ALPA, against which Pinnacle filed a bad faith lawsuit during
January 2008, and Pinnacle’s inability to reach a new pilot agreement whereby,
in an effort to remain competitive within the industry, Pinnacle could increase
its pilot salaries to the industry average.





If we are
unable to hire, train and retain qualified pilots we would be unable to
efficiently run our operations and our competitive ability would be
impaired.  Our business could be harmed and revenue reduced if, due to
the shortage of pilots, we are forced to cancel flights and forego earning
incentive-based revenue under our code-share agreements.  For example,
during the first half of 2007 we failed to earn $2.9 million of incentive-based
revenue under our ASA primarily due to a pilot shortage.





Under certain circumstances, we may
be required to pay cash or a combination of cash and our common stock to holders
of our 3.25% senior convertible notes due 2025 at their option prior to the
maturity date.  However, due to our significant investment in
purchasing additional aircraft for our operating fleet, our liquidity is
reduced.





Holders
of our $121.0 million principal amount senior convertible notes (the “Notes”)
may require us to purchase all or a portion of their Notes for cash on February
15, 2010, February 15, 2015 and February 15, 2020 at a purchase price equal to
100% of the principal amount of the Notes to be repurchased plus accrued and
unpaid interest, if any, to the purchase date.  In addition, under
certain circumstances, holders of the Notes may convert the Notes into the
equivalent value of our common stock. Upon conversion, we will pay the portion
of the conversion value up to the principal amount of each Note in cash, and any
excess conversion value in cash or our common stock at our
election.  However, due to our significant investment in the purchase
of our CRJ-900 and Q400 aircraft, our financial leverage has significantly
increased and our liquidity has been reduced. We may find it difficult to obtain
the cash necessary to redeem the notes should holders choose to convert the
notes into cash and stock or should holders choose to redeem the notes at the
optional redemption date in February 2010.  For further discussion of
the Notes, please refer to Note 7, Debt, in Item 8 of this Form
10-K.





We are currently under audit by the
Internal Revenue Service, and the results of the audit could materially affect
our financial statements and liquid assets.





The Internal Revenue Service (“IRS”) is
currently examining our federal income tax returns for years 2003 through
2005.  The IRS has focused on several key transactions that we
undertook during those periods and the IRS has proposed
adjustments.  Should the IRS prevail on any proposed adjustment, the
impact on the Company could be significant.  While we believe that we
have recorded reserves that are appropriate for each identified issue, our
liquid assets and our net earnings could be significantly reduced if the IRS
examination ultimately overturns our positions.





Our short-term investment portfolio
is primarily composed of Auction Rate Securities (“ARS”), which have recently
become illiquid and may become impaired.





We
require liquidity to make our investment in new aircraft.  In order to
fund the non-financed portion of future aircraft deliveries and due to the
existence of certain short-term financing debt covenants, we may be forced to
sell some of our ARS portfolio under distressed, illiquid market conditions,
which would result in our recognizing a loss on such sales.  In
addition, we may record an impairment charge in future periods if we determine
that the decline in value of our ARS portfolio is other-than-temporary or will
not recover before we sell the investment.





14
 Item 1A. Risk
Factors





We may be adversely affected by increases in
fuel prices, and we would be adversely affected by disruptions in the supply of
fuel.





Colgan’s
pro-rate agreements provide that Colgan pays for its own fuel.  Fuel
prices have recently increased significantly and remain high.  For
example, the average price paid per gallon increased 29% from the first quarter
of 2007 to the fourth quarter of the same year.  Due to the
competitive nature of the airline industry, we may not be able to pass on
increased fuel prices to customers by increasing fares. If fuel prices decline
in the future, increased fare competition and lower revenues may offset any
potential benefit of lower fuel prices.





Our results could be negatively
affected by Colgan’s pro-rate agreements.





Colgan
has revenue-sharing agreements with United, Continental and US
Airways.  We are now exposed to the fluctuations associated with
revenue-sharing agreements for fare competition and passenger
volumes.  The rise and fall of profits can correspond to seasonality,
and operations can be adversely affected by severe weather, levels of travel
demand and competition in Colgan’s markets.  We will realize increased
profits as ticket prices and passenger load factors increase or fuel prices
decrease and, correspondingly, realize decreased profits as ticket prices and
passenger load factors decrease or fuel prices increase.





We may not achieve the potential
benefits of the Colgan acquisition.





Our
achievement of the potential benefits of the Colgan acquisition will depend on
our ability to successfully implement our business strategy, including improving
the pro-rate route profitability, improving the utilization of equipment and
facilities, increasing employee productivity and allocating overhead and
administrative expenses over a larger platform as we grow Colgan’s fleet with
the additional Q400 aircraft.  Our initiatives to improve and grow
Colgan’s operations may be costly, complex and time-consuming.





The
Colgan acquisition diversifies our fleet mix with the addition of Colgan's
existing turboprop and new Q400 aircraft.  This fleet diversification
increases the complexity of managing our business.  If we are not able
to successfully achieve our objectives and manage the diverse fleet, the
potential benefits of the Colgan acquisition may not be realized fully or at
all, or they may take longer to realize than expected.  We cannot be
certain that the Colgan acquisition will result in combined results of
operations and financial condition consistent with our expectations or superior
to what Pinnacle or Colgan could have achieved independently.





Our capacity purchase agreements
with Delta and Continental may not be profitable.





During
2007, we entered into new ten-year capacity purchase agreements with Delta and
Continental to operate CRJ-900 and Q400 aircraft, respectively.  As
part of the bidding process to win these contracts, we utilized complex
financial models, which included assumptions as to numerous
variables.  Adding to the complexity is that the agreements required
that we purchase the aircraft to be utilized under these
agreements.  We lack experience managing aircraft ownership, and our
assumptions may not be accurate.  Consequently, should our actual
experience differ from the assumptions we used when modeling the business, the
contracts may not be profitable.





Our current growth plans include
fleet diversification, which increases the complexity of our business and
exposes us to risks that could reduce our
profitability.





We are in
the process of acquiring 16 CRJ-900 and 15 Q400 aircraft.  Currently,
we have agreements to operate all purchased aircraft for Delta and Continental,
respectively.  If we are incorrect in our assessment of the
profitability and feasibility of our growth plans, or if circumstances change in
a way that was unforeseen by us, our growth may not be
profitable.  With the addition of these aircraft, Pinnacle is no
longer operating a single fleet type.  Since 2003, Pinnacle has
operated only CRJ-200 aircraft to take advantage of the efficiencies in employee
training, aircraft maintenance, lower spare parts inventory requirements, and
simplified aircraft scheduling.  Similarly, Colgan has historically
operated only Saab and Beech aircraft.  As we expand our operations to
include additional aircraft types, some of these efficiencies may no longer be
realized, which could reduce our profitability.





15





Item
1B.  Unresolved Staff Comments.





All staff
comments received from the Securities and Exchange Commission were resolved as
of the date of this filing.





16
 Item 2.
Properties





Flight
Equipment





As shown
in the following table, the Company’s aircraft fleet consisted of 140 Canadair
regional jets (“CRJs”) and 48 turboprop aircraft at December 31,
2007.


Aircraft
      Type
            
            Number of Aircraft
      Leased
            
            Number of Aircraft
      Owned
            
            Standard Seating
      Configuration
            
            Average Age (in
      years)CRJ-200
            
            137
            
            -
            
            50
            
            4.5CRJ-900(1)
            
            -
            
            3
            
            76
            
            0.1Saab
      340
            
            17
            
            25
            
            34/30
            
            16.2Beech
      1900D
            
            5
            
            1
            
            19
            
            14.6Total
            
            159
            
            29





(1)Of the
three CRJ-900 aircraft, only one was operated as of December 31,
2007.





The
following table outlines the number of firm orders and options to purchase
aircraft as of December 31, 2007:





Firm
              Noncancelable
            
            Firm
      Cancelable
            
            Options
            
            TotalQ4002008
            
            15
            
            -
            
            -
            
            152009
            
            -
            
            8
            
            8
            
            162010
            
            -
            
            2
            
            12
            
            14Total
      Q400
            
            15
            
            10
            
            20
            
            45CRJ-9002008
            
            12
            
            -
            
            -
            
            122009
            
            1
            
            -
            
            -
            
            1Total
      CRJ-900
            
            13
            
            -
            
            -
            
            13Total
            
            28
            
            10
            
            20
            
            58








17
 Item 2.
Properties





Facilities





The
Company had the following significant dedicated facilities as of December 31,
2007:





Location
            
            Description
            
            Square
      Footage
            
            Lease Expiration
      DateMemphis,
      TN
            
            Pinnacle
      Airlines, Inc. Headquarters and Corporate Education Center
            
            
            59,100
            
            August
      2011Memphis,
      TN
            
            Pinnacle
      Airlines Corp. Headquarters
            
            
            12,300
            
            July
      2009Memphis,
      TN
            
            Hangar
      and Maintenance Facility
            
            
            51,250
            
            December
      2016Knoxville,
      TN
            
            Hangar
      and Maintenance Facility
            
            
            55,000
            
            Termination
      of the ASAManassas,
      VA
            
            Colgan
      Air, Inc. Hangars and Maintenance Facility and Corporate
      Headquarters
            
            
            63,060
            
            December
      2008/  December 2025





Our
significant maintenance facilities are positioned in spoke cities based on
market size, frequency, and location.  These facilities are used for
overnight maintenance; however, Memphis and Manassas are also used during the
day.  We have additional smaller maintenance facilities in Fort Wayne,
Indiana, South Bend, Indiana, Houston, Texas, Latham, New York and Hyannis,
Massachusetts.  The facilities are highly utilized with an average
turn around time of seven to ten hours.  We also expect to relocate
the maintenance base from Manassas to Washington Dulles airport to lower
operating costs.  We believe that our existing facilities are adequate
for the foreseeable needs of our business.





The table
above includes two hangars in Manassas that we lease from one of the selling
shareholders of Colgan.  Subsequent to year end, we entered into a
side agreement with the selling shareholder, authorizing the selling shareholder
to market the two hangars to a third-party purchaser with a condition precedent
that a third-party purchaser assume our leases with modifications that would
reduce the lease term and permit early lease termination.  We remain
obligated under the original purchase agreement to purchase the hangars in the
event that a sale to a third-party purchaser fails to occur.





In
connection with the ASA, we entered into facilities use agreements under which
we have the right to use Northwest terminal gates, parking positions and
operations space at the Detroit, Minneapolis/St. Paul and Memphis
airports.  The DCA provides us with the right to use terminal gates,
parking positions and operations space at Delta’s Atlanta hub.





In
connection with our code-sharing partners, we maintain contract service
agreements with Continental, United and US Airways allowing for the use of
terminal gates, parking positions and operations space at the Houston,
Washington Dulles, Boston, LaGuardia, and Pittsburgh airports. The addition of
the Q400 aircraft to our fleet will require additional gate, parking and
operational space, which is included in the Continental CPA.





We
believe the use of the terminal gates, parking positions, and operations space
for our code-share partners will be sufficient to meet the operational needs of
our business.





18





Item 3. Legal
Proceedings





Pinnacle
and Colgan are defendants in various ordinary and routine lawsuits incidental to
our business. While the outcome of these lawsuits and proceedings cannot be
predicted with certainty, it is the opinion of our management, based on current
information and legal advice, that the ultimate disposition of these suits will
not have a material adverse effect on our financial statements as a
whole.  For further discussion, see Note 17, Commitments and
Contingencies, in Item 8 of this Form 10-K.





On
November 5, 2007, ALPA filed suit in the U.S. District Court in Minneapolis,
Minnesota against Pinnacle.  The suit seeks an injunction prohibiting
Pinnacle from paying certain bonuses to its pilots, asserting that such an
action would violate the Railway Labor Act.  Pinnacle believes that
the lawsuit lacks merit, and accordingly, Pinnacle will vigorously defend its
position in this case.  Pinnacle does not believe that it will incur
any material loss with respect to this lawsuit.  On January 8, 2008,
Pinnacle filed suit in the U.S. District Court for the Western District of
Tennessee against ALPA, alleging bad faith bargaining.  The primary
intent of the lawsuit is to encourage ALPA to negotiate in good faith so that
Pinnacle can reach agreement for an amended collective bargaining agreement as
soon as possible.  Pinnacle’s pilots are currently paid at rates less
than the industry average for similarly sized aircraft, and an amended agreement
is expected to contain higher rates of pay for Pinnacle’s pilots.  For
further discussions, see Item 1 of this Form 10-K.





Colgan is
a defendant in litigation resulting from the September 11, 2001 terrorist
attacks.  The Company believes that any adverse outcome from this
litigation will be covered by insurance and will therefore have no material
adverse effect on the Company’s financial position, results of operations and
cash flows.





Environmental
Matters





We are
subject to regulation under various environmental laws and regulations, which
are administered by numerous state and federal agencies, including the Clean Air
Act, the Clean Water Act and the Comprehensive Environmental Response,
Compensation and Liability Act of 1980. In addition, many state and local
governments have adopted environmental laws and regulations to which our
operations are subject. We are, and may from time to time become, involved in
environmental matters, including the investigation and/or remediation of
environmental conditions at properties used or previously used by us. We are
not, however, currently subject to any environmental cleanup orders imposed by
regulatory authorities, nor do we have any active investigations or remediations
at this time.





Regulatory
Matters





We are
subject to regulation under various laws and regulations which are administered
by numerous state and federal agencies, including but not limited to the FAA,
TSA and DOT.  We are involved in various matters with these agencies
during the ordinary course of our business.  While the outcome of
these matters cannot be predicted with certainty, it is the opinion of our
management, based on current information and past experience, that the ultimate
disposition of these matters will not have a material adverse effect on our
financial condition as a whole.





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





None.








19
 Part
II
 Item 5. Market for Registrant’s
Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities





The
shares of PNCL’s common stock are quoted and traded on the Nasdaq National
Market under the symbol “PNCL.” Our common stock began trading on November 25,
2003, following our initial public offering. Set forth below, for the applicable
periods indicated, are the high and low closing sale prices per share of our
common stock as reported by the Nasdaq National Market.





2006
            
            High
            
            
            LowFirst
      Quarter
            
            $
            8.14
            
            
            $
            6.07Second
      Quarter
            
            $
            7.59
            
            
            $
            6.40Third
      Quarter
            
            $
            7.59
            
            
            $
            5.74Fourth
      Quarter
            
            $
            17.05
            
            
            $
            7.44





2007
            
            High
            
            
            LowFirst
      Quarter
            
            $
            19.88
            
            
            $
            16.76Second
      Quarter
            
            $
            19.29
            
            
            $
            16.13Third
      Quarter
            
            $
            19.68
            
            
            $
            15.14Fourth
      Quarter
            
            $
            16.75
            
            
            $
            13.86





As of
March 14, 2008, there were approximately 40 holders of record of our common
stock.  We have paid no cash dividends on our common stock and have no
current intention of doing so in the future.





The follow table represents the
Company’s purchase of its common stock made during the three months ended
December 31, 2007:





Period
            
            Total Number of Shares
      Purchased
            
            
            Average Price Paid per Share
      (1)
            
            
            Total Number of Shares
      Purchased as Part of Publicly Announced Plans or
      Programs
            
            
            Maximum
      Number
              (or Approximate Dollar Value)
      that May Yet Be Purchased Under the Plans or
    ProgramsBalance
      at October 1, 2007
            
            
            1,958,032
            
            
            $
            17.95
            
            
            
            1,958,032
            
            
            $
            4,793,287October
      1, 2007 – October  31, 2007
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            4,793,287November
      1, 2007 – November  30, 2007
            
            
            2,492,060
            
            
            
            13.22
            (2)
            
            
            2,492,060
            
            
            
            -
            (2)December
      1, 2007 – December 31, 2007
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Total
            
            
            4,450,092
            
            
            $
            15.30
            
            
            
            4,450,092
            
            
            $
            -(1) Average
      price paid per share excludes any commissions paid.(2) On
      November 21, 2007, the Board of Directors authorized a $28.1 million
      increase in the Company's existing share repurchase program to enable the
      Company to purchase the 2,492,060 shares of its common stock held by
      Northwest. The Company paid Northwest $32.9 million, or $13.22 per
      share, for the stock, which was a mutually agreed upon volume-based priced
      less than the then closing market price of $16.26.








20
 Item 5. Market for Registrant’s
Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities








The
information under the caption “Securities Authorized for Issuance under Equity
Compensation Plans,” appearing in the Proxy Statement for our 2008 Annual
Meeting of Stockholders, anticipated to be filed with the Commission within the
120 days after December 31, 2007, is hereby incorporated by
reference.





Our
Certificate of Incorporation provides that no shares of capital stock may be
voted by or at the direction of persons who are not United States citizens
unless such shares are registered on a separate stock record. Our Bylaws further
provide that no shares will be registered on such separate stock record if the
amount so registered would exceed United States foreign ownership restrictions.
United States law currently limits to 25% the voting power in our company (or
any other U.S. airline) of persons who are not citizens of the United
States.





Performance
Graph





The following graph compares the
cumulative total return on the Company’s common stock with the cumulative total
returns (assuming reinvestment of dividends) on the American Stock Exchange
Airline Industry Index and the NASDAQ Composite Index as if $100 were invested
in our common stock and each of those indices on November 25, 2003, the date of
the Company’s initial public offering.








21
 Item 6. Selected Financial
Statements





You shouldread this selected consolidated financial data
together with the audited consolidated financial statements and related notes
contained in Item 8, Management’s Discussion and Analysis
of Financial Condition and Results of Operation contained in Item 7 and
Risk Factorsin Item 1A
of this Form 10-K.








Years Ended December
      31,2007(8)
            
            
            2006
            
            
            2005
            
            
            2004
            
            
            2003Statement of Operations
      Data:
            
            (in
      thousands, except per share data)Total
      operating revenues
            
            $
            787,374
            
            
            $
            824,623
            
            
            $
            841,605
            
            
            $
            635,448
            
            
            $
            456,770Total
      operating expenses (1)
            
            
            735,286
            
            
            
            697,075
            
            
            
            814,676
            
            
            
            568,145
            
            
            
            392,601Operating
      income (1)
            
            
            52,088
            
            
            
            127,548
            
            
            
            26,929
            
            
            
            67,303
            
            
            
            64,169Operating
      income as a percentage of operating revenues (2)
            
            
            6.6
            %
            
            
            15.5
            %
            
            
            3.2
            %
            
            
            10.6
            %
            
            
            14.0
            %Nonoperating
      (expense) income(3)
            
            
            (1,051
            )
            
            
            (2,948
            )
            
            
            14,482
            
            
            
            (4,178
            )
            
            
            (6,770
            )Net
      income (1)
            
            
            34,637
            
            
            
            77,799
            
            
            
            25,698
            
            
            
            40,725
            
            
            
            35,067Basic
      earnings per share (1)
            
            $
            1.66
            
            
            $
            3.55
            
            
            $
            1.17
            
            
            $
            1.86
            
            
            $
            1.60Diluted
      earnings per share (1)
            
            $
            1.50
            
            
            $
            3.54
            
            
            $
            1.17
            
            
            $
            1.86
            
            
            $
            1.60Shares
      used in computing basic earnings per share
            
            
            20,897
            
            
            
            21,945
            
            
            
            21,913
            
            
            
            21,892
            
            
            
            21,892Shares
      used in computing diluted earnings per share
            
            
            23,116
            
            
            
            21,974
            
            
            
            21,932
            
            
            
            21,911
            
            
            
            21,892








As of December
      31,2007(8)
            
            
            2006
            
            
            2005
            
            
            2004
            
            
            2003Balance Sheet
      Data:
            
            (in
      thousands)Cash
      and cash equivalents (4)
            
            $
            26,785
            
            
            $
            705
            
            
            $
            31,567
            
            
            $
            34,912
            
            
            $
            31,523Short-term
      investments
            
            
            186,850
            
            
            
            72,700
            
            
            
            44,160
            
            
            
            -
            
            
            
            -Property
      and equipment, net
            
            
            255,410
            
            
            
            40,985
            
            
            
            42,535
            
            
            
            39,416
            
            
            
            34,286Total
      assets
            
            
            708,588
            
            
            
            301,273
            
            
            
            228,802
            
            
            
            165,960
            
            
            
            128,906Long-term
      debt obligations, including capital leases
            
            
            196,480
            
            
            
            121,000
            
            
            
            121,000
            
            
            
            120,000
            
            
            
            120,000Stockholders'
      equity (deficiency)
            
            
            57,822
            
            
            
            97,021
            
            
            
            18,618
            
            
            
            (7,548
            )
            
            
            (42,382
            )








22
 Item 6. Selected Financial
Statements








Years Ended December
      31,2007(8)
            
            2006
            
            2005
            
            2004
            
            2003Other
    Data:Revenue
      passengers (in thousands)
            11,494
            
            8,988
            
            8,105
            
            6,340
            
            4,540Revenue
      passenger miles (in thousands) (5)
            4,898,188
            
            4,288,551
            
            4,129,039
            
            2,894,776
            
            1,797,631Available
      seat miles (“ASMs”) (in thousands) (6)
            6,604,082
            
            5,640,629
            
            5,732,773
            
            4,219,078
            
            2,678,000Passenger
      load factor (7)
            74.2%
            
            76.0%
            
            72.0%
            
            68.6%
            
            67.1%Operating
      revenue per ASM (in cents) (2)
            11.92
            
            14.62
            
            14.68
            
            15.06
            
            17.06Operating
      revenue per block hour (2)
            $1,392
            
            $1,987
            
            $1,944
            
            $1,962
            
            $2,168Operating
      costs per ASM (in cents) (1)
            11.13
            
            12.36
            
            14.21
            
            13.47
            
            14.66Operating
      cost per block hour (1)
            $1,300
            
            $1,679
            
            $1,882
            
            $1,754
            
            $1,864Block
      hoursRegional
      jets
            438,988
            
            415,069
            
            432,900
            
            323,810
            
            210,646Turboprops
            126,675
            
            -
            
            -
            
            -
            
            -DeparturesRegional
      jets
            265,418
            
            251,091
            
            249,262
            
            201,816
            
            146,898Turboprops
            107,171
            
            -
            
            -
            
            -
            
            -Average
      daily utilization (in block hours)Regional
      jets
            8.73
            
            9.17
            
            9.07
            
            8.98
            
            8.83Turboprops
            7.32
            
            -
            
            -
            
            -
            
            -Average
      stage length (in miles)
            321
            
            470
            
            500
            
            450
            
            384Number
      of operating aircraft (end of period)Regional
      jets
            138
            
            124
            
            124
            
            117
            
            76Turboprops
            48
            
            -
            
            -
            
            -
            
            -Employees
            5,316
            
            3,860
            
            3,436
            
            3,056
            
            2,253(1)  Results
      for the years ended December 31, 2006 and 2005 were affected by the
      Northwest and Mesaba bankruptcies.(2)  As
      discussed in “Pinnacle’s Agreements with Major Airlines” in Item 1. Business, our target
      operating margin under the ASA was 10% from December 1, 2003 through
      December 31, 2006. Under the ASA, effective January 1, 2007, Pinnacle’s
      Northwest Airlink target operating margin was reduced to 8% and certain
      significant expenses such as fuel and aircraft rentals were eliminated or
      reduced. For further discussion of the target operating margin, refer to
      Note 4 Code-Share
      Agreementsin Item 8 of this Form 10-K.(3)  Nonoperating
      income for the year ended December 31, 2005 includes a gain of $18.0
      million related to the repurchase of our note payable to
      Northwest.(4)  Cash
      balance as of December 31, 2006 does not include the normal Northwest
      end-of-month payment of $31.9 million, which was received on January 2,
      2007 as December 31, 2006 fell on a non-business day.(5)  Revenue
      passenger miles represent the number of miles flown by revenue
      passengers.(6)  Available
      seat miles represent the number of seats available for passengers
      multiplied by the number of miles the seats are flown.(7)  Passenger
      load factor equals revenue passenger miles divided by available seat
      miles.(8)  The
      date of acquisition for Colgan was January 18, 2007. The data for 2007
      includes Colgan data and statistics from the date of acquisition through
      the end of the year, in addition to data for Pinnacle Airlines, Inc. and
      Pinnacle Airlines Corp.  See Footnotes 3 and 18 in Item 8 of
      this Form 10-K for further
discussion.








23
 Item 6. Selected Financial
Statements





Certain Statistical
Information:





The
following tables present our operating expenses per block hour and operating
expenses per available seat mile.  While not relevant to our financial
results, this data is used as an analytic in the airline
industry.  Please see Results of Operations in Item
7 of this Form 10-K for more information on our operating expenses.








Years Ended December
      31,2007
            
            
            2006
            
            
            2005
            
            
            2004
            
            
            2003Operating
      expenses per block hour:Salaries,
      wages and benefits
            
            $
            359
            
            
            $
            342
            
            
            $
            310
            
            
            $
            325
            
            
            $
            395Aircraft
      fuel(1)
            
            
            68
            
            
            
            263
            
            
            
            260
            
            
            
            258
            
            
            
            261Aircraft
      maintenance, materials and repairs
            
            
            154
            
            
            
            85
            
            
            
            74
            
            
            
            73
            
            
            
            67Aircraft
      rentals(1)
            
            
            245
            
            
            
            636
            
            
            
            642
            
            
            
            645
            
            
            
            647Other
      rentals and landing fees
            
            
            104
            
            
            
            104
            
            
            
            99
            
            
            
            114
            
            
            
            139Ground
      handling services
            
            
            173
            
            
            
            210
            
            
            
            214
            
            
            
            203
            
            
            
            212Depreciation
      and amortization
            
            
            16
            
            
            
            10
            
            
            
            9
            
            
            
            10
            
            
            
            14Government
      reimbursements
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (5
            )Commissions
      and passenger related expenses
            
            
            43
            
            
            
            9
            
            
            
            10
            
            
            
            11
            
            
            
            12Other
            
            
            140
            
            
            
            125
            
            
            
            126
            
            
            
            115
            
            
            
            122Provision
      for (decreases) increases in losses associated with bankruptcy filings of
      Northwest and Mesaba
            
            
            (2
            )
            
            
            (105
            )
            
            
            138
            
            
            
            -
            
            
            
            -Total
      operating expenses
            
            $
            1,300
            
            
            $
            1,679
            
            
            $
            1,882
            
            
            $
            1,754
            
            
            $
            1,864





Years Ended December
      31,2007
            
            
            2006
            
            
            2005
            
            
            2004
            
            
            2003Operating
      expenses per available seat mile (in cents):Salaries,
      wages and benefits
            
            
            3.07
            
            
            
            2.51
            
            
            
            2.34
            
            
            
            2.49
            
            
            
            3.11Aircraft
      fuel(1)
            
            
            0.58
            
            
            
            1.94
            
            
            
            1.96
            
            
            
            1.98
            
            
            
            2.05Aircraft
      maintenance, materials and repairs
            
            
            1.32
            
            
            
            0.62
            
            
            
            0.56
            
            
            
            0.56
            
            
            
            0.53Aircraft
      rentals(1)
            
            
            2.10
            
            
            
            4.68
            
            
            
            4.85
            
            
            
            4.95
            
            
            
            5.09Other
      rentals and landing fees
            
            
            0.89
            
            
            
            0.77
            
            
            
            0.75
            
            
            
            0.88
            
            
            
            1.09Ground
      handling services
            
            
            1.48
            
            
            
            1.55
            
            
            
            1.62
            
            
            
            1.56
            
            
            
            1.67Depreciation
      and amortization
            
            
            0.14
            
            
            
            0.07
            
            
            
            0.07
            
            
            
            0.08
            
            
            
            0.11Government
      reimbursements
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (0.04
            )Commissions
      and passenger related expenses
            
            
            0.37
            
            
            
            0.07
            
            
            
            0.07
            
            
            
            0.09
            
            
            
            0.09Other
            
            
            1.20
            
            
            
            0.92
            
            
            
            0.95
            
            
            
            0.88
            
            
            
            0.96Provision
      for (decreases) increases in losses associated with bankruptcy filings of
      Northwest and Mesaba
            
            
            (0.02
            )
            
            
            (0.77
            )
            
            
            1.04
            
            
            
            -
            
            
            
            -Total
      operating expenses
            
            
            11.13
            
            
            
            12.36
            
            
            
            14.21
            
            
            
            13.47
            
            
            
            14.66





(1)  As
      discussed in “Pinnacle’s Agreements with Major Airlines” in Item 1. Businesscertain
      significant expenses such as fuel and aircraft rentals are eliminated or
      reduced under the ASA.








24
 Item 7. Management's Disussion and
Analysis of Financial Condition and Results of
Operations





Overview





The year
ended December 31, 2007 brought significant changes to our Company.  We
began 2007 by operating under our amended ASA with Northwest and with the
January acquisition of Colgan Air, Inc.  Colgan allows us to diversify our
fleet and offer a platform for turboprop aircraft.  In addition to this
acquired growth, we experienced growth by entering into new capacity purchase
agreements with both Delta and Continental.  In February, we announced that
we entered into a 10-year agreement with Continental Airlines to operate at
least 15 Q400 regional aircraft.  Shortly thereafter, we announced in April
a new 10-year agreement with Delta Air Lines to operate at least 16 CRJ-900
regional aircraft  We firmly believe that the Q400 and CRJ-900 regional
aircraft provide the right products for future growth in a time where fuel
prices have risen significantly and when customers demand a comfortable aircraft
cabin.  To further grow our business, we intend to continue our efforts to
market these aircraft to both our existing customers and to other branded
airlines.





Pinnacle
completed 438,988 block hours and 265,418 departures, increases of 6% and 6%,
respectively, over 2006. Colgan completed 126,675 block hours and 107,171
departures from the acquisition date of January 18, 2007 through the end of the
year.





For the
year ended December 31, 2007, the Company recorded operating revenue of $787.4
million, a decrease of $37.2 million, or 5%, over 2006. Operating revenue was
reduced by approximately $323.8 million for contractual changes in the ASA,
which are discussed in detail within our Results of Operations below. The
amortization of net deferred revenue associated with Pinnacle's ASA also
increased revenue by approximately $22.6 million. The acquisition of Colgan
increased the Company's consolidated revenue by approximately $192.4
million.





Operating
income and operating margin were $52.1 million and 6.6%, respectively, for 2007.
The Pinnacle Segment achieved a full year operating margin of 9.5%, while the
Colgan Segement recorded a negative operating margin of (2.3)% for 2007.
Consolidated operating income and operating margin were approximately $85.3
million and 10.3%, respectively, excluding nonrecurring items, for 2006.
Contractual changes in Pinnacle's ASA with Northwest, net of the related
amortization of deferred revenue, reduced operating income by approximately
$21.1 million for 2007. In addition, we failed to earn $2.9 million of incentive
revenue related to our operational performance during the first half of 2007.
Pinnacle's operating income also declined by $5.8 million, primarily as a result
of increased costs associated with training for additional pilots due to the
industry-wide increase in pilot attrition in 2007, and anticipated costs
associated with the induction of the CRJ-900 aircraft into Pinnacle's fleet.
Colgan's operating loss of $4.5 million further contributed to the
year-over-year decline in operating income.





Net
income and EPS for the year ended December 31, 2007 were $34.6 million and
$1.50, respectively.








25
 Item 7. Management's Disussion and
Analysis of Financial Condition and Results of
Operations





Outlook





To better
understand our outlook for 2007, the following content within Item 7 should be
read in conjunction with Item 1A., Risk Factors and the Liquidity and Capital
Resources section of this item, both in this Annual Report on Form
10-K.





We plan
to grow the business of both our Pinnacle and Colgan subsidiaries by entering
into new capacity purchase contracts with airline partners that conduct branded
flying and by investing in new regional aircraft to support these
contracts.  We believe that a key factor in growing the business with
our airline partners is to maintain industry-leading operating performance,
measured by the percentage of scheduled flights that we complete and the
percentage of flights that arrive at their destination on time.  We
are currently scheduled to induct 12 CRJ-900 aircraft and 15 Q400 aircraft into
scheduled service during 2008 with Delta and Continental,
respectively.  Our focus in 2008 will be to implement this growth
strategy while continuing to maintain a high standard of operating
performance.





In
addition, we will focus on achieving future profitable growth in 2009 and beyond
by marketing our services to branded airlines in the United
States.  We have options and firm cancelable orders for an additional
30 Q400 aircraft, to be delivered between May 2009 and July
2010.  Continental has an option to add 15 of these aircraft under our
capacity purchase agreement, and we intend to market the remaining 15 to our
partners and other airlines with branded flying.  In addition to
growing our Q400 operations, we believe there will be opportunities to increase
regional jet capacity with major airlines, primarily with larger regional jets
having seating capacities of 70 to 90 seats.  Delta has an option to
add an additional seven CRJ-900 aircraft under our capacity purchase agreement,
and we intend to pursue this opportunity with Delta as well as opportunities
with other branded airlines.





Our
Colgan subsidiary’s existing operations are conducted under revenue pro-rate
code-share agreements.  Under this type of agreement, we select our
own routes, manage our fares and inventory of unsold seats, and incur all of the
costs of operating and marketing our flights.  We market our flights
under the brand of our code-share partners, and we pro-rate the revenue from
passengers who purchase a connecting ticket between flight segments operated by
us and our partners.  Under this type of flying, we bear the risk of
changes in the pricing structure and demand for travel in markets we serve, and
we bear the risk of changes in fuel prices.  Our Colgan subsidiary
experienced an operating loss of $4.5 million during 2007 related to its
existing base of revenue pro-rate operations.  Colgan incurred
significantly higher fuel costs during 2007, with the average price paid per
gallon increasing 29% from the first quarter of 2007 to the fourth quarter of
the same year.  In addition, Colgan incurred approximately $2.3
million in costs during 2007 associated with the introduction of Q400
operations.  We will focus on returning Colgan’s revenue pro-rate
operations to profitability during 2008 and have planned a number of initiatives
to accomplish this.  These initiatives include:





§
            Relocating
      nine essential air service markets from Pittsburgh under our US Airways
      code-share agreement to Washington Dulles under our United code-share
      agreement.  Washington Dulles is a larger hub airport than
      Pittsburgh with substantially more connecting opportunities for our
      passengers.  We expect this change to increase the number of
      passengers that we carry in these essential air service markets, thus
      increasing our passenger revenue. The transition will be complete by the
      end of the first quarter.





§
            Relocating
      Colgan’s maintenance base from Manassas, Virginia to Washington Dulles
      airport.  Relocating our maintenance base will significantly
      reduce the number of ferry flights in our system, lowering our operating
      costs.  We expect this move to be completed by the end of the
      first quarter.





§
            Implementing
      fuel conservation initiatives, such as tankering fuel at locations where
      we can purchase it at a lower cost, better planning of the amount of fuel
      we carry on our flights, and other measures designed to reduce the amount
      of fuel that we use.






26
 Item 7. Management's Disussion and
Analysis of Financial Condition and Results of
Operations




§
            Reducing
      maintenance costs by simplifying our maintenance structure, reducing the
      number of outstations where we maintain a line maintenance presence, and
      reducing the time it takes us to perform routine maintenance
      procedures.  In addition to reducing our maintenance costs,
      these measures will increase the number of aircraft available for
      scheduled service, thus increasing the utilization of our Saab
      fleet.





§
            Eliminating
      our Beech 1900 subfleet, thus reducing the carrying costs associated with
      supporting two aircraft types and reducing crew training
      costs.  We plan to retire the last Beech 1900 aircraft during
      the fourth quarter of 2008.





Colgan’s
financial performance is also subject to seasonal
fluctuations.  Colgan has historically incurred losses during the
first and fourth quarters each year when demand for air travel declines, and
earned income or incurred smaller losses during the second and third quarters
each year when air travel demand is higher.  A significant portion of
Colgan’s 2007 operating loss was incurred during the month of December, when
passenger demand typically drops considerably in the markets that Colgan
serves.  We also expect Colgan to incur an operating loss during the
first quarter of 2008.  We expect this seasonality to continue to
impact Colgan’s pro-rate financial results in future periods.





During
2008, we will monitor the effectiveness of initiatives we are implementing to
improve Colgan’s financial performance, and we will also monitor external trends
such as passenger demand and the price of fuel.  The initiatives we
implement may not improve Colgan’s performance enough to restore
profitability.  In addition, decreases in unit revenue or increases in
the price of fuel may further deteriorate Colgan’s financial
performance.  We may incur a loss on Colgan’s pro-rate operations for
the full year of 2008.  We do not intend to grow our level of pro-rate
flying beyond our current operations at Colgan, and we may determine in the
future that it will be necessary to reduce or eliminate entirely the pro-rate
operations that we currently perform, focusing instead on growing Colgan’s
capacity purchase business.





Our
Pinnacle subsidiary has been in negotiations with the Air Line Pilots
Association (“ALPA”) since April 2005.  In August 2006, Pinnacle filed
for mediation with the National Mediation Board.  Since that time,
Pinnacle has met periodically, with and without the mediator assigned to the
negotiations, but the parties have not reached an agreement.  During
the fall of 2007, ALPA filed a lawsuit against Pinnacle seeking to enjoin
Pinnacle from offering signing bonuses and other incentive payments to its first
officers.  The Company believes the lawsuit is without
merit.  In January 2008, Pinnacle filed a lawsuit against ALPA,
alleging that ALPA has not negotiated in good faith for a new collective
bargaining agreement.  It is of utmost importance to us to reach an
agreement with ALPA that is consistent with our company-wide philosophy of
industry-average pay and benefits with enhanced employee
productivity.  Pinnacle’s pilot group is currently paid below industry
average, and a new collective bargaining agreement is expected to contain an
increase in pay for Pinnacle’s pilots.  While Pinnacle intends to
vigorously pursue obtaining a fair contract with ALPA, the timing of resolving
this matter cannot be predicted.





In 2007,
Colgan recognized the United Steel Workers to represent Colgan’s flight
attendants.  Colgan will begin negotiating for a flight attendant
collective bargaining agreement with the United Steel Workers
shortly.  We do not expect this new collective bargaining agreement to
have a material impact on our financial results.





We are
currently engaged in discussions with Northwest involving various disputed
payments under our ASA, including items that relate to the period prior to
commencement of our current ASA in January 2007.  Two of these items could
affect our operating income in future periods.  The first item relates
to a 2006 adjustment to our block hour, departure, and fixed cost rates. 
Our annual operating income could increase or decrease by approximately $2.8
million per year based upon differing interpretations of the relevant ASA
terms.  The second issue involves the reclassification of certain airport
and ground handling costs and related ASA revenue in a manner that could reduce
the Company’s operating income in future periods by up to approximately $2.0
million per year going forward.





If we are
unable to resolve these issues directly with Northwest, the parties may enter
into an arbitration process or other form of legal dispute
resolution.  Adverse determinations in these matters could result in a
loss to the Company of up to $7.2 million for disputed amounts through December
31, 2007.  We believe that we will prevail in these matters, and
therefore, we do not believe a loss is probable at this time.  However, we
may not be successful in resolving these disputes without reducing our income
going forward, or without paying Northwest for some or all of the amount noted
above.  We cannot currently predict the timing of the resolution of
these matters.





27
 Item 7. Management's Disussion and
Analysis of Financial Condition and Results of
Operations





The airline
industry in general is experiencing a shortage of qualified pilots to absorb the
recent growth in industry capacity.  This shortage has particularly
affected regional airlines such as Pinnacle, as major airlines typically recruit
new pilots from within the ranks of regional airlines.  During the
first quarter of 2007, Pinnacle began experiencing higher than normal attrition,
primarily due to pilots leaving for positions at major carriers.  Both
of our operating subsidiaries have enacted programs to increase pilot recruiting
and training efforts.  Assuming pilot attrition remains at current
levels, we believe that our subsidiaries will have adequate flight crews to
maintain our commitments to all of our operating partners for the foreseeable
future.  While we expect staffing levels at our subsidiaries to be
adequate going forward, we also expect higher than normal training costs in the
first half of 2008 as we recruit pilots, flight attendants and mechanics for our
new Q400 and CRJ-900 operations.





Recent
published reports speculate that a number of airlines are considering various
forms of consolidation, including some of our partners.  Specifically,
reports have indicated that Delta is considering a business combination with
either United or Northwest.  We do not believe that major airline
industry consolidation will materially affect our current operations, as our
regional airline services agreements are relatively long-term and do not contain
early termination provisions that could be triggered by
consolidation.  In addition, we believe that we have maintained strong
relationships with all of our partners, and that we will continue to be an
important part of our partners’ networks with or without industry
consolidation.





Both
Delta and AMR Corp., parent of American Airlines and American Eagle, have
publicly stated that they intend to sell or spin off their wholly owned regional
airline subsidiaries.  In addition, consolidation amongst airlines
with branded flying may spark consolidation within the regional airlines that
support them.  While we have no plans to merge with or acquire another
airline, we will continue to review the competitive landscape and make certain
that we are best positioned to benefit our stakeholders if consolidation occurs
within the airline industry.





We invest
in auction rate securities (“ARS”) that provide for an interest rate reset
through a “dutch auction” process in periods spanning from 7 to 35 days (See
Note 16 in Item 8 of this Form 10-K for additional ARS
related information).  In February 2008 when our invested balance
approximated $136 million, auctions of our ARS failed to generate enough demand
to successfully reset interest rates.  We must either hold the
securities until the next successful auction or attempt to sell the securities
through a privately-placed secondary market transaction; until such time we are
earning a contractual maximum interest rate on each security.





We are
monitoring the ARS market closely.  While we wait for both the ARS
market to rationalize and for investor demand to return, we have arranged for a
margin loan facility for a total of up to $60 million (the “Term loan”) to be
used to support our aircraft purchases and other liquidity needs, which we
believe will be sufficient to supplement our cash flows from operations and meet
our other current liquidity needs.  Because of the unprecedented
events in the ARS market, we cannot predict when liquidity in the ARS market
will return.  Although we believe our securities continue to represent
good investments due to the AAA/Aaa credit ratings of the underlying
investments, we may be forced to sell some of our ARS portfolio under
distressed, illiquid market conditions, which could result in our recognizing a
loss on such sales.  In addition, we may reclassify all or a portion
of our ARS portfolio as long-term investments, and we may record an impairment
charge in future periods if we determine that the decline in value of our ARS
portfolio is other-than-temporary or will not recover before we sell the
investment.





Critical Accounting
Policies





Our
discussion and analysis of our financial condition and results of operations is
based upon our financial statements, which have been prepared in accordance with
generally accepted accounting principles in the United States. The preparation
of these financial statements requires us to make estimates and judgments that
affect the reported amounts of assets, liabilities, revenues and
expenses.  The SEC has defined critical accounting policies as those
policies that are most important to the preparation of our consolidated
financial statements and require management’s subjective and complex judgments
due to the need to make estimates about the effect of matters that are
inherently uncertain.  See also Note 2 in Item 8 of this Form 10-K for
a discussion of new and proposed accounting standards.





28
 Item 7. Management's Disussion and
Analysis of Financial Condition and Results of
Operations





Revenue
Recognition





Nature of Estimates
Required: Our
capacity purchase agreements include provisions that under certain circumstances
require rate adjustments related to the allocation of overhead expenses. 
These allocations ultimately affect the revenue recognized.  Additionally,
our code-share agreements include incentive payment provisions whereby revenue
is adjusted should we achieve certain operating metrics.  In some
instances, uncertainty exists as to the party responsible for causing a negative
effect on the relevant operating metric.  Our code-share partners may
dispute the amount billed and pay less than the amount invoiced if it interprets
the agreement differently than we do.





Assumptions and Approach
Used: Our operating revenues are calculated based on our interpretation
of the underlying code-share agreements.





Effect if Different Assumptions
Used:If our interpretation differs materially from those of our
code-share partners, our revenue could be materially understated or
overstated.  For example, during the second quarter of 2007, we estimated
our operating performance under the ASA to have resulted in lost incentive
revenue of approximately $2.4 million for the first six months of 2007, while
Northwest asserted lost incentive revenue of $4.8 million.  Subsequent to a
detailed analysis of the facts underlying the cause of the operating
performance, we ultimately settled the issue for approximately $2.9
million.





Income Tax
Reserves





Nature of Estimates
Required: On January 1, 2007, we
adopted Financial Accounting Standards Board (“FASB”) Interpretation No. 48,
Accounting for Uncertainty in
Income Taxes (“FIN 48”). This interpretation establishes new standards
for the financial statement recognition, measurement and disclosure of uncertain
tax positions taken or expected to be taken in income tax
returns.  Under FIN 48, we recognized tax benefits only for income tax
positions that are more likely than not to be sustained upon examination by tax
authorities.  The amount recognized is measured as the largest amount
of benefit that is greater than fifty percent likely to be realized upon
settlement with the tax authority.  The cumulative effect of adopting FIN
48 was immaterial to our financial statements.  We classify interest
related to income tax liabilities as interest expense, and if applicable,
penalties are recognized as a component of income tax expense.  These
income tax liabilities and accrued interest and penalties are presented as
current liabilities in our consolidated balance sheets.





In
addition to our federal tax return, we file numerous state income tax
returns.  We are no longer subject to U.S. federal income tax examination
for years through 2003 except for specific U.S. federal income tax positions
that are in various stages of appeal. No resolution date can be reasonably
estimated at this time for these appeals.





Assumptions and Approach
Used: Our income tax reserves are based on management’s assessment
of an issue’s expected resolution, based on several factors, including tax
audits, appeals, litigation, changes in tax laws and other rules and the history
of how the issue has been treated by other airlines.





Effect if Different Assumptions
Used:   It is difficult to predict the ultimate outcome or the
timing of resolution for tax positions under FIN 48. Changes may result from the
conclusion of ongoing audits or appeals in state, local, and federal tax
jurisdictions. Our liability for tax positions under FIN 48 includes one matter
that is individually material. Specifically, we are currently under audit by the
Internal Revenue Service (“IRS”) for the tax years 2003 through 2005.  In
May 2007, the IRS proposed certain adjustments to our positions related to
various exam matters.  We have submitted a protest to the IRS with respect
to these adjustments, and we are awaiting the start of an administrative appeals
process.  Should the IRS prevail on these adjustments, the impact could be
significant.  We believe the potential tax exposure related to the items
the IRS has focused on during its examinations would not exceed $35.0 million
plus penalties of $9.7 million, of which we have reserved $16.7 million. 
Should the IRS prevail in obtaining the additional amount, future earnings could
be reduced by approximately $18.0 million.  It is reasonably possible that
the amount of the benefit with respect to certain of our unrecognized tax
positions will increase or decrease within the next 12 months, but an
estimate of the range of the reasonably possible outcomes cannot be made.
However, should the IRS prevail in its arguments, the resolution of any of our
tax positions under FIN 48 could be material.





29
 Item 7. Management's Disussion and
Analysis of Financial Condition and Results of
Operations





Long-Lived
Assets





Goodwill





Nature of Estimates
Required:Our long-lived assets consist of goodwill and intangible assets,
as well as property and equipment.  Under Statement of Financial Accounting
Standard No. 142, Goodwill and
Other Intangible Assets(“SFAS 142”), intangible assets can have either
finite or indefinite useful lives.  As of December 31, 2007, we had
approximately $28.2 million and $17.1 million in goodwill and identifiable
intangible assets with definite lives, respectively. Under SFAS 142, goodwill
and intangible assets with indefinite useful lives should be tested at least
annually for impairment.  Factors considered important when determining the
impairment of goodwill under SFAS 142 include items affecting the cash flows of
the reporting segments; significant changes in the underlying business strategy
or operational environment; material ongoing industry or economic trends; or
other factors specific to the asset or reporting segments being evaluated. 
Any changes in the key assumptions about the business and its prospects, or
changes in market conditions or other externalities could result in an
impairment charge.





Assumptions and Approach
Used:  Our cash flow estimates are based on historical results
adjusted to reflect our best estimate of future market and operating conditions.
Our estimates of fair value represent our best estimate based on industry trends
and reference to market rates and transactions.  Other assumptions include
determining the appropriate discount rate, which represents our weighted average
cost of capital.  Factors indicating potential impairment include, but are
not limited to, significant decreases in the market value of the long-lived
assets, a significant change in the condition of the long-lived assets and
operating cash flow losses associated with the use of the long-lived
assets.





Effect if Different Assumptions
Used:Based on the results of these evaluations, we concluded no
impairment was necessary as of December 31, 2007.  However, there is
inherent risk in estimating the future cash flows used in the impairment test.
If cash flows do not materialize as estimated, there is a risk impairment
charges may be necessary in the future.  As such, an impairment charge
could affect earnings by as much as the carrying values of the assets listed
above.





Property and
Equipment





Nature of Estimates Required:More than 35% of our total assets are invested in property and equipment,
which will continue to increase as we acquire additional aircraft to support our
new agreements with Delta and Continental. We capitalize only
those costs that meet the definition of capital assets under accounting
standards. Accordingly, repair and maintenance costs that do not extend the
useful life of an asset or are not part of the cost of acquiring the asset are
expensed as incurred.  The depreciation of our property and equipment over
their estimated useful lives, and the determination of any salvage values,
requires management to make judgments about future
events.





Assumptions and Approach
Used:  Because we utilize most of our property and equipment over
relatively long periods, we periodically evaluate whether adjustments to our
estimated service lives or salvage values are necessary to ensure these
estimates properly match the economic use of the asset. When necessary, we will
engage airline industry specialists to assist with the determination of relevant
estimates.  This evaluation may result in changes in the estimated lives
and residual values used to depreciate our aircraft and other equipment. These
estimates affect the amount of depreciation expense recognized in a period and,
ultimately, the gain or loss on the disposal of the asset.  However, such
amounts may differ materially in the future due to technological obsolescence,
accident frequency, regulatory changes and other factors beyond our
control.





The
accounting test for whether an asset held for use is impaired involves first
comparing the carrying value of the asset with its estimated future undiscounted
cash flows. If the cash flows do not exceed the carrying value, the asset must
be adjusted to its current fair value. We have not experienced any significant
impairment of assets to be held and used. However, from time to time we make
decisions to remove certain long-lived assets from service based on projections
of reduced capacity needs and those decisions may result in an impairment
charge.  There were no material asset impairment charges recognized in
2007, 2006 or 2005.





30
 Item 7. Management's Disussion and
Analysis of Financial Condition and Results of
Operations





Effect if Different Assumptions
Used:Any impairment charge could affect earnings by as much as the
carrying values of the assets.





Spare Parts and
Supplies





Nature of Estimates
Required:
Inventories, expendable parts and maintenance supplies relating to flight
equipment are carried at cost and are expensed when the inventory is used. 
An allowance for obsolescence is provided over the remaining estimated useful
life of the related aircraft equipment, for spare parts expected to be on hand
at the date the aircraft are retired from service, plus allowances for spare
parts currently identified as obsolete or excess. We will continue to modify
these estimates as our fleet ages.  The adequacy of our allowance for
obsolescence requires a high degree of judgment.





Assumptions and Approach
Used: Our
allowance for obsolescence related to inventory is provided over the remaining
useful life of the related aircraft, plus allowance for spare parts currently
identified as excess.  Part of the calculation for this reserve is based on
historical experience.  In addition, we may reserve for additional
obsolescence when we deem parts as excess inventory.





Effect if Different Assumptions
Used: As of December 31, 2007, our allowance for obsolescence related to
our spare parts and supplies was approximately $2.5 million.  If we
increase the reserve by 10%, the impact on pre-tax income is
immaterial.





We have
made certain other estimates that, while not involving the same degree of
judgment, are important to understanding our financial statements.  We
continually evaluate our accounting policies and the estimates we use to prepare
our consolidated financial statements. Our estimates as of the date of the
financial statements reflect our best judgment after giving consideration to all
currently available facts and circumstances. Therefore, actual results may
differ significantly from these estimates and may require adjustment in the
future, as additional facts become known or as circumstances
change.  Management has discussed the development of these critical
accounting estimates with the audit committee of our board of directors, and the
audit committee has reviewed the disclosures presented above relating to
them.For more
information, see Note 2 in Item 8 of this Form 10-K.





31
 Item 7. Management's Disussion and
Analysis of Financial Condition and Results of
Operations





Basis of
Presentation





Our
consolidated statements of income for the years ending December 31, 2007, 2006
and 2005 can be compared as follows (in thousands):





2007
            
            
            Increase/
              (Decrease)
      2007-2006
            
            
            2006
            
            
            Increase/
              (Decrease)
      2006-2005
            
            
            2005Operating
      revenues:Regional
      airline services
            
            $
            777,179
            
            
            
            (5
            )%
            
            $
            816,787
            
            
            
            (2
            )%
            
            $
            833,125Other
            
            
            10,195
            
            
            
            30
            %
            
            
            7,836
            
            
            
            (8
            )%
            
            
            8,480Total
      operating revenues
            
            
            787,374
            
            
            
            (5
            )%
            
            
            824,623
            
            
            
            (2
            )%
            
            
            841,605Operating
      expenses:Salaries,
      wages and benefits
            
            
            202,860
            
            
            
            43
            %
            
            
            141,835
            
            
            
            6
            %
            
            
            134,277Aircraft
      fuel
            
            
            38,487
            
            
            
            (65
            )%
            
            
            109,224
            
            
            
            (3
            )%
            
            
            112,666Aircraft
      maintenance, materials and repairs
            
            
            86,899
            
            
            
            148
            %
            
            
            35,110
            
            
            
            10
            %
            
            
            31,865Aircraft
      rentals
            
            
            138,661
            
            
            
            (48
            )%
            
            
            264,124
            
            
            
            (5
            )%
            
            
            277,914Other
      rentals and landing fees
            
            
            58,986
            
            
            
            37
            %
            
            
            43,135
            
            
            
            0
            %
            
            
            42,972Ground
      handling services
            
            
            97,843
            
            
            
            12
            %
            
            
            87,390
            
            
            
            (6
            )%
            
            
            92,689Depreciation
      and amortization
            
            
            9,265
            
            
            
            132
            %
            
            
            3,985
            
            
            
            (1
            )%
            
            
            4,017Commissions
      and passenger related
            
            
            24,204
            
            
            
            552
            %
            
            
            3,711
            
            
            
            (11
            )%
            
            
            4,155Other
            
            
            79,129
            
            
            
            52
            %
            
            
            52,132
            
            
            
            (4
            )%
            
            
            54,522Provision
      for (decreases) increases in losses associated with bankruptcy filings
      of  Northwest and Mesaba
            
            
            (1,048
            )
            
            
            98
            %
            
            
            (43,571
            )
            
            
            173
            %
            
            
            59,599Total
      operating expenses
            
            
            735,286
            
            
            
            5
            %
            
            
            697,075
            
            
            
            (14
            )%
            
            
            814,676Operating
      income
            
            
            52,088
            
            
            
            (59
            )%
            
            
            127,548
            
            
            
            374
            %
            
            
            26,929Nonoperating
      (expense) income
            
            
            (1,051
            )
            
            
            (64
            )%
            
            
            (2,948
            )
            
            
            (120
            )%
            
            
            14,482Income
      before income taxes
            
            
            51,037
            
            
            
            (59
            )%
            
            
            124,600
            
            
            
            201
            %
            
            
            41,411Income
      tax expense
            
            
            16,400
            
            
            
            (65
            )%
            
            
            46,801
            
            
            
            198
            %
            
            
            15,713Net
      income
            
            $
            34,637
            
            
            
            (55
            )%
            
            $
            77,799
            
            
            
            203
            %
            
            $
            25,698








32
 Item 7. Management's Disussion and
Analysis of Financial Condition and Results of
Operations





Consolidated Results of
Operations





2007 Compared to
2006





Operating Revenues.Consolidated regional airline services revenue of $777.2 million
decreased by $39.6 million, or 5%, from regional airline services revenue of
$816.8 million for the same period in 2006.  The decrease in revenue
was primarily due to the decrease in revenue associated with expense
reimbursements from Northwest and a reduction in Pinnacle’s target operating
margin of 10% in 2006 to 8% effective January 1, 2007.  The most
significant decreases in reimbursable expenses were aircraft fuel and aircraft
rent. Under the ASA, Northwest now provides jet fuel to Pinnacle at no cost,
whereas in 2006, jet fuel was a reimbursable expense.  This change
resulted in a decrease in revenue of $129.0 million over the same period in
2006.  Also under the ASA, our aircraft rental expense has been
lowered to a rate that approximated market rates at that
time.  Revenue related to aircraft rent reimbursed by Northwest
decreased $185.2 million over the same period in 2006 as a result of this
change.  The decrease in revenue is also attributable to
incentive-based revenue not earned related to the pilot shortage that negatively
affected our first quarter operations.  As a result of reducing
capacity below planned levels, Pinnacle did not meet the required completion
factor goal for the six months ended June 30, 2007 under the
ASA.  Consequently, we did not earn incentive-based revenue of
approximately $2.9 million for the six months ended June 30,
2007.  These revenue decreases are offset by the addition of $192.4
million in revenue related to Colgan, of which $14.5 million was attributable to
essential air services (“EAS”), as discussed in Note 4 of Item 8 of this Form
10-K.  In addition, these revenue decreases are offset by the
recognition of deferred ASA revenue of $22.6 million and the increases in
Pinnacle’s revenue related to a 6% increase in block hours and departures due to
an increase in Pinnacle’s fleet compared to 2006.





Other
revenue of $10.2 million increased by $2.4 million, or 30%, compared to other
revenue of $7.8 million for the same period in 2006.  The increase in
revenue is primarily attributable to a $2.4 million increase related to our
agreement to provide ground handling services to Northwest for its own flights
at six additional cities under a separate agreement.  The increase is
also attributable to a $0.3 million increase in revenue for other services and
to the addition of $0.3 million in other revenue related to
Colgan.  These increases are offset by a decrease of $0.6 million of
ground handling services to other airlines.





Operating Expenses.Total
operating expenses increased by $38.2 million and 5%.  The increase in
operating expenses is primarily related to the addition of Colgan offset by the
changes to our ASA, primarily to aircraft fuel and aircraft rent.





Salaries,
wages and benefits increased by $61.0 million, or 43%, primarily due to the 38%
increase in the average number of employees.  The increase in
employees is primarily due to the acquisition of Colgan during the first quarter
of 2007.





Aircraft
fuel expense decreased $70.7 million, or 65%, primarily due to the contractual
change in the ASA whereby passenger fuel costs are now provided by Northwest at
no cost to Pinnacle.  Aircraft fuel expenses incurred by Colgan
accounted for $38.1 million, or 99%, of the expense in 2007.





Aircraft
maintenance, materials and repairs expenses increased by approximately $51.8
million and 148%.  Maintenance expense incurred by Colgan accounted
for $38.4 million, or 74%, of this increase.  Additionally, Pinnacle
incurred an additional $5.9 million of heavy check expense during 2007, which is
caused by an increase in the number of heavy checks performed as its fleet
ages.  The additional maintenance expense was also attributed to the
11% increase in Pinnacle’s operating fleet.





Aircraft
rental expense decreased $125.5 million, or 48%, primarily due to the terms of
the amended ASA with Northwest, slightly offset by $8.5 million of rent expense
incurred by Colgan.  Effective January 1, 2007, our monthly lease
rates were reduced to rates that approximated market conditions at that
time.  As previously noted, we sublease our CRJ-200 aircraft from
Northwest under operating leases that expire December 31,
2017.  Northwest reimburses in full all rental expense for the CRJ-200
aircraft operated under the ASA.




33
 Item 7. Management's Disussion and
Analysis of Financial Condition and Results of
Operations




Ground
handling services increased by $10.5 million, or 12%, due to the $12.1 million
of ground handling expense attributable to Colgan.  This increase is
offset by a decrease in Pinnacle’s ground handling expenses due to the increase
in the number of cities in which ground handling functions are performed by its
employees rather than being outsourced.





Commissions
and passenger related expense increased $20.5 million, primarily due to the
addition of Colgan expenses.  This caption is being presented for the
first time in 2007, as it is a material portion of Colgan’s operating
expenses.  Because Colgan has the responsibility of selling its own
tickets, it incurs costs related to these transactions.  We have not
previously incurred these costs as Northwest processes Pinnacle’s ticket sales
at no cost.  Also included in this amount are passenger related
expenses such as catering expense and interrupted trip expense.





The $27.0
million, or 52%, increase in other expenses is primarily attributable to $20.1
million in other operating expenses incurred by Colgan, which includes passenger
insurance, flight training, and administrative costs.  Also
contributing to the increase is the 11% increase in Pinnacle’s operating
fleet.





Nonoperating
Expense.Net nonoperating expense decreased by $1.9 million
compared to the same period in 2006.  The increase was caused by a
$3.3 million increase in interest expense, largely attributable to Colgan’s
operations offset by $2.9 million of capitalized interest, primarily related to
the acquisition of our Q400 and CRJ-900 aircraft, as discussed in Note 2 in Item
8 of this Form 10-K.  In addition, miscellaneous expense increased by
$3.9 million primarily related to the $4.1 million loss we recorded on the sale
of our $42.5 million bankruptcy claim against Northwest during the second
quarter of 2007, offset by $0.2 million related to gain on sale of fixed
assets.  Further offsetting the increase in nonoperating expense is a
$9.1 million increase in interest income from our significantly larger
short-term investment portfolio.  The increase in our portfolio
relates to the investment of proceeds received from the assignment of our
Northwest and Mesaba claims.





For the
year ended December 31, 2007, our income tax expense decreased $30.4 million
primarily related to the decrease in pre-tax income as compared to the same
period in 2006.  In addition, due to the tax free interest income on
our short-term investment portfolio, the Company’s effective tax rate decreased
by 5.5 points.





2006
Compared to 2005





Operating Revenues.2006
operating revenue of $824.6 million decreased $17.0 million, or 2%, over 2005
operating revenue of $841.6 million.  The decrease in revenue was
primarily due to a decrease of $24.4 million in revenue associated with expense
reimbursements.  The most significant decreases in reimbursable
expenses, primarily aircraft rent, other rentals and landing fees, aircraft fuel
and ground handling services provided by Northwest, were caused by a decreased
average fleet size in 2006. During 2005, 22 CRJ-200 aircraft were added,
although 15 of these aircraft were removed from the fleet effective November 1,
2005.  We continued to receive fixed payments on these 15 aircraft
through November 30, 2005.  The decrease in revenue from expense
reimbursements and an additional decrease of $8.6 million associated with our
decreased level of flying are partially offset by a rate increase in the 2002
ASA that increased revenue by $15.1 million for the year ended December 31,
2006.





Regional
airline services revenue per block hour for the years ended December 31, 2006
and 2005 were $1,968 and $1,925 respectively, which represents an increase of
approximately 2%. Regional airline services revenue per departure increased by
3% from $3,253 to $3,342. The variances in revenue per block hour and departure
are due primarily to a decrease in the average length of our flights of 6% over
the same periods.





Operating Expenses.Total
operating expenses decreased by $117.6 million and 14%.  The decrease
in operating expenses during 2006 was primarily due to a benefit of $43.6
million and losses of $59.6 million associated with the bankruptcy filings of
Northwest and Mesaba for the year ended December 31, 2006 and 2005,
respectively. Excluding the benefits and losses due to bankruptcy filings, for
the year ended December 31, 2006 operating expenses decreased by $14.4 million
and 2%.  The decrease in operating expense was due primarily to the
decreased average fleet size during 2006.





34
 Item 7. Management's Disussion and
Analysis of Financial Condition and Results of
Operations





Salaries,
wages and benefits increased by $7.6 million, or 6%, primarily due to the
increase in the average number of employees of 4%, as well as wage rate and
benefit increases.  The increase in employees is primarily due to an
agreement we entered into with Northwest during the fourth quarter of 2006,
under which we provide our own ground handling services at seven additional
cities under the 2002 ASA where we had previously been handled by
Northwest.  In addition, we agreed to provide ground handling services
to Northwest for its own flights at six additional cities under a separate
agreement.  As part of this transition, we incurred significant
hiring, training, and other startup costs and capital expenditures for ground
equipment.  The Company also recorded a $1.6 million postretirement
liability for pilots, of which $1.3 million was related to prior
periods.





Aircraft
fuel expense decreased $3.4 million, or 3%, due to the 4% decrease in block
hours and the 1% increase in departures, which was caused by a 6% decrease the
average length of flights.  In accordance with the 2002 ASA, passenger
fuel costs were reimbursed in full by Northwest and capped at $0.78 per
gallon.





Aircraft
maintenance, materials and repairs expenses that are reimbursed by Northwest
increased by $1.1 million and 7%.  Required heavy airframe maintenance
checks performed on our CRJ-200 aircraft increased during 2006.  Heavy
airframe maintenance checks were performed on 63 aircraft during 2006 versus 56
aircraft in 2005. This accounted for approximately $0.5 million of the increase
in reimbursed maintenance expenses.  The increase in non-reimbursable
expenses of $2.1 million was primarily due to the aging of our
fleet.





Aircraft
rental expense decreased $13.8 million, or 5%, due to the 4% decrease in average
fleet size of 129 in 2005 to 124 in 2006.  As previously noted, we
sublease our CRJ-200 aircraft from Northwest under operating leases that expire
December 31, 2017.  Through 2006, the monthly lease rates include
certain fleet management costs of Northwest and are not representative of the
rates paid by Northwest to third-party lessors.  Effective January 1,
2007, our monthly lease rates were reduced to a market-based
rate.  Under the ASA, Northwest reimburses in full aircraft rental
expense.





Ground
handling services decreased by $5.3 million, or 6%, due primarily to an increase
in the number of cities in which ground handling functions are performed by our
employees rather than being outsourced.  The remaining decrease is
attributable to a change in the mix of cities served.  However, this
decrease in expense for ground handling services is offset by the increase in
salaries and wages, as described above.





Other
expenses decreased by $2.4 million and 4%.  The decrease in
unreimbursed other expenses was driven by our decreased level of operations,
most notably a decrease of $0.5 million of expenses associated with overnight
travel for our pilots and flight attendants and $1.5 million attributable to a
decrease in professional service expenses.  Our 2005 professional
services expense included increased costs associated with state tax planning,
the audit of our financial statements and compliance with Section 404 of the
Sarbanes-Oxley Act of 2002, and the process of obtaining our second air carrier
certificate.  These costs decreased in 2006 as these projects did not
require the same level of assistance from outside professionals.





Nonoperating
Expense.  Nonoperating income (expense) decreased by $17.4
million primarily related to the purchase in 2005 of our outstanding $120.0
million note payable to Northwest at a discounted purchase price of $101.6
million.  As a result, nonoperating income for 2005 includes a gain of
$18.0 million, net of related fees, related to the repurchase of this
debt.





Income
tax expense increased by $31.1 million from 2005 to 2006. This increase was due
to an increase in our income before taxes, primarily attributable to change in
items associated with the bankruptcy filings of Northwest and
Mesaba.  In 2005, we recorded expense of $59.6 million relating to
this, whereas 2006 included a benefit of $43.6 relating to these
bankruptcies.  Excluding bankruptcy-related items, our effective tax
rates were 37.8% and 37.2% for the years ending December 31, 2006 and 2005,
respectively.





35
 Item 7. Management's Disussion and
Analysis of Financial Condition and Results of
Operations





Segmented Results of
Operations





Operating
Revenues


2007
            
            
            Increase/
              (Decrease)
      2007-2006
            
            
            2006
            
            
            Increase/
              (Decrease)
      2006-2005
            
            
            2005Operating
      revenues:Pinnacle
      Segment
            
            $
            595,053
            
            
            
            (28
            )%
            
            $
            824,623
            
            
            
            (2
            )%
            
            $
            841,605Colgan
      Segment
            
            
            192,405
            
            
            
            -
            
            
            N/A(1)
            
            
            
            -
            
            
            N/A(1)Other/
      Eliminations
            
            
            (84
            )
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Total
      operating revenues
            
            $
            787,374
            
            
            
            (5
            )%
            
            $
            824,623
            
            
            
            (2
            )%
            
            $
            841,605





(1)
            Colgan
      was purchased in January 2007 and as such, only one year is
      provided.





2007 Compared to
2006





The
Pinnacle Segment’s revenue of $595.1 million decreased by $229.6 million, or
28%, from the same period in 2006.  As previously discussed, the
decrease in revenue was primarily due to the changes in our ASA with Northwest,
which resulted in a decrease in revenue associated with expense reimbursements
from Northwest and a reduction in the target operating margin.  The
most significant decreases in reimbursable expenses were aircraft fuel and
aircraft rent.  The decrease in revenue is also attributable to
incentive-based revenue not earned due to our first quarter operations which
fell below certain operational metrics.  These revenue decreases are
offset by the recognition of deferred ASA revenue, the increase in revenue from
ground handling services and a 6% increase in block hours and departures due to
an increase in Pinnacle’s fleet size.





2006 Compared to
2005





The
Pinnacle Segment’s 2006 operating revenue of $824.6 million decreased by $17.0
million, or 2%, over 2005 operating revenue.  As previously discussed,
the decrease in revenue was primarily due to the decrease in our average fleet
size in 2006, which resulted in a decrease of certain expense reimbursements and
decreased level of flying.  The most significant decreases in
reimbursable expenses were primarily aircraft rent, other rentals and landing
fees, aircraft fuel and ground handling services provided by
Northwest.  The decrease in revenue from expense reimbursements due to
decreased level of flying was partially offset by a rate increase in the 2002
ASA.





Operating
Income


2007
            
            
            Increase/
              (Decrease)
      2007-2006
            
            
            2006
            
            
            Increase/
              (Decrease)
      2006-2005
            
            
            2005Operating
      incomePinnacle
      Segment
            
            $
            56,591
            
            
            
            (56
            )%
            
            $
            127,548
            
            
            
            374
            %
            
            $
            26,929Colgan
      Segment
            
            
            (4,503
            )
            
            
            -
            
            
            N/A(1)
            
            
            
            -
            
            
            N/A(1)Other/
      Eliminations
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Total
      operating income
            
            $
            52,088
            
            
            
            (59
            )%
            
            $
            127,548
            
            
            
            374
            %
            
            $
            26,929





(1)
            Colgan
      was purchased in January 2007 and as such, only one year is
      provided





36
 Item 7. Management's Disussion and
Analysis of Financial Condition and Results of
Operations





2007 Compared to
2006





The Pinnacle Segments 2007 operating
income of $56.6 million decreased by $71.0 million, or 56%, over the same period
in 2006.  The primary reason for the decrease in operating income was
due to the terms of the amended ASA with Northwest.  As previously
discussed, the terms of the ASA decreased expense reimbursements and reduced the
target operating margin, which as a result, lowered operating income by $229.6
million.  The changes in the ASA with Northwest also attributed to the
decrease in operating expenses, primarily aircraft fuel and aircraft rent, of
$158.6 million.





2006 Compared to
2005





The Pinnacle Segment’s 2006 operating
income of $127.5 million increased by $100.6 million, or 374%, for the same
period in 2005.  The primary reason for the increase is due to a
decrease of $117.6 million of operating expenses for 2006 compared to the same
period in 2005.  As previously discussed, the decrease in operating
expenses was primarily due to the benefit in 2006 and the losses in 2005
associated with the bankruptcy filings of Northwest and
Mesaba.  Corresponding to the decrease in operating expense, operating
revenue decreased by $17.0 million compared to the same period in 2005 primarily
due to the decrease in our average fleet size in 2006, which resulted in a
decrease of certain expense reimbursements and decreased level of
flying.





Liquidity and
Capital Resources





We
generate cash by providing regional airline and related services to our
code-share partners.  As of December 31, 2007, we had cash and
short-term investments of $214 million.  Cash flows from operations
were $275 million, $21 million, and $27 million for the years ended December 31,
2007, 2006, 2005.  We expect our cash flow from operations and our
financing arrangements to be sufficient to meet our ongoing capital requirements
and financial commitments.  Additionally, we do not expect to make
income tax payments during 2008-2010 due to the accelerated depreciation
recognized for tax purposes on the newly acquired CRJ-900 and Q400
aircraft.





As of
December 31, 2007, we had $187 million of short-term investments, which are
primarily composed of Auction Rate Securities (“ARS”).  As of February
22, 2008, our invested balance in these securities was approximately $136
million.  As discussed further in Note 16 in Item 8 of this Form 10-K,
these securities recently have become illiquid as fewer investors are
participating in the auction process.  We had planned to monetize a
portion of our ARS portfolio throughout 2008 to fund the non-financed portion of
our aircraft deliveries.  While we wait for both the ARS market to
rationalize and for investor demand to return, we have arranged for a margin
loan facility for a total of up to $60 million (the “Term loan”) to be used to
support our aircraft purchases.  The Term loan is pre-payable at any
time prior to maturity on February 28, 2009 should we elect to sell any of our
ARS portfolio.  The Term loan bears interest at the one month LIBOR
plus 2.0%.  We believe that this short-term financing facility in
addition to cash flows from our operations is adequate to meet our aircraft
funding requirements and related debt covenants.





37
 Item 7. Management's Disussion and
Analysis of Financial Condition and Results of
Operations





Contractual obligations. The
following chart details our debt and lease obligations at December 31, 2007 (in
thousands):


Payments Due by
      Period2008
            
            2009
            
            2010
            
            2011
            
            2012
            
            Thereafter
            
            TotalDebt
      (1)
            
            $
            73,514
            
            $
            9,110
            
            $
            5,644
            
            $
            4,490
            
            $
            3,812
            
            $
            169,756
            
            $
            266,326Interest
      payments on debt
            
            
            10,568
            
            
            8,606
            
            
            8,019
            
            
            7,667
            
            
            7,383
            
            
            67,360
            
            
            109,603Aircraft
      purchase commitments(2)
            
            
            500,858
            
            
            23,669
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            524,527Bank
      line of credit
            
            
            8,375
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            8,375Capital
      leases
            
            
            1,512
            
            
            1,306
            
            
            1,311
            
            
            777
            
            
            703
            
            
            174
            
            
            5,783Operating
      leases(3)
            
            
            140,454
            
            
            131,966
            
            
            129,653
            
            
            128,988
            
            
            127,786
            
            
            585,507
            
            
            1,244,354Purchase
      obligations (4)
            
            
            31,853
            
            
            1,002
            
            
            461
            
            
            337
            
            
            523
            
            
            7,413
            
            
            41,589Total
      contractual cash obligations
            
            $
            767,134
            
            $
            175,659
            
            $
            145,088
            
            $
            142,259
            
            $
            140,207
            
            $
            830,210
            
            $
            2,200,557





(1)
            The
      Company’s $121 million 3.25% senior convertible notes due 2025 (the
      “Notes”) did not meet the requirements in the fourth quarter 2007 to be
      convertible in the first quarter 2008.  As a result, the Notes
      are classified as a noncurrent liability on the Company’s consolidated
      balance sheet at December 31, 2007, and are included above in the
      “thereafter” column.  However, beginning in 2010, we can redeem
      the Notes for cash and holders of the Notes can require us to purchase all
      or a portion of the Notes for cash on February 5, 2010, February 5, 2015,
      and February 5, 2020.


(2)
            Amounts
      include $5.6 million forpre-delivery
      payments on aircraft committed to be paid in 2008 (as discussed in Note 17
      in Item 8 of this Form 10-K).  As discussed below, we have
      obtained commitments from EDC to finance a significant portion of this
      commitment for a term of 15 years from the delivery date of each
      aircraft


(3)
            The
      amounts noted above for operating leases include $1.1 billion of
      obligations for leased CRJ-200 aircraft from Northwest.  We are
      reimbursed by Northwest in full for CRJ-200 aircraft rental expense under
      the ASA.  For a more detailed discussion of operating leases,
      refer to Note 9 in Item 8 of this Form
10-K.


(4)
            Amounts
      include the $20 million purchase of our Series A Preferred Share from
      Northwest on January 2, 2008. Amounts include $6.4 million for the
      purchase of two aircraft hangars in 2008 if the Colgan selling
      shareholders are unable to sell to a third-party (as discussed in Note 3
      in Item 8 of this Form 10-K).  Also includes noncancelable
      commitments to purchase goods and services, including certain aircraft
      parts, aircraft engines and information technology software and
      equipment.





The table
above excludes $16.7 million related to the reserves for uncertain tax positions
as we are unable to make reasonably reliable estimates of the timing of any
potential settlement or resolution with the respective taxing
authorities.





In
February 2005, we issued $121.0 million principal amount of our 3.25% senior
convertible notes due 2025.  The Notes bear interest at the rate of
3.25% per year, payable in cash semiannually in arrears on February 15 and
August 15 of each year.  The Notes are convertible into a combination
of cash and common stock at a conversion price of approximately
$13.22.  The Notes are convertible in any quarter subsequent to a
quarter in which the closing price of our common stock exceeds $15.86 for 20 of
the last 30 trading days.  This condition was met during the first and
second quarters of 2007, causing the Notes to become convertible at the option
of each Note holder during the second and third quarters of
2007.  This condition was not met during the third and fourth quarters
of 2007, and consequently the Notes are not convertible at this
time.  No holders of the Notes tendered their notes for conversion
during the second and third quarters of 2007.  Consequently, due to
the option value imbedded within each Note, the Notes generally trade at values
higher than the fair value of the common stock and cash into which they could be
converted.  Although the Notes have been convertible and will possibly
be convertible during future periods, we do not expect a significant number of
holders to tender the Notes for conversion.  Nonetheless, in any
period during which the holders have the right to exercise the conversion
option, the Notes’ $121.0 million par value will be classified as a current
liability on our balance sheet.





38
 Item 7. Management's Disussion and
Analysis of Financial Condition and Results of
Operations





On
February 17, 2007, we entered into a purchase agreement for up to 25 firm and 20
option Q400 aircraft with Bombardier, Inc.  Under the agreement, we
are obligated to purchase a minimum of 15 Q400 regional
aircraft.  These 15 firm aircraft will be delivered to our Colgan
subsidiary between January 2008 and June 2008.  We have a right of
cancellation for an additional ten firm aircraft for which notice is required by
April 2008 for the first five such aircraft and by July 2008 for the remaining
five aircraft.  If we do not exercise these cancellation rights, then
we will take delivery of these ten additional aircraft between May 2009 and
February 2010.  In addition to the 25 firm aircraft, we have optional
rights to acquire 20 Q400 aircraft that would be delivered between May 2009 and
July 2010.





On April
27, 2007, Delta Air Lines assigned to us its rights to purchase 16 CRJ-900
aircraft from Bombardier, Inc.  We took delivery of three of these
aircraft in November and December 2007, though only one of these aircraft
entered scheduled service during 2007.  We will take delivery of the
remaining aircraft between January 2008 and January 2009.  Under our
capacity purchase agreement with Delta, Delta may also require us to purchase an
additional seven CRJ-900 aircraft to operate.





Our
aggregate purchase commitment for non-cancelable aircraft orders with Bombardier
for both the Q400 aircraft and the remaining CRJ-900 aircraft is approximately
$525 million.  We are required to make pre-delivery payments to
Bombardier, which are refunded to us upon the delivery of the
aircraft.  During September and October 2007, we executed two
pre-delivery payment financing facilities (the “PDP Facilities”) withExport
Development Canada (“EDC”) for up to $80 million to provide borrowings to fund
our pre-delivery payment commitments to Bombardier.  Borrowings under
the pre-delivery payment facilities bear interest at the 3-month LIBOR rate plus
1.65%, which was 6.48% as of December 31, 2007.  The outstanding
balance for the borrowings as of December 31, 2007 was $64
million.  As each aircraft is delivered to us, we will repay the
associated borrowings under the PDP Facilities.





Upon
delivery of our first three CRJ-900 aircraft in 2007, we obtained long-term
financing of $60.3 million for the aircraft from EDC.  We expect to
finance the purchase of the remaining 28 aircraft using a combination of
internal capital resources and debt financing.  We have obtained
commitments from EDC to finance the aircraft for a term of 15 years from the
delivery date of each aircraft.  The approximate remaining borrowing
commitment is $446 million of the approximate remaining purchase price of $525
million.  We expect to fund the approximate remaining $79 million from
internal capital resources.





To reduce
the financial risk associated with changes in long-term interest rates while we
take delivery of the Q400 and CRJ-900 aircraft, we initiated a cash flow hedging
program during July 2007.  The program consists of interest rate swaps
whereby we agree to pay a fixed interest rate and receive the six-month LIBOR
rate.  The swaps have been or will be cash settled when the permanent
financing is obtained at the time we take delivery of the
aircraft.  As of February 28, 2008, we have hedged approximately $436
million or 78% of the $560 million we expect to finance.  The average
hedged interest rate is approximately 5.27%.  Should interest rates
change by 100 basis points before we take delivery, and assuming that we do not
hedge the anticipated debt on the remaining firm noncanceable aircraft,
aggregate interest expense in the first year of financing would change by
approximately $1.2 million.  During 2007, the Company made prepaid
interest payments of $1.3 million in connection with its cash flow hedging
program.  As of December 31, 2007, the Company expected to make
additional prepaid interest payments of $16.8 million during 2008.





In
December 2007, we financed the purchase of a CRJ-900 engine from General
Electric Capital Corporation (“GE”) for $3.4 million.  During 2008, we
expect to purchase additional inventory and spare engines for our new CRJ-900
and Q400 aircraft totaling approximately $9.8 million.  We expect to
use internal resources and financing from the engine manufacturers or third
parties to fund these inventory and spare engine purchases.





The
Company maintains a revolving line of credit with an institutional lender for a
principal amount not to exceed $8.5 million or 75% of the net unpaid balance of
eligible accounts receivable.  This instrument has an interest rate of
Prime plus 0.25%.  In June 2007, the Company extended the termination
date of the loan to April 15, 2008.  Amounts outstanding under the
line of credit were $8.4 million at December 31, 2007.





39
 Item 7. Management's Disussion and
Analysis of Financial Condition and Results of
Operations





As part
of our agreement to purchase Colgan, we agreed to purchase from one of its
selling shareholders two aircraft hangars located in Manassas, Virginia if the
selling shareholders are unable to consummate a sale to a
third-party.  The Company agreed to purchase the two hangars for a
purchase price of $6.4 million, which approximates their fair
value.





The IRS
is currently examining our tax records for years 2003 through
2005.  The IRS has proposed adjustments related to certain key
transactions that we undertook during those periods.  The adjustments
would increase our tax liability for these periods by approximately $33 million
(net of offsetting timing differences within these periods) plus penalties of
$9.7 million.  We have filed a formal protest with respect to these
proposed adjustments and are awaiting the start of an administrative appeal
process within the IRS.  We continue to believe that the tax positions
we have taken are appropriate and in compliance with tax law and
regulations.  Although we believe our tax positions are appropriate,
we have recorded reserves totaling $16.7 million.  While we believe
our reserves are adequate for each identified issue, our liquid assets would be
significantly reduced if we are ultimately required to make payments to the IRS
for taxes and related interest and penalties associated with these proposed
adjustments.





Operating activities. Net
cash provided by operating activities was $275.5 million during the year ended
December 31, 2007.  This was due primarily to the $271.7 million
increase in deferred revenue, which was primarily comprised of the approximately
$311 million of proceeds received from the assignment of our Northwest claims,
offset by the elimination of our pre-petition receivables balance of
approximately $42 million.





As of
December 31, 2007, we had $214 million of cash and short-term investments,
comprised of $27 million in cash and cash equivalents and $187 million in
short-term investments.





On
January 3, 2007, we assigned an aggregate of $335 million of our $377.5 million
stipulated unsecured claim against Northwest to several third parties for
aggregate proceeds of approximately $283 million, net of expenses.  We
received the proceeds from this sale on January 23, 2007.  On June 29,
2007 we assigned the remaining $42.5 million of our claim for proceeds of $27.7
million.  The sale of our claim is subject to federal and state income
taxation, and through December 31, 2007, we have made estimated tax payments of
approximately $110 million related to the claim sale.





Net cash
provided by operating activities was $21.1 million during the year ended
December 31, 2006, due primarily to cash generated from net income of $77.8
million, a benefit of $43.6 million associated with the bankruptcy filings of
Northwest and Mesaba, $15.6 million in deferred income tax expense, $30.9
million in receivables related to the timing of the previously mentioned payment
from Northwest and other miscellaneous charges.





Net cash
provided by operating activities was $27.3 million during the year ended
December 31, 2005, due primarily to cash generated from net income of $25.7
million, which includes the after-tax gain on repurchase of debt of $11.3
million, offset by an increase in income taxes payable of $16.1 million,
payments withheld by Northwest and other miscellaneous charges.





Investing activities. 
Cash used in investing activities for the year ended December 31, 2007 was
$220.1 million.  This was primarily attributable to net purchases of
short-term investments in marketable debt securities of $114.2 million, $74.1
million in pre-delivery payments for the Q400 and CRJ-900 aircraft and purchases
of property and equipment of $24.2 million, primarily consisting of aircraft
purchases.  In addition, the acquisition of Colgan decreased cash by $8.3
million, net of cash acquired.





Investing
activities consisted of property and equipment purchases of $4.4 million and
$8.0 million for the years ended December 31, 2006 and 2005, respectively. 
Investing activities also consisted of net short-term investments in marketable
equity and debt securities of $28.5 million and $44.2 million for the years
ended December 31, 2006 and 2005 respectively.





40
 Item 7. Management's Disussion and
Analysis of Financial Condition and Results of
Operations





We expect
capital expenditures for 2008 to be approximately $16 million.  We are
expecting to fund these expenditures with cash flows generated from our
operations.





Financing activities. Cash
used in financing activities for the year ended December 31, 2007 totaled $29.3
million.  During the year, we received $68.0 million in debt proceeds,
primarily related to the pre-delivery payment financing facilities for our Q400
and CRJ-900 aircraft.  This was offset by $30.9 million of principal
payments on debt obligations and $1.0 million of payments made on capital
leases.  In addition, we purchased $68.2 million of treasury shares as part
of our share repurchase program.





Cash used
in financing activities for the year ended December 31, 2006 totaled $17.0
million, which related to the repayment of the line of credit with First
Tennessee Bank.  That line of credit expired in June 2006.





Deferred tax asset.We have
recorded a deferred tax asset of $93.4 millionrelated to future tax
benefits we will receive for our deferred ASA revenue.  As discussed
in Note 4 to our consolidated financial statements, the deferred ASA revenue is
being recognized over the 11-year term of the ASA.





Guarantees and
indemnifications. We are the guarantor of approximately $2.1 million
aggregate principal amount of tax-exempt special facilities revenue bonds and
interest thereon. These bonds were issued by the Memphis-Shelby County Airport
Authority (the “Authority”) and are payable solely from our rentals paid under a
long-term lease agreement with the Authority. The leasing arrangement is
accounted for as an operating lease in the consolidated financial
statements.





We had
$5.3 million and $1.3 million invested in certificates of deposit and in other
similar instruments at December 31, 2007 and 2006,
respectively.  These certificates of deposit have various maturities,
all less than one year and are used as collateral for standby letter of credit
facilities that we maintain for various vendors.  As of December 31,
2007, we had $2.7 million of standby letters of credit outstanding.





We are
party to numerous contracts and real estate leases in which it is common for us
to agree to indemnify third parties for tort liabilities that arise out of or
relate to the subject matter of the contract or occupancy of the leased
premises. In some cases, this indemnity extends to related liabilities arising
from the negligence of the indemnified parties, but usually excludes any
liabilities caused by their gross negligence or willful misconduct.
Additionally, we typically indemnify the lessors and related third parties for
any environmental liability that arises out of or relates to our leased
premises.





In our
aircraft lease agreements, we typically indemnify the prime lessor, financing
parties, trustees acting on their behalf and other related parties against
liabilities that arise from the manufacture, design, ownership, financing, use,
operation and maintenance of the aircraft and for tort liability, whether or not
these liabilities arise out of or relate to the negligence of these indemnified
parties, except for their gross negligence or willful misconduct.





We expect
that we would be covered by insurance (subject to deductibles) for most tort
liabilities and related indemnities described above with respect to real estate
we lease and aircraft we operate.





We do not
expect the potential amount of future payments under the foregoing indemnities
and agreements to be material.





Off-Balance Sheet
Arrangements.  None of our operating lease obligations are
reflected on our consolidated balance sheets. We are responsible for all
maintenance, insurance and other costs associated with these leased assets;
however, the lease agreements do not include a residual value guarantee, fixed
price purchase option or other similar guarantees.  We have no other
off-balance sheet arrangements.





41
 Item 7. Management's Disussion and
Analysis of Financial Condition and Results of
Operations





Forward-Looking
Statements





Statements
in this Annual Report on Form 10-K (or otherwise made by or on the behalf of
Pinnacle Airlines Corp.) contain various forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Act of 1934, as amended (the “Exchange Act”), which
represent our management's beliefs and assumptions concerning future events.
When used in this document and in documents incorporated by reference,
forward-looking statements include, without limitation, statements regarding
financial forecasts or projections, our expectations, beliefs, intentions or
future strategies that are signified by the words "expects", "anticipates",
"intends", "believes" or similar language. These forward-looking statements are
subject to risks, uncertainties and assumptions that could cause our actual
results and the timing of certain events to differ materially from those
expressed in the forward-looking statements. All forward-looking statements
included in this report are based on information available to us on the date of
this report. It is routine for our internal projections and expectations to
change as the year or each quarter in the year progress, and therefore it should
be clearly understood that the internal projections, beliefs and assumptions
upon which we base our expectations may change prior to the end of each quarter
or the year. Although these expectations may change, we may not inform you if
they do. Our policy is generally to provide our expectations only once per
quarter, and not to update that information until the next quarter.





You
should understand that many important factors, in addition to those discussed in
this report, could cause our results to differ materially from those expressed
in the forward-looking statements. Some of the potential factors that could
affect our results are described in Item 1A Risk Factors and in this item
under “Outlook.”  In light of these risks and uncertainties, and
others not described in this report, the forward-looking events discussed in
this report might not occur, might occur at a different time, or might cause
effects of a different magnitude or direction than presently
anticipated.





42
 Item 7A. Quantitative and Qualitative
Disclosures About Market Risk





Because the
majority of our business is under capacity purchase agreements, we have limited
exposure to market risks such as commodity price risk (e.g., aircraft fuel
prices).  With the recent acquisition of Colgan and the subsequent
contracts with Delta and Continental regarding the purchase of aircraft, we are
exposed to increased commodity price and interest rate risk as discussed
below.





Commodity Price
Risk





We have
exposure to certain market risks associated with our aircraft
fuel.  Aviation fuel expense is a significant expense for any air
carrier and even marginal changes in the cost of fuel greatly affect a carrier’s
profitability.  Standard industry contracts do not generally provide
protection against fuel price increases, nor do they ensure availability of
supply.  However, our capacity purchase agreements require that fuel
be provided to us at no cost, thereby reducing our overall exposure to fuel
price fluctuations.  However, with the acquisition of Colgan in
January 2007, the Company’s pro-rate code-share agreements with US Airways,
Continental, and United Air Lines expose the Company to fuel price
risk.  Slightly offsetting our fuel risk, our agreement with
Continental provides for an adjustment to the pro-rated revenue we received from
Continental based on projected changes in fuel prices.  For the
projected annualized fuel consumption related to these agreements, each ten
percent change in the price of jet fuel amounts to an approximate $4.0 million
change in annual fuel costs.





Interest Rate
Risk





Aircraft financing. In 2007,
we entered into firm noncancelable commitments to acquire 31
aircraft.  We expect to finance approximately $560 million of the
approximately $663 million purchase price for the 15 Q400 and 16 CRJ-900
aircraft we are acquiring.  The aircraft financing commitments provide
that we elect either a fixed or floating interest rate option prior to each
drawdown to occur upon delivery of each aircraft.  The floating rate
option is based upon a spread over the six month LIBOR.  The fixed
rate option is computed by converting the floating rate to a fixed rate
equivalent based upon published “swap” rates for debt with a maturity closest to
the weighted average life of the debt.





To reduce
the financial risk associated with changes in long-term interest rates prior to
delivery of the last CRJ-900 aircraft, we initiated a cash flow hedging program
during July 2007.  The program consists of interest rate swaps whereby
the Company agrees to pay a fixed interest rate and receives the six month LIBOR
rate.  The swaps have been and will be cash settled when the permanent
financing is obtained at the time we take delivery of the
aircraft.  As of February 28, 2008, we have hedged approximately $436
million or 78% of the $560 million we expect to finance.  Should
interest rates change by 100 basis points before we take delivery, and assuming
that we do not hedge the anticipated debt on the remaining firm noncanceable
aircraft, aggregate interest expense in the first year of financing would change
by approximately $1.2 million. See Note 9 in Item 8 of this Form 10-K
for additional information about our cash flow hedging program.





Investment
income.  Our earnings are affected by fluctuations in interest
rates due to the impact those changes have on our interest income from
short-term investments.  We do not purchase or hold any derivative
financial instruments to protect against the effects of changes in interest
rates on our interest income.  Based on our current balance of
short-term investments, a 100 basis point change in interest would result in an
increase or decrease in annual investment income of approximately $1.9
million.  See Note 16 in Item 8 of this Form 10-K for additional
information about short-term investments.





43
 Item 7A. Quantitative and Qualitative
Disclosures About Market Risk





Senior convertible
notes. While we pay interest on the Notes at a fixed rate of 3.25%,
the fair value of the Notes is sensitive to changes in interest rates and to
changes in the market price of our common stock.  Interest rate
changes may result in increases or decreases in the fair value of the Notes due
to differences between market interest rates and rates in effect at the
inception of the obligation.  The fair value of the Notes may also
increase or decrease with differences between the current market price of our
common stock and the market price on the original issuance date of the
Notes.  Unless we elect to repurchase our Notes in the open market,
changes in their fair value have no impact on our consolidated financial
statements as a whole. The estimated fair value of the Notes on January 25, 2008
was approximately $136 million, based on quoted market prices.








44





Item
8.Financial Statements and Supplementary Data




Report of
      Independent Registered Public Accounting Firm
                46Consolidated
      Statements of Income
                47For
      the Years Ended December 31, 2007, 2006, and 2005Consolidated
      Balance Sheets
                48As
      of December 31, 2007 and 2006Consolidated
      Statements of Stockholders’ Equity (Deficiency)
                49For
      the Years Ended December 31, 2007, 2006, and 2005Consolidated
      Statements of Cash Flows
                50For
      the Years Ended December 31, 2007, 2006, and 2005Notes to
      Consolidated Financial Statements
                51Report of
      Independent Registered Public Accounting Firm on Management’s Assessment
      and the Effectiveness of Internal Control Over Financial
      Reporting
                87


45





REPORT OF INDEPENDENT
REGISTERED


PUBLIC ACCOUNTING
FIRM





TheBoard of Directors and Stockholders


Pinnacle
Airlines Corp.








We have
audited the accompanying consolidated balance sheets of Pinnacle Airlines Corp.
as of December 31, 2007 and 2006, and the related consolidated statements of
income, shareholders' equity, and cash flows for each of the three years in the
period ended December 31, 2007.  These financial statements are the
responsibility of the Company's management.  Our responsibility is to
express an opinion on these financial statements based on our
audits.





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





In our
opinion, the financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Pinnacle Airlines
Corp. at December 31, 2007 and 2006, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 2007, in conformity with U.S. generally accepted accounting
principles.





We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), Pinnacle Airlines Corp.'s internal control over
financial reporting as of December 31, 2007, based on criteria established in
Internal Control-Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission and our report dated March 13, 2008
expressed an unqualified opinion thereon.











/s/
ERNST & YOUNG LLP





Memphis,
Tennessee





March 13,
2008











46
 Pinnacle Airlines
Corp.
 Consolidated Statements of
Income
 (in thousands, except per share
data)




Years Ended December
      31,2007
            
            
            2006
            
            
            2005Operatingrevenues:Regional
      airline services
            
            $
            777,179
            
            
            $
            816,787
            
            
            $
            833,125Other
            
            
            10,195
            
            
            
            7,836
            
            
            
            8,480Total
      operating revenues
            
            
            787,374
            
            
            
            824,623
            
            
            
            841,605Operating
      expenses:Salaries,
      wages and benefits
            
            
            202,860
            
            
            
            141,835
            
            
            
            134,277Aircraft
      fuel
            
            
            38,487
            
            
            
            109,224
            
            
            
            112,666Aircraft
      maintenance, materials and repairs
            
            
            86,899
            
            
            
            35,110
            
            
            
            31,865Aircraft
      rentals
            
            
            138,661
            
            
            
            264,124
            
            
            
            277,914Other
      rentals and landing fees
            
            
            58,986
            
            
            
            43,135
            
            
            
            42,972Ground
      handling services
            
            
            97,843
            
            
            
            87,390
            
            
            
            92,689Commissions
      and passenger related
            
            
            24,204
            
            
            
            3,711
            
            
            
            4,155Depreciation
      and amortization
            
            
            9,265
            
            
            
            3,985
            
            
            
            4,017Other
            
            
            79,129
            
            
            
            52,132
            
            
            
            54,522Provision
      for (decreases) increases in losses associated withbankruptcy
      filings of Northwest and Mesaba
            
            
            (1,048
            )
            
            
            (43,571
            )
            
            
            59,599Total
      operating expenses
            
            
            735,286
            
            
            
            697,075
            
            
            
            814,676Operating
      income
            
            
            52,088
            
            
            
            127,548
            
            
            
            26,929Operating
      income as a percentage of operating revenues
            
            
            6.6
            %
            
            
            15.5
            %
            
            
            3.2
            %Nonoperating
      (expense) income:Interest
      income
            
            
            11,601
            
            
            
            2,548
            
            
            
            1,239Interest
      expense
            
            
            (8,853
            )
            
            
            (5,578
            )
            
            
            (4,772
            )Miscellaneous
      (expense) income, net
            
            
            (3,799
            )
            
            
            82
            
            
            
            15Gain
      on repurchase of debt
            
            
            -
            
            
            
            -
            
            
            
            18,000Total
      nonoperating (expense) income
            
            
            (1,051
            )
            
            
            (2,948
            )
            
            
            14,482Income
      before income taxes
            
            
            51,037
            
            
            
            124,600
            
            
            
            41,411Income
      tax expense
            
            
            16,400
            
            
            
            46,801
            
            
            
            15,713Net
      income
            
            $
            34,637
            
            
            $
            77,799
            
            
            $
            25,698Basic
      earnings per share
            
            $
            1.66
            
            
            $
            3.55
            
            
            $
            1.17Diluted
      earnings per share
            
            $
            1.50
            
            
            $
            3.54
            
            
            $
            1.17Shares
      used in computing basic earnings per share
            
            
            20,897
            
            
            
            21,945
            
            
            
            21,913Shares
      used in computing diluted earnings per share
            
            
            23,116
            
            
            
            21,974
            
            
            
            21,932





The
accompanying notes are an integral part of these consolidated financial
statements





47
 Pinnacle Airlines
Corp.
 Consolidated Balance
Sheets
 (in thousands, except share
data)





December
    31,
            
            
            December
    31,2007
            
            
            2006AssetsCurrent
      assetsCash
      and cash equivalents
            
            $
            26,785
            
            
            $
            705Restricted
      cash
            
            
            5,327
            
            
            
            1,250Short-term
      investments
            
            
            186,850
            
            
            
            72,700Receivables,
      net of allowances of $131 in 2007 and $7,806  in
      2006
            
            
            31,107
            
            
            
            100,925Spare
      parts and supplies, net of allowances of $2,536 in 2007 and $1,517 in
      2006
            
            
            16,030
            
            
            
            8,061Prepaid
      expenses and other assets
            
            
            16,535
            
            
            
            13,753Deferred
      income taxes, net of allowance
            
            
            12,285
            
            
            
            -Total
      current assets
            
            
            294,919
            
            
            
            197,394Property
      and equipmentFlight
      equipment
            
            
            162,374
            
            
            
            38,436Aircraft
      pre-delivery payments
            
            
            81,425
            
            
            
            -Other
      property and equipment
            
            
            39,969
            
            
            
            24,470283,768
            
            
            
            62,906Less
      accumulated depreciation
            
            
            (28,358
            )
            
            
            (21,921
            )Net
      property and equipment
            
            
            255,410
            
            
            
            40,985Deferred
      income taxes, net of allowance
            
            
            79,856
            
            
            
            -Other
      assets, primarily aircraft lease deposits
            
            
            28,528
            
            
            
            27,262Debt
      issuance costs, net of amortization of $636 in 2007 and $414 in
      2006
            
            
            4,598
            
            
            
            3,978Goodwill
            
            
            28,206
            
            
            
            18,422Intangible
      assets, net of amortization of $3,594 in 2007 and $1,883 in
      2006
            
            
            17,071
            
            
            
            13,232Total
      assets
            
            $
            708,588
            
            
            $
            301,273Liabilities and stockholders’
      equityCurrent
      liabilitiesCurrent
      maturities of debt and capital leases
            
            $
            11,028
            
            
            $
            -Pre-delivery
      payment facilities
            
            
            63,603
            
            
            
            -Bank
      line of credit
            
            
            8,375
            
            
            
            -Accounts
      payable
            
            
            33,062
            
            
            
            18,201Accrued
      expenses
            
            
            80,316
            
            
            
            26,190Income
      taxes payable
            
            
            2,356
            
            
            
            16,658Deferred
      income taxes
            
            
            -
            
            
            
            6,815Deferred
      revenue
            
            
            24,099
            
            
            
            -Other
      current liabilities
            
            
            20,620
            
            
            
            5,980Total
      current liabilities
            
            
            243,459
            
            
            
            73,844Senior
      convertible notes
            
            
            121,000
            
            
            
            121,000Long-term
      debt, less current maturities
            
            
            71,812
            
            
            
            -Capital
      leases, net of current maturities
            
            
            3,668
            
            
            
            -Deferred
      income taxes
            
            
            -
            
            
            
            7,112Deferred
      revenue, net of current portion
            
            
            209,752
            
            
            
            -Other
      liabilities
            
            
            1,075
            
            
            
            2,296Commitments
      and contingencies
            
            
            -
            
            
            
            -Stockholders’
      equitySeries A preferred share, stated value $100 per share; one share
      authorized and issued
            
            
            -
            
            
            
            -Common stock, $0.01 par value; 40,000,000 shares authorized;22,402,999
      and 22,080,585 shares issued, respectively
            
            
            224
            
            
            
            221Treasury stock, at cost, 4,450,092 shares
            
            
            (68,152
            )
            
            
            -Additional paid-in capital
            
            
            91,165
            
            
            
            86,152Net unrealized loss, primarily related to
derivatives
            
            
            (10,200
            )
            
            
            -Retained earnings
            
            
            44,785
            
            
            
            10,648Total
      stockholders’ equity
            
            
            57,822
            
            
            
            97,021Total
      liabilities and stockholders’ equity
            
            $
            708,588
            
            
            $
            301,273





The
accompanying notes are an integral part of these consolidated financial
statement





48
 Pinnacle Airlines
Corp.
 Consolidated Statements of
Stockholders' Equity (Deficiency)
 (in thousands, except share
data)








Common
    Stock
            
            
            Additional Paid-In
      Capital
            
            
            Accumulated Earnings
      (Deficiency)
            
            
            Unearned Compensation on
      Restricted Stock
            
            
            Accumulated Other
      Compre-hensive Gain/ (Loss)
            
            
            Treasury
      Stock
            
            
            TotalBalance,December 31,2004
            
            $
            220
            
            
            $
            85,603
            
            
            $
            (92,849
            )
            
            $
            (522
            )
            
            $
            -
            
            
            $
            -
            
            
            $
            (7,548
            )Net
      income and comprehensive
              income
            
            
            -
            
            
            
            -
            
            
            
            25,698
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            25,698Forfeiture
      of restricted stock
              –
      5,000 shares
            
            
            -
            
            
            
            (54
            )
            
            
            -
            
            
            
            54
            
            
            
            -
            
            
            
            -
            
            
            
            -Amortization
      of unearned
              compensation
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            468
            
            
            
            -
            
            
            
            -
            
            
            
            468Balance, December
      31,
              2005
            
            
            220
            
            
            
            85,549
            
            
            
            (67,151
            )
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            18,618Net
      income and comprehensive
              income
            
            
            -
            
            
            
            -
            
            
            
            77,799
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            77,799Impact
      of adoption of  SFAS
              158,
      net of tax of $24
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            40
            
            
            
            -
            
            
            
            40Restricted
      stock issuance –
              135,325
      shares
            
            
            1
            
            
            
            (1
            )
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Share-based
      compensation
            
            
            -
            
            
            
            564
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            564Balance, December 31,2006
            
            
            221
            
            
            
            86,112
            
            
            
            10,648
            
            
            
            -
            
            
            
            40
            
            
            
            -
            
            
            
            97,021Comprehensive
      income:Net
      income
            
            
            -
            
            
            
            -
            
            
            
            34,637
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            34,637Derivative
      instruments (cash
              flow
      hedge), net of
              tax
      of $6,016
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (10,761
            )
            
            
            -
            
            
            
            (10,761
            )Post
      retirement actuarial
              gain,  net
      of tax of $304
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            521
            
            
            
            -
            
            
            
            521Total
      comprehensive income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            24,397Impact
      of adoption of FIN48
            
            
            -
            
            
            
            -
            
            
            
            (500
            )
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (500
            )Restricted
      stock issuance –
              76,311
      shares
            
            
            1
            
            
            
            (1
            )
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Treasury
      stock repurchase –
              4,450,092
      shares
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (68,152
            )
            
            
            (68,152
            )Exercise
      of stock options
            
            
            2
            
            
            
            2,896
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            2,898Share-based
      compensation
            
            
            -
            
            
            
            2,158
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            
            
            
            
            2,158Balance, December 31,2007
            
            $
            224
            
            
            $
            91,165
            
            
            $
            44,785
            
            
            $
            -
            
            
            $
            (10,200
            )
            
            $
            (68,152
            )
            
            $
            57,822





The
accompanying notes are an integral part of these consolidated financial
statements.





49
 Pinnacle Airlines
Corp.
 Consolidated Statements of Cash
Flows
 (in thousands, except share
data)








Years Ended December
      31,2007
            
            
            2006
            
            
            2005Operating
      activitiesNet
      income
            
            $
            34,637
            
            
            $
            77,799
            
            
            $
            25,698Adjustments
      to reconcile net income to cash provided by operating
      activities:Provision
      for (decreases) increases in losses associated with
              bankruptcy
      filings of Northwest and Mesaba
            
            
            (1,048
            )
            
            
            (43,571
            )
            
            
            59,254Loss
      on sale of unsecured claim
            
            
            4,144
            
            
            
            -
            
            
            
            -Depreciation
      and amortization
            
            
            10,835
            
            
            
            5,408
            
            
            
            4,891Deferred
      income tax
            
            
            (99,717
            )
            
            
            15,647
            
            
            
            (7,965
            )Recognition
      of deferred revenue
            
            
            (23,058
            )
            
            
            -
            
            
            
            -Excess
      tax benefits on the exercise of stock options
            
            
            (693
            )
            
            
            -
            
            
            
            -Insurance
      proceeds
            
            
            3,565
            
            
            
            -
            
            
            
            -Other
            
            
            4,091
            
            
            
            5,581
            
            
            
            1,245Gain
      on repurchase of debt
            
            
            -
            
            
            
            -
            
            
            
            (18,000
            )Changes
      in operating assets and liabilities:Receivables
            
            
            79,093
            
            
            
            (30,929
            )
            
            
            (56,574
            )Increase
      in deferred revenue, primarily from assignment of
              Northwest
      claim
            
            
            271,705
            
            
            
            -
            
            
            
            -Spare
      parts and supplies
            
            
            (1,846
            )
            
            
            (2,126
            )
            
            
            (1,617
            )Prepaid
      expenses and other assets
            
            
            (4,989
            )
            
            
            (11,584
            )
            
            
            (1,023
            )Restricted
      cash
            
            
            (4,077
            )
            
            
            (250
            )
            
            
            -Accounts
      payable and accrued expenses
            
            
            5,893
            
            
            
            6,286
            
            
            
            6,037Income
      taxes payable
            
            
            2,064
            
            
            
            (1,098
            )
            
            
            16,123Other
      liabilities
            
            
            (5,119
            )
            
            
            (62
            )
            
            
            (785
            )Cash
      provided by operating activities
            
            
            275,480
            
            
            
            21,101
            
            
            
            27,284Investing
      activitiesPurchases
      of property and equipment
            
            
            (24,188
            )
            
            
            (4,394
            )
            
            
            (7,962
            )Proceeds
      from the sale of property and equipment
            
            
            610
            
            
            
            -
            
            
            
            -Aircraft
      pre-delivery payments
            
            
            (74,138
            )
            
            
            -
            
            
            
            -Purchases
      of short-term investments
            
            
            (1,024,284
            )
            
            
            (721,365
            )
            
            
            (114,900
            )Proceeds
      from sale of short-term investments
            
            
            910,134
            
            
            
            692,825
            
            
            
            70,740Acquisition
      of Colgan Air, Inc. net of cash acquired
            
            
            (8,267
            )
            
            
            (2,029
            )
            
            
            -Purchase
      of contractual rights from Northwest
            
            
            -
            
            
            
            -
            
            
            
            (5,115
            )Cash
      used in investing activities
            
            
            (220,133
            )
            
            
            (34,963
            )
            
            
            (57,237
            )Financing
      activitiesPayments
      on capital leases
            
            
            (965
            )
            
            
            -
            
            
            
            -Proceeds
      from debt
            
            
            67,963
            
            
            
            -
            
            
            
            138,000Payments
      on debt
            
            
            (30,862
            )
            
            
            (17,000
            )
            
            
            (106,600
            )Debt
      issuance costs
            
            
            (842
            )
            
            
            -
            
            
            
            (4,792
            )Treasury
      shares repuchased
            
            
            (68,152
            )
            
            
            -
            
            
            
            -Proceeds
      from exercise of stock options
            
            
            2,898
            
            
            
            -
            
            
            
            -Exess
      tax benefis from exercise of stock options
            
            
            693
            
            
            
            -
            
            
            
            -Cash
      provided by (used in) financing activities
            
            
            (29,267
            )
            
            
            (17,000
            )
            
            
            26,608Net
      increase (decrease) in cash and cash equivalents
            
            
            26,080
            
            
            
            (30,862
            )
            
            
            (3,345
            )Cash
      and cash equivalents at beginning of period
            
            
            705
            
            
            
            31,567
            
            
            
            34,912Cash
      and cash equivalents at end of period
            
            $
            26,785
            
            
            $
            705
            
            
            $
            31,567Supplemental disclosure of cash
      flow informationInterest
      paid
            
            $
            8,717
            
            
            $
            4,594
            
            
            $
            2,837Income
      tax payments
            
            $
            113,871
            
            
            $
            32,299
            
            
            $
            7,562Noncash investing and financing
      activitiesProperty
      and equipment acquired through the issuance of debt
            
            $
            73,166
            
            
            $
            -
            
            
            $
            -Mark-to-market
      adjustment on derivative instruments
            
            $
            16,777
            
            
            $
            -
            
            
            $
            -Other
      noncash investing and financing activities
            
            $
            3,453
            
            
            $
            -
            
            
            $
            -




The
accompanying notes are an integral part of these consolidated financial
statements





50
 Pinnacle Airlines Corp.
 Notes to Consolidated Financial
Statements
 (All amounts in thousands, except per
share data)





1. Description of Business





Pinnacle
Airlines Corp. (“PNCL”) operates through its wholly owned subsidiaries, Pinnacle
Airlines, Inc. (“Pinnacle”) and Colgan Air, Inc. (“Colgan”) (collectively, the
‘‘Company”).  PNCL purchased Colgan on January 18, 2007, as discussed
below in Note 3.





Pinnacle
is a regional airline that provides airline capacity to Northwest Airlines, Inc.
(‘‘Northwest’’) and Delta Air Lines, Inc. (“Delta”).  Pinnacle
operates an all-regional jet fleet and serves as a Northwest Airlink carrier at
Northwest’s domestic hub airports in Detroit, Minneapolis/St. Paul and Memphis,
and the regional focus city of Indianapolis.  As of December 31, 2007,
Pinnacle offered regional airline services with approximately 770 daily
departures to 115 cities in 36 states and four Canadian
provinces.  Effective December 1, 2007, Pinnacle began operations as a
Delta Connection carrier, providing airline capacity to Delta at its Atlanta hub
with approximately six daily departures to four cities in four
states.





Colgan is
a regional airline that operates under partnership agreements with Continental
Airlines, Inc. (“Continental”), United Air Lines, Inc. (“United”), and US
Airways Group, Inc. (“US Airways”).  Colgan operates an all turboprop
aircraft fleet and serves as a Continental Connection Carrier out of
Houston/George Bush Intercontinental Airport, a United Express carrier out of
Washington Dulles Airport and as a US Airways Express carrier with significant
operations at Pittsburgh, Boston, Washington Dulles and New York/LaGuardia
airports.  As of December 31, 2007, Colgan offered approximately 270
daily departures to 53 cities in 12 states.  Effective February 2008,
Colgan also provides regional airline service under a capacity purchase
agreement with Continental at its Newark Liberty International Airport
hub.





As shown
in the following table, the Company’s operating aircraft fleet consisted of 138
Canadair regional jets (“CRJs”) and 48 turboprop aircraft at December 31,
2007.





Aircraft
      Type
            
            Number of
      Aircraft
            
            Standard Seating
      ConfigurationCRJ-200
            
            137
            
            50CRJ-900
            
            1
            
            76Total
      Pinnacle aircraft
            
            138Saab
      340
            
            42
            
            34Beech
      1900D
            
            6
            
            19Total
      Colgan aircraft
            
            48Total
      aircraft
            
            186





PNCL was
incorporated in Delaware on January 10, 2002 to be the holding company of
Pinnacle Airlines, Inc., which is a predecessor to the Company incorporated in
Georgia in 1985.  Pinnacle Airlines, Inc. was acquired in April 1997
by Northwest Airlines Corporation.  Pinnacle Airlines, Inc. provided
regional airline service exclusively to Northwest from the acquisition until
Pinnacle began operations in December 2007 under the Delta Connection
agreement.  In November 2003, PNCL completed its initial public
offering (the “Offering”) and Northwest was no longer a majority
shareholder.  From March 2002 through December 2006, Pinnacle provided
services to Northwest under an airline services agreement (“the 2002
ASA”).  On December 16, 2006, the Company and Northwest agreed to the
terms of an amended and restated ASA (the “ASA”), which became effective January
1, 2007. In addition, the Company entered into a Stock Purchase Agreement
pursuant to which it purchased its Series A Preferred Share (the “Preferred
Share”) previously held by Northwest on January 2, 2008 (see Note 4 for
additional information). Through November 30, 2007, Northwest was the owner of
2,492 shares, or 11%, of the Company’s issued common stock.  On that
date, the Company purchased these shares from Northwest at a price of
$32,945.





51
 Pinnacle Airlines Corp.
 Notes to Consolidated Financial
Statements
 (All amounts in thousands,
except per share data)





In
addition to the class of stock presented on the face of the consolidated balance
sheets, the Company’s capital structure includes 1,000 shares of preferred
stock, par value $0.01 per share and 5,000 shares of Series common stock, par
value $0.01 per share.  No shares have been issued from either of
these classes of stock.





2.  Significant Accounting
Policies





Revenue
Recognition





Passenger
revenues, charter revenues and ground handling revenues are recognized in the
period the services are provided.  Under the Company’s capacity purchase
arrangements with Northwest and Delta, the Company receives a fixed-fee, as well
as reimbursement of specified costs on a gross basis with the potential of
additional revenue incentives from its partners when the Company’s operational
performance exceeds certain metrics.  The reimbursement of specified costs,
known as “pass-through costs,” may include aircraft ownership costs, passenger
liability and hull insurance, aircraft property taxes, fuel, landing fees and
catering.  Two significant changes to the Company’s pass-through costs
during 2007 compared to prior years relate to changes in its ASA with
Northwest.  Beginning in 2007, fuel is provided at no cost by
Northwest, and aircraft rent was reduced to rates that approximate market
rates.  See Note 4 for additional information.  Except as
described above, all revenue recognized under these contracts is presented at
the gross amount billed for reimbursement pursuant to Emerging Issues Tax Force
(“EITF”) Issue No. 99-19, Reporting Revenue Gross as a
Principal versus Net as an Agent.





The
Company also earns revenue under its pro-rate operating agreements with US
Airways, Continental, United and under Essential Air Service (“EAS”) contracts
with the Department of Transportation (“DOT”).  Regional airline service
revenues are recognized when flights are completed.  Tickets are sold and
processed by the partner airlines and amounts due to the Company are settled on
a monthly basis. Passenger tickets typically include segments flown by the
Company and segments flown by the partner airlines. Passenger revenues are based
on a pro-rated share of ticket prices earned by the Company for the passengers
transported.  The Company earns additional compensation based on the
achievement of certain performance metrics.  Revenue earned by the Company
under its EAS contracts with the DOT is recognized based on actual flights
completed to and from selected smaller cities and communities and is based on
pre-determined contractual rates.  In addition, the Company’s pro-rate
operating agreement with Continental includes a guarantee fee provision whereby
a payment is either made by or to the Company to the extent that scheduled block
hours for any given month are higher or lower than the guaranteed block
hours.





Derivative
Instruments





The
Company accounts for derivative financial instruments in accordance with the
provisions of Statement of Financial Accounting Standards No. 133, Accounting for Derivative
Instruments and Hedging Activities (“SFAS 133”), as amended and
interpreted. SFAS 133 requires the Company to measure all derivatives at fair
value and to recognize them in the balance sheet as an asset or liability with
the offset to accumulated other comprehensive income/loss (“OCI”), net of taxes
and hedge ineffectiveness.





The
Company expects its cash flow hedges will be highly effective during their terms
in offsetting changes in cash flow attributable to the hedged
risk.  The Company performs both prospective and retrospective
assessment at least quarterly, including assessing the possibility of
counterparty default.  To assess effectiveness, the Company performs a
regression analysis at the inception of each hedge and performs a similar
analysis in each reporting period during the term of the hedge.   The
Company’s assessment considers the various risks that could cause
ineffectiveness and considers scenarios where the hypothetical derivative does
not equal the actual derivative.  If the Company determines that a
derivative is no longer expected to be highly effective, the Company will
discontinue hedge accounting prospectively and recognize subsequent changes in
the fair market value of the hedge in the consolidated statements of income as
interest expense/income rather than deferring the amount in OCI.





52
 Pinnacle Airlines Corp.
 Notes to Consolidated Financial
Statements
 (All amounts in thousands, except per
share data)





For
derivatives designated as cash flow hedges, changes in the fair value of the
derivative are generally reported in OCI.  These gains or losses are
recognized in the Company’s consolidated statements of income as interest
expense/income over the life of the underlying permanent aircraft
financing.  To the extent that the Company is overhedged and the
change in the fair value of the hedge does not perfectly offset the change in
cash flows resulting from a change in interest rates, the ineffective portion is
immediately recognized as interest expense/income in the Company’s consolidated
statements of income.  The ineffective portion of the hedge is
determined by comparing changes in the actual hedge to changes in a hypothetical
perfect hedge.  For further discussion of the Company’s derivative
instruments, see Note 10.





Capitalized
Interest





The
Company accounts for capitalized interest in accordance with the provision of
SFAS No. 34, Capitalization of
Interest Cost, which requires the Company to capitalize interest on
assets that require a period of time to prepare them for their intended
use.  The Company is capitalizing interest, as part of the asset’s
cost, on its aircraft pre-delivery payments and on costs associated with its
system implementation project.  The Company recorded gross interest
expense of $11,783 during the year ended December 31, 2007, of which $2,930 was
capitalized.  The Company did not capitalize interest in the years
ended December 31, 2006 and 2005.





Principles of
Consolidation





The
accompanying consolidated financial statements have been prepared in accordance
with generally accepted accounting principles in the United States of America
and include the accounts of Pinnacle Airlines Corp. and its wholly owned
subsidiaries, Pinnacle Airlines, Inc. and Colgan Air, Inc.  All
intercompany transactions have been eliminated in consolidation.





Concentration of Credit
Risk





In 2007,
75.1% of the Company's revenues have been derived from Northwest and the Company
has a significant concentration of its accounts receivable with Northwest with
no collateral.  For further discussion of amounts owed from Northwest,
see Notes 4 and 8.





Significant
Concentration





One
supplier manufactures the Company’s CRJ-200 aircraft, which comprises the
majority of the Company’s operating fleet. One supplier also manufactures the
CRJ-200 engines. These suppliers also provide the Company with parts, repair and
other support services for the CRJ-200 aircraft and engines.





Use of Estimates





The
preparation of the Company’s consolidated financial statements requires the use
of estimates and assumptions that affect the reported amounts of assets and
liabilities, the reported amounts of revenues and expenses and the disclosure of
contingent liabilities.  Management makes its best estimate of the
ultimate outcome for these items based on historical trends and other
information available when the financial statements are
prepared.  Changes in estimates are recognized in accordance with the
accounting rules for the estimate, which is typically in the period when the new
information becomes available to management.





Segment Reporting





SFAS 131,
Disclosures about Segments of
an Enterprise and Related Information, requires disclosures related to
components of a company for which separate financial information is available to
and evaluated regularly by the company’s chief operating decision maker when
deciding how to allocate resources and in assessing
performance.  Prior to January 1, 2007, the Company operated in one
reportable business segment consisting of regional airline services provided to
Northwest.  As of December 31, 2007, the Company had two reportable
segments consisting of Pinnacle Airlines, Inc. and Pinnacle Airlines Corp. (the
“Pinnacle Segment”) and Colgan Air, Inc. (the “Colgan Segment”).





53
 Pinnacle Airlines Corp.
 Notes to Consolidated Financial
Statements
 (All amounts in thousands, except per
share data)





2.  Significant Accounting
Policies (continued)




Aircraft Maintenance and Repair
Costs





Aircraft maintenance, including planned
major maintenance activities, and repairs are expensed as incurred because
maintenance activities do not represent separately identifiable assets or
property units in and of themselves, rather, they serve only to restore assets
to their original operating condition.  Maintenance and repairs
incurred under power-by-the-hour maintenance contracts are accrued and expensed
when the contractual obligation exists.





Share-Based
Compensation





In
December 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No.
123R, Share-Based Payment(“SFAS 123R”).  SFAS 123R is a revision of SFAS No. 123 and
supersedes Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees and related interpretations(“APB 25”).  Beginning
January 1, 2006, the Company adopted SFAS 123R, which requires recognition of
compensation expense for share-based awards, including employee stock option
grants, using a fair value method.  As allowed under SFAS 123R, the
Company chose the modified prospective adoption method, under which compensation
cost is recognized in the financial statements beginning with the effective
date, for all share-based payments granted after that date, and for all unvested
awards granted prior to the effective date of SFAS 123R.  Accordingly,
prior period amounts have not been restated.  The Company utilizes the
Black-Scholes-Merton multiple-option pricing valuation model to measure the fair
value of stock option grants under SFAS 123R.





Prior to January 1, 2006, the Company
accounted for share-based compensation using the intrinsic value method
prescribed in APB 25 to measure compensation expense for share-based
compensation plans.  Under APB 25, no compensation expense was
recognized if the exercise price of the Company’s employee stock options equaled
the market price of the underlying stock on the date of the grant and the number
of shares was fixed.  Since the Company’s stock options had all been
granted with exercise prices at fair value, the Company recognized no
compensation expense for stock options while under APB 25.





See Note
15 for additional disclosures related to share-based compensation.





Cash and Cash Equivalents and
Restricted Cash





Cash equivalents consist of short-term,
highly liquid investments, which are readily convertible into cash and have
initial maturities of three months or less.





Restricted cash consists of
certificates of deposits and other similar instruments with various maturity
dates, all less than one year, and are used as collateral for standby letter of
credit facilities that the Company maintains for various vendors.  As
of December 31, 2007 and 2006, the Company had restricted cash of $5,327 and
$1,250, respectively.





Allowance for Doubtful
Accounts





The
Company grants trade credit to certain approved customers. The Company performs
a monthly analysis of outstanding trade receivables to assess the likelihood of
collection.  For balances where the Company does not expect full
payment of amounts owed, the Company will record an allowance to adjust the
trade receivable to the Company’s best estimate of the amount it will ultimately
collect.  If balances are ultimately determined to be uncollectible,
both the receivable and the related allowance are written off.  For a
discussion of the allowances recorded in 2006 and 2005 for amounts due from
Northwest, see Note 4.





54
 Pinnacle Airlines Corp.
 Notes to Consolidated Financial
Statements
 (All amounts in thousands, except per
share data)





2.  Significant Accounting
Policies (continued)




Property and
Equipment





Property
and equipment, consisting primarily of aircraft, aircraft rotable spare parts
and other property, are stated at cost, net of accumulated depreciation.
 Expenditures for major renewals, modifications and improvements are
capitalized to extend the useful life of the asset.  Property and equipment
are depreciated to estimated residual values using the straight-line method over
the estimated useful lives of the assets.  Depreciation of owned aircraft
and aircraft rotable spares is determined by allocating the cost, net of
estimated residual value, over the asset’s estimated useful life. 
Depreciation of leased aircraft is determined by allocating the cost, net of
estimated residual value, over the shorter of the asset’s useful life or the
remaining lease terms of related aircraft.  Modifications that
significantly enhance the operating performance and/or extend the useful lives
of property and equipment are capitalized and amortized over the lesser of the
remaining life of the asset or the lease term, as applicable.







The
depreciation of property and equipment over their estimated useful lives, and
the determination of any salvage values, requires management to make judgments
about future events. Because the Company utilizes many of its assets over
relatively long periods, periodic evaluations are performed to determine whether
adjustments to the estimated service lives or salvage values are necessary to
ensure these estimates properly match the economic use of the asset. This
evaluation may result in changes in the estimated lives and residual values used
to depreciate the aircraft and other equipment. These estimates affect the
amount of depreciation expense recognized in a period and, ultimately, any gain
or loss on the disposal of the asset.





Estimated
useful lives and residual values for the Company’s property and equipment are as
follows:





Depreciable
      Life
              (in
    years)
            
            Residual
      ValueOwned
      AircraftRegional
      jets
            
            25
            
            10%Turboprops
            
            15-25
            
            8%Aircraft
      rotablesRegional
      jets
            
            15-25
      (1)
            
            25%Turboprops
            
            15-25
            
            8%Ground
      and shop equipment
            
            10
            
            0%Office
      equipment
            
            5-10
            
            0%Software
      and computer equipment
            
            3-5
            
            0%Leasehold
      improvements
            
            2-19
            
            0%Vehicles
            
            5
            
            0%





(1)Depreciation
      is determined by allocating the cost, net of estimated residual value,
      over the shorter of the asset’s useful life or the remaining lease terms
      of related aircraft, as applicable.





Spare Parts and
Supplies





Spare parts and supplies consist of
expendable parts and maintenance supplies related to flight equipment, which are
carried at cost using the first-in, first-out (FIFO) method. Spare parts and
supplies are recorded as inventory when purchased and charged to expense as
used.  An allowance for obsolescence for spare parts expected to be on
hand at the date the aircraft are retired from service is provided over the
remaining estimated useful life of the related aircraft equipment. In addition,
an allowance for spare parts currently identified as obsolete or excess is
provided.  These allowances are based on management estimates and are
subject to change.





55
 Pinnacle Airlines Corp.
 Notes to Consolidated Financial
Statements
 (All amounts in thousands, except per
share data)





2.  Significant Accounting
Policies (continued)




Long-Lived and Intangible
Assets





The Company evaluates whether there has
been an impairment of its long-lived and intangible assets when indicators of
impairment exist.  Impairment exists when the carrying amount of a
long-lived or intangible asset is not recoverable (undiscounted cash flows are
less than the asset’s carrying value) and exceeds its fair value. If it is
determined that an impairment has occurred, the carrying value of the long-lived
asset is reduced to its fair value.  The Company concluded that there
were no indicators of impairment as of December 31, 2007.





The
Company’s most significant intangible asset is its contractual rights, which
were acquired from Northwest.  Among other things, the contractual
rights granted the Company the right to operate an additional ten CRJs during
the remaining term of the 2002 ASA.  In consideration of these
contractual rights, the Company paid $15,115 to Northwest.  The
acquired contractual rights are being amortized as an adjustment to revenue on a
straight-line basis over the remaining term of the ASA.  During the
years ended December 31, 2007, 2006 and 2005, the Company recorded $1,203,
$1,203, and $680, respectively, in amortization and expects future amortization
associated with this intangible asset to be $1,203 per year through 2017. See
Note 3 for a description of Colgan’s intangible assets.




Goodwill





Goodwill represents the excess of the
purchase price over the fair value of acquired net assets.  Goodwill
in the amount of $22,449 was recorded in connection with Northwest’s acquisition
of the Company in 1997.  Similarly, goodwill in the amount of $9,785
was recorded in connection with PNCL’s 2007 acquisition of Colgan.





Goodwill is reviewed at least annually
for impairment by comparing the fair value of the Company’s reporting unit with
its carrying value.  The Company’s reporting units for goodwill
purposes are the Pinnacle Segment and the Colgan Segment.  Fair value
is determined using a discounted cash flow methodology and includes management’s
assumptions on revenue growth rates, operating margins, discount rates and
expected capital expenditures.  Unless circumstances otherwise
dictate, the Company performs its annual impairment testing in the fourth
quarter.  Based on the results of these evaluations, the Company
concluded no impairment charge was necessary as of December 31,
2007.





Financial
Instruments





Fair values of receivables and accounts
payable approximate their carrying amounts due to the short period of time to
maturity.





The Company invests excess cash
balances into overnight Eurodollar deposits and collateralized repurchase
agreements with banks at the end of each business day. The deposits and
agreements represent an unconditional obligation of the banks to repay principal
and repurchase securities on the next business day. The overnight investment
balance was $21,602 and $0 at December 31, 2007 and 2006, respectively, and is
included in cash and cash equivalents on the Company’s consolidated balance
sheets.





As of
December 31, 2007 and 2006, the Company had $2,742 and $936, respectively, of
standby letters of credit outstanding.





In
February 2005, the Company did a private placement of $121,000 principal amount
of the Company’s 3.25% senior convertible notes due February 15, 2025, (the
“Notes”).  The fair value of the Notes on December 31, 2007 and 2006
was $154,275 and $170,761, respectively, based on quoted market
prices.  The Notes are classified as noncurrent liabilities, except as
of the end of the period preceding the period when the Notes’ conversion option
applies, in which case the entire balance would be classified as a current
liability.  For further discussion, see Note 7.





56
 Pinnacle Airlines Corp.
 Notes to Consolidated Financial
Statements
 (All amounts in thousands, except per
share data)





2.  Significant Accounting
Policies (continued)




Short-Term
Investments





The
Company invests excess cash balances primarily in short-term money market
instruments, short-term marketable debt securities and highly liquid equity
securities.  Investments in marketable securities are classified as
available-for-sale and presented at their estimated fair values based on quoted
market prices for those securities, in accordance with SFAS No. 115, Accounting for Certain Investments
in Debt and Equity Securities.





At
December 31, 2007 and 2006, the Company had $186,850 and $72,700, respectively,
invested in auction rate securities (“ARS”).  The majority of ARS are
issued by U.S. states and political subdivisions of the states and typically
have contractual maturities of more then ten years.





ARS are
notes that provide for an interest rate reset through a “dutch auction” process
in periods spanning from 7 to 35 days.  The underlying bonds have
long-term maturities, but because of the auction process have heretofore been
viewed as relatively liquid, short-term investments.  The auction
process resets the interest rate on the securities to current market rates, and
provides a vehicle for investors to buy or sell the securities in what has
historically been a relatively liquid environment.  All of the
Company’s ARS are currently rated AAA/Aaa by Standard & Poors, Moody’s, or
Fitch ratings services, and are collateralized by student loan receivables that
are guaranteed under the government’s Federal Family Education Loan
Program.





The
Company classifies investments in ARS as short-term investments on the Company’s
consolidated balance sheets.  The Company believes that the securities
were stated at fair value as of December 31, 2007 based on the existence of
subsequent successful auctions in 2008.  All income generated from
these securities was from earned interest and dividends and there were no
unrealized or realized gains or losses for the years ended December 31, 2007,
2006 and 2005.  For further discussion, see Note 16.





Reclassification





Certain prior year amounts have been
reclassified to conform to current year classifications.





New Accounting
Standards





In
September 2006, the FASB issued SFAS No. 157 ("SFAS 157"), Fair Value Measurements,
which defines fair value, establishes guidelines for measuring fair value and
expands disclosures regarding fair value measurements.  SFAS 157 does
not require any new fair value measurements but rather eliminates
inconsistencies in guidance found in various prior accounting
pronouncements.  SFAS 157 is effective for fiscal years beginning
after November 15, 2007.  However, on December 14, 2007, the FASB
issued proposed FASB Staff Position (“FSP”) FAS 157-b, which would delay the
effective date of SFAS 157 for all nonfinancial assets and nonfinancial
liabilities, except those that are recognized or disclosed at fair value in the
financial statements on a recurring basis (at least annually). This proposed FSP
partially defers the effective date of SFAS 157 to fiscal years beginning after
November 15, 2008, and interim periods within those fiscal years for items
within the scope of this FSP.  Effective for 2008, the Company will
adopt SFAS 157 except as it applies to those nonfinancial assets and
nonfinancial liabilities as noted in proposed FSP FAS 157-b.  The
Company does not believe that the partial adoption of SFAS 157 will have a
material impact on its financial statements.





In
December 2007, the FASB issued SFAS No. 141 (Revised 2007) (“SFAS 141R”),
Business Combinations.
SFAS 141R will change the accounting for business combinations. Under SFAS 141R,
an acquiring entity will be required to recognize all the assets acquired and
liabilities assumed in a transaction at the acquisition-date fair value with
limited exceptions. SFAS 141R will change the accounting treatment and
disclosure for certain specific items in a business combination. SFAS 141R
applies prospectively to business combinations for which the acquisition date is
on or after the beginning of the first annual reporting period beginning on or
after December 15, 2008. SFAS 141R will have an impact on accounting
for business combinations once adopted but the effect is dependent upon
acquisitions at that time.





57
 Pinnacle Airlines Corp.
 Notes to Consolidated Financial
Statements
 (All amounts in thousands, except per
share data)





2.  Significant Accounting
Policies (continued)




Proposed Accounting
Standard





In July
2007, the FASB exposed for comment and is currently deliberating FSP APB 14-a,
Accounting for Convertible
Debt Instruments That May Be Settled in Cash Upon Conversion (Including Partial
Cash Settlement) ("FSP 14-a"). The proposed FSP specifies that issuers of
such instruments should separately account for the liability and equity
components in a manner that will reflect the entity's nonconvertible debt
borrowing rate on the instrument's issuance date when interest cost is
recognized in subsequent periods.  The Company’s senior convertible
notes are within the scope of FSP 14-a; therefore, if the FSP is issued as
proposed, the Company would be required to record the debt portions of the Notes
at their fair value on the date of issuance and amortize the discount into
interest expense over the life of the debt. However, there would be no effect on
the Company’s cash interest payments. If the FSP is issued as proposed, the
Company expects the increase in noncash interest expense recognized in the
consolidated financial statements to be significant. As currently proposed, this
FSP likely will be effective for financial statements issued for fiscal years
beginning after December 15, 2008, would not permit early application, and would
be applied retrospectively to all periods presented. Therefore, the adoption of
this FSP, if issued as proposed, would be reflected in the Company’s financial
statements beginning with the first quarter of 2009.





3.  Colgan
Acquisition





On
January 18, 2007, PNCL completed the acquisition of all of the issued and
outstanding stock of Colgan.  The consolidated statements of income
reported herein contain Colgan’s operating results since the date of
purchase.





The
acquisition of Colgan was accounted for using the purchase method of accounting,
as required by SFAS No. 141, Business
Combinations.  Accordingly, the aggregate purchase price was
assigned to the acquired assets and liabilities based on their fair market
values on the purchase date.





Pursuant
to the terms of the stock purchase agreement between PNCL and the selling
shareholders of Colgan, the purchase price was $20,000 payable through a $10,000
cash payment and a $10,000 promissory note, bearing interest at 6.0%, secured by
the stock of Colgan.  Subsequent to year end, an agreement was reached
with the sellers whereby all previously asserted additional amounts owed of
approximately $2,000 were withdrawn and no additional payment will be
made.





The
following table reflects the final allocation of the aggregate purchase price of
the acquisition to the assets acquired and liabilities assumed:





Purchase Price
      AllocationCurrent
      assets
            
            $
            18,949Property
      and equipment
            
            
            50,286Other
      assets
            
            
            2,276Intangibles
            
            
            5,550Goodwill
            
            
            9,785Total
      assets acquired
            
            
            86,846Less:
      Accounts payable
            
            
            (13,531)Accrued
      expenses
            
            
            (12,996)Bank
      line of credit
            
            
            (8,375)Long-term
      debt and capital leases
            
            
            (30,460)Purchase
      price, including $1,484 of transaction costs
            
            
            21,484Less:  Note
      payable issued
            
            
            (10,000)Less:  Cash
      acquired
            
            
            (1,187)Cash
      paid for acquisition
            
            $
            10,297








58
 Pinnacle Airlines Corp.
 Notes to Consolidated Financial
Statements
 (All amounts in thousands, except per
share data)




3.  Colgan
Acquisition (continued)




During
2006, the Company paid $1,000 in escrow payments and $1,030 of transaction
costs.  The remaining $8,267 was paid during the three months ended
March 31, 2007.  The difference between the purchase price and the
fair value of Colgan’s assets acquired and liabilities assumed is recorded as
goodwill.  The Company attributes this goodwill to the opportunity to
diversify its operations to include turboprop aircraft and to expand its
relationships with the three major airlines for which Colgan currently
operates.  For tax purposes, goodwill is deductible over 15
years.





The
following is a summary of the Company’s intangible assets acquired through the
Colgan purchase:





Gross Carrying
      Amount
            
            
            Accumulated
      Amortization
              December 31,
      2007
            
            
            Weighted Average Amortization
      Period
              (in
      years)
            
            
            Amortization Expense Through
      December 31, 2007
            
            
            Estimated Annual Amortization
      Expense for 2008 - 2012Code-share
      andEAS
      agreements
            
            $
            3,900
            
            
            $
            358
            
            
            
            10
            
            
            $
            358
            
            
            $
            390Identifiableintangible
      assets:Airport
      slots
            
            
            1,650
            
            
            
            151
            
            
            
            10
            
            
            
            151
            
            
            
            165Goodwill
            
            
            9,785
            
            
            
            -
            
            
            N/A
            
            
            
            -
            
            
            
            -Total
            
            $
            15,335
            
            
            $
            509
            
            
            
            
            
            
            $
            509
            
            
            $
            555





PNCL
leases two hangars and related property from one of the selling shareholders for
approximately $59 per month.  Subsequent to year end, PNCL entered
into discussions with the selling shareholder, authorizing the selling
shareholder to market the two hangars to a third-party purchaser requiring that
the third-party purchaser assume PNCL’s leases with certain modifications that
would reduce the lease term and permit early lease termination.  PNCL
remains obligated under the original purchase agreement to purchase the hangars
in the event that a sale to a third-party purchaser fails to
occur.  The purchase price of the two hangars would be $6,358, which
approximates their fair value.





Colgan’s
existing operations are subject to seasonal fluctuations.  Colgan has
historically recorded losses during the first and fourth quarters each year,
when demand for air travel declines, and recorded income or smaller losses
during the second and third quarters each year, when air travel demand is
higher.  The Company expects this seasonality to continue to affect
Colgan’s financial results in future periods.





The
following unaudited pro forma information presents the results of operations of
the Company for the year ended December 31, 2006 as if the acquisition of Colgan
had taken place at the beginning of that period.  Because the
acquisition of Colgan occurred early in the year ended December 31, 2007, pro
forma information for that period is not presented.





Year Ended December 31,
      2006
              (unaudited)Operating
      revenues
            
            $
            1,016,005Operating
      income
            
            
            131,308Net
      income
            
            
            77,904Basic
      earnings per share
            
            $
            3.55Diluted
      earnings per share
            
            $
            3.55








59
 Pinnacle Airlines Corp.
 Notes to Consolidated Financial
Statements
 (All amounts in thousands, except per
share data)





4.  Code-share Agreements
with Partners





The
following is a summary of the percentage of regional airline services revenue
attributable to each code-share partner for the years ended December 31, 2007,
2006 and 2005.





Percentages of Regional Airline
      Services RevenueCode-share
      Partner
            
            2007
            
            2006
            
            2005Northwest
      Airlines
            
            75.1%
            
            100.0%
            
            100.0%US
      Airways
            
            12.3%
            
            -
            
            -Continental
      Airlines
            
            6.8%
            
            -
            
            -United
      Air Lines
            
            3.8%
            
            -
            
            -Delta
      Air Lines
            
            0.2%
            
            -
            
            -Essential
      Air Services
            
            1.8%
            
            -
            
            -Total
            
            100.0%
            
            100.0%
            
            100.0%





Northwest
Airlines





The
Company, through its Pinnacle subsidiary, provides regional jet service to
Northwest as a Northwest Airlink carrier under an amended and restated airline
services agreement (the “ASA”) that became effective as of January 1, 2007 and
expires in December 2017.  At the end of its term in 2017, the ASA
automatically extends for additional five-year periods unless Northwest provides
notice to the Company two years prior to the termination date that it does not
plan to extend the term.





On
September 14, 2005, Northwest filed for protection under Chapter 11 of the
United States Bankruptcy Code. Throughout 2006, the Company continued to operate
under its 2002 ASA while Northwest continued with its bankruptcy
proceedings.  On December 15, 2006, the Company and Northwest agreed
to the terms of the current ASA that became effective as of January 1, 2007, and
entered into an Assumption and Claims Resolution Agreement (the “Assumption
Agreement”).  In addition, the Company entered into a Stock Purchase
Agreement pursuant to which it purchased its Series A Preferred Share (the
“Preferred Share”) previously held by Northwest for $20,000 on January 2, 2008.
This amount is included in other current liabilities on the Company’s
consolidated balance sheet at December 31, 2007.  The Preferred Share
has a stated value and liquidation preference of $100 per share and gave
Northwest the right to appoint two directors to the Company’s board of
directors, as well as certain other rights.  No dividends are payable
to the shareholder of the Preferred Share.





The ASA
provided for the Company to take delivery of 17 additional CRJ-200 aircraft
during 2007.  The Company took delivery of 15 CRJ-200 aircraft during
the three months ended March 31, 2007, increasing Pinnacle’s fleet to 139
aircraft as of March 31, 2007.  Two additional CRJ-200s were scheduled
to be delivered to the Company by the end of 2007.  The retention of
these aircraft as permanent additions to the Company’s fleet was contingent upon
Pinnacle reaching an agreement with the Air Line Pilots Association (“ALPA”),
the union representing Pinnacle’s pilots, for an amended collective bargaining
agreement by March 31, 2007.  Pinnacle did not reach agreement with
ALPA, and, as a result, Northwest gave the Company notice during April 2007 that
it will transition these 15 aircraft to one of its wholly owned
subsidiaries.  This transition began in November 2007 with two
aircraft removed from the Company’s fleet as of December 31,
2007.  Further, the Company did not receive the two remaining aircraft
originally scheduled to be delivered in 2007.





During
the three months ended September 30, 2007, the Company and Northwest agreed to
defer the transition of these 15 aircraft, originally scheduled to begin in
September 2007, to allow Northwest to more efficiently introduce the aircraft
into service at its wholly owned subsidiary.  In exchange, Northwest
agreed to pay the Company $1,500 to compensate it for the costs associated with
the delay.  The Company recorded this payment as deferred revenue,
which is being recognized ratably into operating revenue during the transition
period, which is currently expected to extend through the third quarter of
2008.  Upon completion of this transition, Pinnacle will operate a
fleet of 124 CRJ-200 aircraft under the ASA (subject to further adjustment under
certain circumstances as provided for in the ASA).





60
 Pinnacle Airlines Corp.
 Notes to Consolidated Financial
Statements
 (All amounts in thousands, except per
share data)




4.  Code-share
Agreements with Partners (continued)




Under the
Assumption Agreement, Northwest and the Company agreed that the Company would
receive an allowed unsecured claim of $377,500 against Northwest in its
bankruptcy proceedings as settlement of all amounts that Northwest may owe to
the Company for pre-petition claims and the economic adjustments provided for in
the ASA. The
claim would have been reduced by up to $42,500 if the Company had reached an
agreement with ALPA allowing the 17 additional CRJ-200 aircraft in Pinnacle’s
fleet to be committed for up to ten years.  On January 3, 2007, the
Company agreed to assign an aggregate of $335,000 of its $377,500 stipulated
unsecured claim to several third parties for aggregate proceeds of approximately
$282,900, net of expenses.  At March 31, 2007, the Company estimated
the fair value of its remaining $42,500 claim to be approximately $31,900, for a
total expected value for the entire stipulated unsecured claim of approximately
$314,800.





The
unsecured claim was intended to compensate the Company for pre-petition account
receivables and foregone future earnings under the 2002 ASA, and amounts owed at
the time of Northwest’s bankruptcy.  Therefore, the Company is
recognizing the $271,900, the fair value of its stipulated unsecured claim in
excess of the $42,900 pre-petition receivables, over the 11-year term of the
ASA.  Additionally, as the Preferred Share was only determined to have
a nominal fair value, the Company has determined its agreement to pay $20,000 to
purchase this share should be treated as a payment in respect of entering into
the amended ASA.  Consequently, the Company reduced the deferred ASA
revenue by the present value of this obligation.





The
following table includes the non-cash revenue components of the Company’s ASA
with Northwest:





Beginning Balance at January 1,
      2007
            
            
            Additions
              During
    2007
            
            
            Amount Recognized in
      2007
            
            
            Ending Balance at December 31,
      2007Proceeds
      from sale ofunsecured
      claim(1)
            
            $
            -
            
            
            $
            253,042
            
            
            $
            22,330
            
            
            $
            230,712Aircraft
      delivery fees
            
            
            -
            
            
            
            1,403
            
            
            
            122
            
            
            
            1,281Deferred
      aircraft returnfee
            
            
            -
            
            
            
            1,500
            
            
            
            600
            
            
            
            900Contractual
      rights asset
            
            
            (13,233
            )
            
            
            -
            
            
            
            (1,203
            )
            
            
            (12,030
            )Total
            
            $
            (13,233
            )
            
            $
            225,946
            
            
            $
            21,849
            
            
            $
            220,864





(1)
            Amount
      is net of offset for pre-petition receivables of $42,849 and amounts
      payable to Northwest for the Preferred Share of
  $20,000.





The
Company expects to recognize non-cash ASA-related revenue of $22,896 in 2008 and
$21,996 per year in the years 2009 – 2012.





On June
29, 2007, the Company sold the final $42,500 of its unsecured claim against
Northwest to Goldman Sachs Credit Partners L.P. (“Goldman Sachs”) for a net
purchase price of $27,731.  Under the agreement, Goldman Sachs
received the 941 shares of new Northwest common stock that the Company had
previously received in respect of the assigned portion of the stipulated claim,
and received subsequent distributions of Northwest shares, and will receive all
future distributions made in respect of the assigned portion of the stipulated
claim pursuant to Northwest’s plan of reorganization.  During the year
ended December 31, 2007, the Company recognized a nonoperating loss on the sale
of this claim of $4,144, which represents the difference between the $31,875
fair value of the claim as of March 31, 2007 and the sale proceeds of
$27,731.





Under the
ASA, the Company receives the following payments from Northwest:





Reimbursement
payments:  The Company receives monthly reimbursements for all
expenses associated with its operations under the ASA and relating to: basic
aircraft and engine rentals; aviation liability, war risk and hull insurance;
third-party deicing services; CRJ-200 third-party engine and airframe
maintenance; hub and maintenance facility rentals; passenger security costs;
ground handling in cities where Northwest has ground handling operations;
Detroit landing fees and property taxes.





61
 Pinnacle Airlines Corp.
 Notes to Consolidated Financial
Statements
 (All amounts in thousands, except per
share data)




4.  Code-share
Agreements with Partners (continued)




The
Company has no financial risk associated with cost fluctuations for these items
because the Company is reimbursed by Northwest for the actual expenses
incurred.  The ASA provides that Northwest will supply jet fuel to
Pinnacle at no charge beginning January 1, 2007, although Pinnacle is still
required to meet certain fuel usage targets.  As a result, fuel
attributable to Northwest Airlink operations is provided directly by Northwest
and is no longer recorded in the Company’s consolidated statements of
income.  Prior to 2007, the Company purchased fuel from Northwest and
fuel expense was reimbursed by Northwest.  The Company subleases its
CRJ-200 aircraft from Northwest and Northwest reimburses CRJ-200 aircraft rental
expense in full.  Also effective January 1, 2007, Pinnacle’s aircraft
lease rates were reduced to rates that approximated market conditions at that
time.





Payments based on pre-set
rates:  Under the ASA, the Company is entitled to receive
semi-monthly payments for each block hour and departure it completes and a
monthly fixed cost payment based on the size of its fleet.  These
payments are designed to cover all of the Company’s expenses incurred with
respect to the ASA that are not covered by the reimbursement
payments.  The substantial majority of these expenses relate to labor
costs, ground handling costs in cities where Northwest does not have ground
handling operations, landing fees in cities other than Detroit, overhead and
depreciation.  These rates will be in effect (subject to indexed
annual inflation adjustments) until 2013, when the rates will be
reset.





Margin
payments:  The Company receives a monthly margin payment based
on the revenues described above calculated to achieve a target operating
margin.  The target operating margin for the years ended December 31,
2006 and 2005 was 10%.  Under the ASA, effective January 1, 2007,
Pinnacle’s target operating margin under the ASA was reduced to
8%.  The portion of any margin payments attributable to reimbursement
payments will always be equal to the targeted operating margin for the relevant
period.  However, since the margin pre-set rate payments are not based
on the actual expenses incurred, if the Company’s actual expenses differ from
these payments, its actual operating margin could differ from its target
operating margin.





Beginning
in 2008, Northwest will no longer guarantee Pinnacle’s minimum operating margin,
although Pinnacle will be subject to an 8% margin ceiling.  If the
actual operating margin associated with Northwest Airlink operations for any
year beginning with 2008 exceeds the 8% target operating margin but is less than
13%, the Company will make a year-end adjustment payment to Northwest in an
amount equal to half of the excess above 8%.  If the actual operating
margin associated with Northwest Airlink operations for any year beginning with
2008 exceeds 13%, the Company will pay Northwest all of the excess above 13% and
half of the excess between 8% and 13%.  The ASA contains a provision
requiring the Company to allocate its overhead costs after adding 24 regional
aircraft with other partners, thereby providing for a rate reduction to
Northwest.





Disputes: The Company is
currently engaged in discussions with Northwest involving various disputed
payments under the ASA, including items that relate to the period prior to
execution of the ASA in January 2007.  Two of these items could affect the
Company’s operating income in future periods.  The first item relates to a
2006 adjustment to the Company’s block hour, departure, and fixed cost
rates.  The Company’s annual operating income could increase or
decrease by approximately $2,800 per year based upon differing interpretations
of the relevant ASA terms.  The second issue involves the
reclassification of certain airport and ground handling costs and related ASA
revenue in a manner that could reduce the Company’s operating income in future
periods by up to approximately $2,000 per year.





If the
Company is unable to resolve these issues directly with Northwest, the parties
may enter into an arbitration process or other form of legal dispute
resolution.  Adverse determinations in these matters could result in a
loss to the Company of up to $7,200 for disputed amounts through December 31,
2007.  The Company believes that it will prevail in these matters, and
therefore, it does not believe a loss is probable at this
time.  However, the Company may not be successful in resolving these
disputes without reducing its income going forward, or without paying Northwest
for some or all of the amount noted above.  The Company cannot currently
predict the timing of the resolution of these matters.





62
 Pinnacle Airlines
Corp.
 Notes to Consolidated Financial
Statements
 (All amounts in thousands, except per
share data)




4.  Code-share Agreements with Partners
(continued)




US Airways





As of
December 31, 2007, the Company, through its Colgan subsidiary, operated 20 Saab
340 aircraft and six Beech 1900D aircraft under a code-share agreement with US
Airways (the “US Airways Agreement”).  Colgan entered into the US
Airways Agreement in 1999 to provide passenger service and cargo service under
the name “US Airways Express.”  The US Airways Agreement provides the
Company with the use of the US Airways flight designator code to identify
flights and fares in computer reservations systems, permits use of logos,
service marks, aircraft paint schemes, and uniforms similar to US Airways and
coordinated scheduling and joint advertising.  The US Airways
Agreement is structured as a pro-rate agreement for which the Company receives
all of the fares associated with its local passengers and an allocated portion
of connecting passengers’ fares.  The Company pays all of the costs of
operating the flights, including sales and distribution costs.  The
Company controls all scheduling, inventory and pricing for each local market it
serves.  The current US Airways Agreement became effective on October
1, 2005 and has a three-year term.





The US
Airways Agreement provides US Airways first right of initial refusal should the
Company receive an offer to purchase or lease slots at Ronald Reagan National
Airport in Washington, D.C. or LaGuardia International Airport in New York, New
York or an offer to purchase any portion of an equity interest in Colgan, except
for stock sale or transfer between former Colgan shareholders and their
families.  US Airways waived its right of first refusal to purchase
Colgan prior to the Company’s acquisition of Colgan.





Continental
Airlines





As of
December 31, 2007, the Company, through its Colgan subsidiary, operated 11 Saab
340 aircraft based in Houston, Texas under a code-share agreement with
Continental (the “Continental Agreement”).  Colgan entered into the
Continental Agreement in January 2005 for a term of five years.  The
Continental Agreement is structured as a pro-rate agreement for which the
Company receives all of the fares associated with local passengers and an
allocated portion of the connecting passengers’ fares.  The Company
pays all of the costs of operating the flights, including sales and distribution
costs.  However, the Company also receives a connect incentive payment
from Continental for passengers connecting from Colgan operated flights to any
flights operated by Continental or its other code-share partners at
Houston/George Bush Intercontinental Airport.  The connect incentive
is modified every six months to adjust for prospective modifications in fuel
price and certain station expenses.





On
February 5, 2007, the Company entered into a capacity purchase agreement (the
Continental “CPA”) with Continental under which Colgan will operate 15 Q400
regional aircraft predominantly out of Continental’s hub at Newark Liberty
International Airport beginning in February 2008.  The Continental CPA
provides that the Company will be compensated at pre-set rates for the capacity
that it provides to Continental.  The Company is responsible for its
own expenses associated with flight crews, maintenance, dispatch, aircraft
ownership and general and administrative costs.  In addition,
Continental will reimburse the Company without margin for certain reconciled
costs, such as landing fees, most other station-related costs, aircraft hull and
passenger liability insurance (provided that the Company’s insurance rates do
not exceed those typically found at other Continental regional airline partners)
and passenger related costs.  Continental will also provide fuel and
ground handling services at its stations to the Company at no
charge.  The Continental CPA also provides for the Company to earn
incentive revenue based upon the achievement of certain operational and
financial performance targets.  The term of the Continental CPA is ten
years.





The
Continental CPA provides for a rate reduction to Continental to the extent that
the Company begins operating Q400 aircraft for another major
airline.  The rate reduction is designed to share the overhead burden
associated with the Q400 aircraft across all of the Company’s potential Q400
operations and is only applicable for the first 15 aircraft that the Company
adds with another airline.





63
 Pinnacle Airlines Corp.
 Notes to Consolidated Financial
Statements
 (All amounts in thousands, except per
share data)




4.  Code-share Agreements with Partners
(continued)




United Air Lines





In
October 2003, Colgan entered into a pro-rate code-share agreement with United
Air Lines to include the United Air Lines flight designator code and the US
Airways flight designator code on all United flights operated by
Colgan.  In October 2005, Colgan entered into a separate code-share
agreement with United to provide services as a United Express carrier (the
“United Agreement”).  As of December 31, 2007, the Company operated
six Saab 340 aircraft under the name “United Express.”  The United
Agreement expires on December 31, 2008 and is structured as a pro-rate agreement
for which the Company receives all of the fares associated with local passengers
and an allocated portion of the connecting passengers’ fares.  The
Company pays all of the costs of operating the flights, including sales and
distribution costs.  The Company controls all scheduling, inventory
and pricing for each local market it serves.





Delta Air Lines





On April
27, 2007, the Company entered into a capacity purchase agreement with Delta Air
Lines for its Pinnacle subsidiary to operate 16 CRJ-900 aircraft as a Delta
Connection Carrier (the “Delta Connection Agreement”, or
“DCA”).   Scheduled service began on December 1, 2007 and the
Company operated one CRJ-900 under the DCA as of December 31,
2007.  The remaining aircraft will be delivered through February
2009.  The term of the DCA is ten years.  Pursuant to the
DCA, Delta assigned 16 delivery positions to the Company under Delta’s purchase
agreement with the aircraft manufacturer.  Delta also has the option
to add an additional seven CRJ-900 aircraft under the DCA.





The DCA
provides for Delta to pay pre-set rates to the Company based on the capacity
provided to Delta.  The Company will be responsible for the costs of
flight crews, maintenance, dispatch, aircraft ownership and general and
administrative costs.  In addition, Delta will reimburse the Company
for certain pass-through costs, including landing fees, most station-related
costs and aircraft hull and general liability insurance.  In most
instances, Delta will provide fuel and ground handling services free of
charge.  The Company will earn incentive payments (calculated as a
percentage of the payments received from Delta) if it meets certain performance
targets.  The DCA also provides for reimbursements to Delta annually
to the extent that the Company’s actual pre-tax margin on its Delta Connection
operations exceeds certain thresholds.





The DCA
includes provisions that result in the accumulation of a reserve related to cash
received as part of the monthly rate-based settlement component in advance of
performing heavy maintenance services.  The maintenance reserve will
increase each month as the operating fleet grows and as the Company receives
additional amounts in the monthly settlement related to heavy maintenance
expenses not yet incurred. The Company will recognize revenue related to these
payments when the related heavy maintenance expenses are incurred, which is not
expected for several years due to the age of the fleet.  The
maintenance reserve balance was $69 as of December 31, 2007.





Other





The
Company’s Colgan subsidiary has five Saab 340 aircraft that are painted in
Colgan’s livery for use under any code-share partner agreement.  These
aircraft are operated as spare aircraft and used on an as needed basis, with two
being reserved for US Airways flights, two reserved for Continental flights, and
one reserved for United flights.





In
addition to the code-share agreements described above, the Company operates
under nine separate contracts with the DOT to provide subsidized air service to
15 communities as part of the EAS program.  The DOT, under the EAS
contracts, provides subsidy revenue to the carrier to supplement passenger
revenue in small markets that could otherwise not be served
profitably.  Revenue related to the EAS program is included in other
revenue in the Company’s consolidated statements of income.





5.  Mesaba Bankruptcy
Filing





Mesaba
Aviation, Inc. (“Mesaba”) filed for bankruptcy protection under Chapter 11 of
the United States Bankruptcy Code on October 13, 2005.  At that time,
the Company subleased 11 Saab turboprop aircraft and two related engines to
Mesaba under agreements that were to expire at various times between 2006 and
2009.  In January 2006, Mesaba rejected the subleases and returned the
aircraft to the Company.





64
 Pinnacle Airlines Corp.
 Notes to Consolidated Financial
Statements
 (All amounts in thousands, except per
share data)




5.  Mesaba Bankruptcy Filing (continued)




During
the years ended December 31, 2006 and 2005, the Company recorded losses of $765
and $8,075, respectively, net of recoveries from the assignment of the claim as
discussed below, following Mesaba’s rejection of the subleases agreements on the
Saab aircraft.  The Company’s actual gross losses were approximately
$15,250.  These provisions for sublease losses considered estimates of
market rental rates, costs necessary to restore the aircraft to a condition
suitable for sublease and recoveries expected through the Mesaba
bankruptcy.





On
October 4, 2006, the Company entered into an assignment of claim agreement with
Goldman Sachs (the “Goldman Agreement").  In the Goldman Agreement,
the Company assigned to Goldman Sachs all of its rights with respect to its
deficiency claim against Mesaba as set forth in the proof of claim filed in
bankruptcy court.  Goldman Sachs agreed to pay the Company 42% of the
final allowed claim, which ultimately will be determined by a final order in
Mesaba's bankruptcy proceedings.  On October 5, 2006, Goldman Sachs
advanced to the Company $5,234, which is equal to 80% of the purchase price
based on the claim amount set forth in the Company’s original proof of
claim.  The Goldman Agreement contains a provision for an additional
payment from (or payment to) Goldman Sachs once the final allowed amount of the
claim is determined.  Should the Company’s ultimate claim against
Mesaba be less than the estimate contained in the Goldman Agreement, it will be
required to pay Goldman Sachs the difference plus interest.





On
February 7, 2007, Mesaba filed an objection to the Company’s proof of claim,
alleging that, among other things, the Company failed to mitigate its damages by
subleasing the aircraft to a third-party or returning the aircraft to the
Company’s lessor, and that the Company may have received a portion of its
damages through its claim settlement with Northwest.  The Company
subsequently filed an amended proof of claim in the Mesaba bankruptcy
proceedings, increasing its damages for actual realized return condition costs
and for stipulated damages as provided for in each aircraft
sublease.  The Company, Goldman Sachs and Mesaba have had informal
settlement discussions, but have not reached a settlement.  A hearing
to consider the merits of whether the Company is entitled to a claim for
stipulated loss damages was held in September 2007, but the bankruptcy court
considering the issue has not yet rendered a ruling.  The final
disposition of the claim amount will be determined through the bankruptcy court,
and the Company cannot estimate when the matter will be resolved.





The
Company believes that its claim against Mesaba has been properly asserted and
does not expect the resolution of this matter to result in a material adjustment
to the Company’s financial statements.





During
the year ended December 31, 2007, the Company incurred expenses higher than
previous estimates to refurbish the six Saab aircraft that were returned to
their lessor.  After acquiring Colgan, the Company determined that it
would place the two Saab aircraft that have leases extending through 2009 into
service at Colgan.  Because the Company will continue to operate these
aircraft, the provision for future sublease losses on these two aircraft was
reduced to $0 during the first quarter of 2007.  These adjustments
increased the Company’s operating income, net income and diluted earnings per
share by $1,048, $665 and $0.03, respectively, for the year ended December 31,
2007.





Additionally,
the Company incurred maintenance expense of $1,220 for the year ended December
31, 2007 related to the refurbishment of the two aircraft that will now be
operated by Colgan.  For the year ended December 31, 2007, Pinnacle
also incurred aircraft rental expense, prior to placing these aircraft into
service at Colgan, of $530.





As of
December 31, 2007, the Company did not expect to incur any future sublease
losses.  The Company’s expected remaining recovery from the Mesaba
bankruptcy of $1,167 is included in prepaid expenses and other assets on the
Company’s consolidated balance sheet as of December 31, 2007.  The
Company’s accrued future sublease losses, net of expected recoveries, at
December 31, 2006 are included in other current liabilities in the amount of
$6,282 and other liabilities in the amounts of $657 on the Company’s
consolidated balance sheet.





65
 Pinnacle Airlines Corp.
 Notes to Consolidated Financial
Statements
 (All amounts in thousands, except per
share data)





6.  Earnings Per Share
Calculation





The Company accounts for earnings per
share (“EPS”) in accordance with SFAS No. 128, Earnings per
Share.  The following table sets forth the computation of basic
and diluted earnings per share:





Years Ended December
      31,2007
            
            
            2006
            
            
            2005Net
      income
            
            $
            34,637
            
            
            $
            77,799
            
            
            $
            25,698Basic
      earnings per share
            
            $
            1.66
            
            
            $
            3.55
            
            
            $
            1.17Diluted
      earnings per share
            
            $
            1.50
            
            
            $
            3.54
            
            
            $
            1.17Share
      computation:Weighted
      average number of shares out-standing
      for basic EPS (1)
            
            
            20,897
            
            
            
            21,945
            
            
            
            21,913Senior
      convertible notes (2)
            
            
            2,017
            
            
            
            -
            
            
            
            -Share-based
      compensation (3)
            
            
            202
            
            
            
            29
            
            
            
            19Weighted
      average number of shares out-standing
      for diluted EPS
            
            
            23,116
            
            
            
            21,974
            
            
            
            21,932





(1)
            During
      2007, the board of directors of the Company authorized a share repurchase
      program, whereby the Company repurchased an aggregate of 4,450 shares of
      its own common stock, of which the weighted average number of shares
      repurchased during the current period are excluded from basic
      EPS.  The Company accounted for the repurchase of this treasury
      stock using the cost method.




(2)
            Dilution
      is calculated as follows:


For the Year Ended December 31,
      2007Increased
      in fully diluted share count=
              $121,000  -  $121,000
                $13.22(a)     $16.956(b)(a)
      Conversion price of the Notes(b)Average
      stock price for the year ended December 31, 2007


(3)
            Options
      to purchase 201, 935, 663 shares of common stock were excluded from the
      diluted EPS calculation at December 31, 2007, 2006 and 2005, respectively,
      because their effect would be
anti-dilutive.





7.  Debt





The
following table summarizes the Company’s long-term debt:





As of December
      31,2007
            
            
            2006Senior
      convertible notes
            
            $
            121,000
            
            
            $
            121,000Long-term
      notes payable:Secured
            
            
            78,820
            
            
            
            -Unsecured
            
            
            402
            
            
            
            -Total
      long-term debt
            
            
            200,222
            
            
            
            121,000Less
      current maturities
            
            
            (7,410
            )
            
            
            -Long-term
      debt, net of current maturities
            
            $
            192,812
            
            
            $
            121,000








66
 Pinnacle Airlines Corp.
 Notes to Consolidated Financial
Statements
 (All amounts in thousands,
except per share data)




7.  Debt (continued)




The
aggregate amounts of principal maturities of long-term debt as of December 31,
2007 were as follows:





2008
            
            $
            7,4102009
            
            
            9,1102010
            
            
            5,6442011
            
            
            4,4902012
            
            
            3,812Thereafter
            
            
            169,756Total
            
            $
            200,222





Notes Payable





Short-term
notes payable consists of the current balance of $2,500 of the $10,000 one-year
promissory note issued by the Company in connection with its acquisition of
Colgan, as discussed in Note 3.





Long-term
notes payable also consists of other secured and unsecured debt.  The
secured debt is collateralized by aircraft, aircraft parts and other assets,
with interest rates ranging from 7.7% to 8.6% and maturities through
2012.  The unsecured debt has interest rates ranging from 3.1% to 4.2%
with maturities through 2008.





Included
in secured long-term notes payable are borrowings for $60,270 from Export
Development Canada (“EDC”) for the three CRJ-900 aircraft delivered in October
and December 2007.  As discussed in Note 10, the Company implemented
an interest swap hedge program, of which one of the three aircraft were hedged,
to reduce its risk from rising interest rates, as it relates to long-term
financing of our aircraft.  The borrowings are collateralized by the
aircraft and bear effective rates of 6.7% to 6.8% and maturities through
2022.





Since
December 31, 2007, the Company has entered into six additional debt agreements
with EDC to finance the aircraft delivered thus far in 2008. As of February 22,
2008 the Company has financed an additional $102,959.





Also
included in secured long-term notes payable is financing of $3,402 with General
Electric Capital Corporation (“GE”) for a CRJ-900 engine.  The
borrowing is collateralized by the engine with an interest rate of 7.5% and
matures in 2017.





On April
25, 2007, the Company repaid in full outstanding notes with a third-party
secured by nine of the Company’s Saab 340 aircraft, which had a balance of
$7,251 as of March 31, 2007.  The notes were payable in various
installments through 2009 and had interest rates of 12.5% to 13.0%.





As of
December 31, 2007 the fair value of the Notes payable was $79,891.





Line of Credit





The
Company maintains a revolving line of credit with an institutional lender for a
principal amount not to exceed $8,500 or 75% of the net unpaid balance of
eligible accounts receivable.  This instrument has an interest rate of
Prime plus 0.25%.  In June 2007, the Company extended the termination
date of the loan to April 15, 2008.  Amounts outstanding under the
line of credit were $8,375 at December 31, 2007.





Pre-delivery Payment Financing
Facilities





In
September and October 2007, the Company executed pre-delivery payment financing
facilities with EDC for up to $80,000 in short-term borrowings.  The
outstanding balance as of December 31, 2007 was $64,419.  Of the
$64,419 balance, $63,603 relates to current borrowings and $816 relates to
non-current borrowings.  Borrowings under the pre-delivery payment
facilities bear interest at the 3-month LIBOR rate plus 1.65%, which was 6.48%
as of December 31, 2007, and are collateralized by the pre-delivery payments to
Bombardier.  The Company repays the borrowings as each aircraft is
delivered.





67
 Pinnacle Airlines Corp.
 Notes to Consolidated Financial
Statements
 (All amounts in thousands, except per
share data)




7.  Debt (continued)


Senior Convertible
Notes





In
February 2005, the Company completed the private placement of $121,000 principal
amount of 3.25% senior convertible notes due February 15, 2025 (the
"Notes").  The Notes are convertible into a combination of cash and
common stock at a conversion price of $13.22.  The Notes become
convertible in any quarter subsequent to a quarter in which the closing price of
the Company’s common stock exceeds the trigger price of $15.86, which is
calculated as 120% of the conversion price, for 20 of the last 30 trading
days.





The
conditions described above were met during the first and second quarters of
2007, thereby causing the Notes to become convertible at the option of each Note
holder during the second and third quarters of 2007.  The conditions
were not met during the third and fourth quarters of 2007; therefore, the Notes
will not be convertible in the first quarter of 2008.  As a result,
the Notes are classified as a noncurrent liability on the Company’s consolidated
balance sheet at December 31, 2007.  The excess of the Company's
average common stock price for the period over the conversion price of $13.22
increases the weighted average number of shares outstanding for diluted earnings
per share.  See Note 6 for additional information regarding the
dilutive effect of the Notes’ conversion rights.  No Notes were
tendered for conversion during the periods in which they were
convertible.





Prior to
February 15, 2010, the Company cannot redeem the Notes at its
option.  Beginning on February 15, 2010, the Company may redeem the
Notes for cash, in whole or in part at any time or from time to
time.  The Company will give not less than 30 days’ or more than 60
days’ notice of redemption by mail to holders of the Notes.  If the
Company elects to redeem the Notes, it will pay a redemption price equal to 100%
of the principal amount of the Notes to be redeemed, plus accrued and unpaid
interest to the redemption date.





The
holders of the Notes may require the Company to purchase all or a portion of
their Notes for cash on February 15, 2010, February 15, 2015 and February 15,
2020 (“Redemption Dates”) at a purchase price equal to 100% of their principal
amount plus accrued and unpaid interest, if any, to the purchase date. The Notes
are structured such that, upon the occurrence of certain events, holders may
convert the Notes into the equivalent value of the Company's common stock at an
initial conversion rate of 75.6475 shares (not in thousands) per $1 principal
amount of Notes, representing an initial conversion price of $13.22 per
share.





Upon
conversion, the Company will pay the holder all or a portion of a conversion
value in cash up to the $1 principal amount.  To the extent that the
conversion value exceeds the $1 principal amount, the excess will be settled in
cash, common stock or a combination of both, at the Company's
option.





Holders
may convert their Notes only during the following periods:





·
            During
      a quarter (and only during such quarter) if the closing price of the
      Company’s common stock exceeds 120% of the conversion price of the Notes
      ($15.86 per share or the “trigger price”) for at least 20 of the last 30
      trading days of the preceding
quarter;





·
            During
      a five-day period after the Notes have traded for a five-day period at a
      price that is less than 98% of the equivalent value that could be realized
      upon conversion of the Notes;





·
            If
      the Company calls the Notes for
redemption;





·
            If
      a change of control or other specified corporate transactions or
      distributions to holders of the Company’s common stock occurs (and in some
      instances, the Company may also owe an additional premium upon a change in
      control); and





·
            During
      the ten trading days prior to the maturity date of February 15,
      2025.





As of
December 31, 2007 the fair value of the Company’s senior convertible notes was
$154,275.





68
 Pinnacle Airlines Corp.
 Notes to Consolidated Financial
Statements
 (All amounts in thousands, except per
share data)




7.  Debt (continued)




Debt Related Subsequent
Event





On March
11, 2008 the Company entered into a Term loan with Citigroup Global Markets
Inc.  The Term loan provides for advances up to $60,000 and is
collateralized by the Company’s ARS holdings.  The proceeds will be
used to support the Company’s aircraft purchases and for general working capital
purposes.  The Term loan is pre-payable at any time prior to maturity
on February 28, 2009 should the Company elect to sell any of its ARS
portfolio.  The Term loan bears interest at the one month LIBOR plus
2.0% and is payable monthly.  The Term loan includes both covenant and
margin requirements with which the Company is presently compliant.





8.  Related Party
Transactions





Northwest





As
discussed in Note 4, Northwest was a related party of the
Company.  The Company generated 75%, 99% and 99%, respectively, of its
consolidated operating revenue from Pinnacle’s ASA with Northwest for the years
ended December 31, 2007, 2006 and 2005.  Under the ASA, Pinnacle uses
the name "Northwest Airlink" and leases all of its CRJ-200s from
Northwest.  Through November 30, 2007, Northwest was the owner of
2,492 shares, or 11%, of the Company’s issued common stock.  On that
date, the Company purchased these shares from Northwest at a price of
$32,945.  As of December 31, 2007, Northwest was the holder of the
Preferred Share.  As discussed in Note 4, the Company repurchased the
Preferred Share on January 2, 2008 for $20,000.  After this purchase,
Northwest no longer owns any shares of the Company’s stock.





Amounts
recorded in the Company’s consolidated statements of income for transactions
with Northwest are as follows:


Years Ended December
      31,2007
            
            
            2006
            
            
            2005Revenue:Regional
      airline services revenue
            
            $
            583,591
            
            
            $
            816,787
            
            
            $
            833,125Other
      revenue
            
            
            7,057
            
            
            
            5,254
            
            
            
            5,873Expenses:Aircraft
      fuel
            
            
            -
            
            
            
            109,230
            
            
            
            111,993Aircraft
      rentals
            
            
            129,258
            
            
            
            264,124
            
            
            
            277,914Other
      rentals
            
            
            11,250
            
            
            
            11,250
            
            
            
            11,250Ground
      handling services
            
            
            58,680
            
            
            
            63,149
            
            
            
            66,671Commissions
      and passenger related expense
            
            
            228
            
            
            
            393
            
            
            
            511Other
            
            
            103
            
            
            
            283
            
            
            
            517Provision
      for increases (decreases) in losses associated with the Northwest and
      Mesaba bankruptcy filings
            
            
            33
            
            
            
            (44,336
            )
            
            
            51,523Interest
      expense
            
            
            -
            
            
            
            -
            
            
            
            463





Net
amounts due from Northwest as of December 31, 2007 and 2006 were $20,370 and
$100,062, respectively, and are included in receivables in the Company’s
consolidated balance sheets.





The
higher than normal receivable balance at December 31, 2006 resulted from the
receipt of the normal month-end payment from Northwest totaling $31,927 on
January 2, 2007, due to the fact that the contractual payment date fell on a
weekend.  The balance at December 31, 2006 also included pre-petition
receivables, net of allowances, of $42,849, which were settled upon the
assignment of the Northwest claim in January 2007.





Certain
trade amounts, primarily relating to landing fees, ground handling and
facilities rentals, due to Northwest as of December 31, 2007 and 2006 were
$1,864, and $3,170, respectively, and are included in accounts payable in the
Company’s consolidated balance sheets.





69
 Pinnacle Airlines Corp.
 Notes to Consolidated Financial
Statements
 (All amounts in thousands, except per
share data)




8.  Related Party Transactions
(continued)


The
Company also has certain business transactions with Mesaba, which as of April
24, 2007, became a wholly owned subsidiary of Northwest.  Ground
handling services obtained from Mesaba for the years ended December 31, 2007,
2006 and 2005 totaled $18,279, $16,455 and $16,878, respectively. Ground
handling services provided to Mesaba for the years ended December 31, 2007, 2006
and 2005 totaled $1,355, $1,306 and $1,686, respectively.  These
amounts are included in other operating revenue in the Company’s consolidated
statements of income.





Other





Colgan
obtains certain avionics services from a business owned by one of Colgan’s
selling shareholders.  For the year ended December 31, 2007, this
related business provided avionics services to the Company in the amount of
$1,425, and the balance owed for these services at December 31, 2007 was
$120.





PNCL has
entered into arrangements with one of the selling shareholders of Colgan for
leases of real property, primarily office and hangar space.  The
amounts paid to this selling shareholder under these leases totaled $276 for the
year ended December 31, 2007.  As discussed in Note 3, PNCL has agreed
to purchase a portion of this property during 2007 for a fair value derived
purchase price of $6,358 if the shareholders are unable to find an unrelated
third-party buyer.





In
February 2006, Colgan entered into a sale-leaseback transaction with a related
party of Colgan for two of its Saab 340 aircraft.  The monthly payments on
each of the leases are $30 and expire in February 2013.





9.  Leases





Capital Leases





The
Company leases certain aircraft equipment, buildings and office equipment under
noncancelable capital leases that expire on various dates through
2013.  Under these capital leases, an obligation is shown on the
Company’s consolidated balance sheets for the present value of the future
minimum payments.  At December 31, 2007, the weighted average interest
rate implied in these leases was approximately 9.6%, and the net book value of
the assets associated with the capital leases was $5,194.





The
following table summarizes approximate minimum future rental payments for the
Company, by year and in the aggregate, together with the present value of net
minimum lease payments as of December 31, 2007:





2008
            
            $
            1,5122009
            
            
            1,3062010
            
            
            1,3112011
            
            
            7772012
            
            
            703Thereafter
            
            
            174Total
      future rental payments
            
            
            5,783Amount
      representing interest
            
            
            (997
            )Present
      value of future lease payment
            
            
            4,786Less:  current
      maturities
            
            
            (1,118
            )Capital
      leases, net of current maturities
            
            $
            3,668





Operating Leases





As
discussed in Note 4, the Company subleases its CRJ-200 aircraft and related
engines from Northwest under operating leases that expire December 31,
2017.  The lease agreements contain certain requirements of the
Company regarding the payment of taxes on the aircraft, acceptable use of the
aircraft, the level of insurance to be maintained, the maintenance procedures to
be performed and the condition of the aircraft upon its return to
Northwest.  Pursuant to the ASA, Northwest reimburses Pinnacle’s
aircraft rental expense in full.





70
 Pinnacle Airlines Corp.
 Notes to Consolidated Financial
Statements
 (All amounts in thousands, except per
share data)




9.  Leases (continued)




As
discussed in Note 5, 11 Saab 340 aircraft were previously subleased to
Mesaba.  In January 2006, Mesaba rejected the subleases of the
aircraft and returned them to Pinnacle.  Two of the 11 aircraft leases
expired in the fourth quarter of 2006 and seven of the aircraft leases expired
in the first quarter of 2007.  The Company’s Colgan subsidiary is
operating the two remaining aircraft until the expiration of their related
subleases in January 2009.





The
Company currently leases five Beech 1900D aircraft.  The aircraft are
subject to 60-month leases ending in 2010, but allow the Company the option
without penalty to early terminate these leases.  The Company has
begun returning these aircraft, with the last aircraft expected to be returned
by the end of 2008.





The
Company also leases 17 of its 42 Saab 340 aircraft under operating
leases.  Ten of the lease agreements allow the Company to terminate
the agreements at various points from 2008 through 2011.  These
aircraft lease agreements generally provide that the Company pay taxes,
maintenance, insurance and other operating expenses applicable to leased
assets.  The leases require aircraft to be in a specified maintenance
condition at lease termination or upon return of the aircraft.





The
Company’s non-aircraft operating leases primarily relate to facilities and
office equipment.





The
following summarizes approximate minimum future rental payments, by year and in
the aggregate, required under noncancelable operating leases with initial or
remaining lease terms in excess of one year as of December 31,
2007:





Aircraft(1)
            
            
            Non-aircraft
            
            
            Total2008
            
            $
            123,040
            
            
            $
            17,414
            
            
            $
            140,4542009
            
            
            115,298
            
            
            
            16,668
            
            
            
            131,9662010
            
            
            113,323
            
            
            
            16,330
            
            
            
            129,6532011
            
            
            113,088
            
            
            
            15,900
            
            
            
            128,9882012
            
            
            113,088
            
            
            
            14,698
            
            
            
            127,786Thereafter
            
            
            565,440
            
            
            
            20,067
            
            
            
            585,507Total
      future rental payments
            
            $
            1,143,277
            
            
            $
            101,077
            
            
            $
            1,244,354





(1)
            The
      amounts noted above for operating leases include $1,134,434 of obligations
      for leased CRJ-200 aircraft from Northwest.  The Company is
      reimbursed by Northwest in full for CRJ-200 aircraft rental expense under
      the ASA.  Should the ASA with Northwest be terminated, these
      aircraft would be returned to
Northwest.





Rental
expense for operating leases for the years ended December 31 consisted of
the following:





2007
            
            
            2006
            
            
            2005Gross
      rental expense
            
            $
            154,006
            
            
            $
            283,448
            
            
            $
            303,560Sublease
      rental payments
            
            
            -
            
            
            
            -
            
            
            
            (7,082
            )Net
      rental expense
            
            $
            154,006
            
            
            $
            283,448
            
            
            $
            296,478





The above
minimum future rentals and total rental expense do not include landing fees
which amounted to approximately $36,545, $23,772, and $24,409 for the years
ended December 31, 2007, 2006 and 2005, respectively.





10. Derivatives





The
Company is exposed to interest rate risk prior to the delivery of the Q400 and
CRJ-900 aircraft.  To mitigate the financial risk associated with
changes in long-term interest rates, the Company initiated a cash flow hedging
program during July 2007.  The program consists of interest rate swaps
whereby the Company agrees to pay a fixed interest rate and receive the six
month LIBOR rate.





The
Company records these instruments at fair market value, and recognizes changes
in the fair value as a loss in other comprehensive income (“OCI”), net of
taxes.  Each outstanding hedge position will be cash settled when the
permanent financing is obtained at the time of delivery of each aircraft, at
which time the remaining hedge-related OCI balance will be amortized into
interest expense over the life of the aircraft financing.  The term of
each cash flow hedge varies between four months and nine months.





71
 Pinnacle Airlines Corp.
 Notes to Consolidated Financial
Statements
 (All amounts in thousands, except per
share data)




10. Derivatives (continued)


The
Company recorded payments of $1,310 related to hedge settlements as of December
31, 2007. As of February 22, 2007 the Company made additional hedge settlement
payments of $7,186 and recorded hedge ineffectiveness charges of approximately
$122.  A hedge settlement relates to an unwind of the underlying swap
agreement, and is recorded as prepaid interest net of any ineffectiveness, which
is recorded as interest expense in the period of the settlement.  Notional
amounts associated with post December 31, 2007 settlements are
$86,525.





The
following is a summary of the Company’s cash flow hedges:





As of December
      31,2007Hedge
      effectiveness net losses recognized in interest expense
            
            $
            -Hedge
      ineffectiveness net losses recognized in interest expense
            
            
            51Other
      hedge net losses recognized in OCI, net of tax
            
            
            10,761Notional
      amount hedged
            
            
            435,699Payments
      related to hedge settlements, net of $13 ineffectiveness
            
            
            1,297Percentage
      of anticipated debt financing for firm noncancelable
    aircraft
            
            
            78
            %Weighted
      average swap rate (1)
            
            
            5.27
            %





(1)
            The
      swap rate reflects the indexed rate to which the Company hedged, which is
      used to set the interest rate on the permanent financing prior to adding a
      credit spread. As of February 22, 2008, the Company’s average swap rate
      was approximately 5.27%.





11. Comprehensive
Income





The
following table summarizes the Company’s Comprehensive Income:




Years Ended December
      31,2007
            
            
            2006
            
            
            2005Net
      income
            
            $
            34,637
            
            
            $
            77,799
            
            
            $
            25,698Adjustments:Retired
      Pilots’ Insurance Benefit Planunrealized
      actuarial gain
            
            
            521
            
            
            
            -
            
            
            
            -Cash
      flow hedge unrealized loss
            
            
            (10,761
            )
            
            
            -
            
            
            
            -Total
      comprehensive income
            
            $
            24,397
            
            
            $
            77,799
            
            
            $
            25,698
































72
 Pinnacle Airlines Corp.
 Notes to Consolidated Financial
Statements
 (All amounts in thousands, except per
share data)





12. Accrued
Expenses





Accrued
expenses consisted of the following as of December 31:


2007
            
            
            2006Taxes
      other than income
            
            $
            9,600
            
            
            $
            8,441Compensation
            
            
            11,888
            
            
            
            8,250Ground
      handling and landing fees
            
            
            7,587
            
            
            
            5,325Insurance
      costs
            
            
            4,130
            
            
            
            2,031Interest
            
            
            4,640
            
            
            
            1,475Ticketing
      costs
            
            
            1,345
            
            
            
            -Maintenance
            
            
            2,731
            
            
            
            -Fuel
            
            
            2,157
            
            
            
            -Income
      tax reserve(1)
            
            
            16,694
            
            
            
            -Derivative
      liability
            
            
            16,777
            
            
            
            -Other
            
            
            2,767
            
            
            
            668Total
      accrued expenses
            
            $
            80,316
            
            
            $
            26,190





(1)
            Prior
      to the adoption of FIN 48, income tax reserves at December 31, 2006 were
      included in income taxes payable and deferred income taxes in the amount
      of $15,672 and $374, respectively.





13.  Other
Expenses





Other
expenses consisted of the following for the years ended December
31:





2007
            
            
            2006
            
            
            2005Passenger
      liability insurance
            
            $
            4,979
            
            
            $
            3,284
            
            
            $
            3,427Hull
      and other insurance
            
            
            3,807
            
            
            
            2,626
            
            
            
            3,047Property
      and other taxes
            
            
            10,023
            
            
            
            9,923
            
            
            
            9,700Employee
      training expense
            
            
            8,289
            
            
            
            5,573
            
            
            
            5,256Employee
      overnightaccommodations
            
            
            19,689
            
            
            
            10,621
            
            
            
            10,889Professional
      services fees
            
            
            5,159
            
            
            
            3,935
            
            
            
            6,248Office
      equipment and supplies
            
            
            5,717
            
            
            
            3,936
            
            
            
            3,402Employee-related
      expenses
            
            
            4,773
            
            
            
            3,379
            
            
            
            3,312Communications
      relatedexpenses
            
            
            5,055
            
            
            
            3,716
            
            
            
            3,569Maintenance-related
      expenses
            
            
            4,295
            
            
            
            465
            
            
            
            510Other
            
            
            7,343
            
            
            
            4,674
            
            
            
            5,162Total
      other expenses
            
            $
            79,129
            
            
            $
            52,132
            
            
            $
            54,522








73
 Pinnacle Airlines Corp.
 Notes to Consolidated Financial
Statements
 (All amounts in thousands, except per
share data)





14. Income
Taxes





The
significant components of the Company's deferred tax assets and liabilities are
as follows:


December
    31,2007
            
            
            2006Deferred
      tax assets:Inventory
      reserves
            
            $
            1,017
            
            
            $
            592Vacation
      pay
            
            
            1,990
            
            
            
            1,332Bad
      debt reserves
            
            
            -
            
            
            
            2,140Stock
      compensation
            
            
            578
            
            
            
            207Accrued
      interest
            
            
            1,321
            
            
            
            312Other
      accruals
            
            
            1,125
            
            
            
            564Pilot
      post-retirement reserve
            
            
            713
            
            
            
            563Deferred
      revenue
            
            
            93,383
            
            
            
            -State
      net operating losses
            
            
            1,121
            
            
            
            -Marketable
      securities
            
            
            6,465
            
            
            
            -Total
      deferred tax assets
            
            
            107,713
            
            
            
            5,710Valuation
      allowance
            
            
            (844
            )
            
            
            -Net
      deferred tax assets
            
            $
            106,869
            
            
            $
            5,710Deferred
      tax liabilities:Prepaid
      expenses
            
            
            (203
            )
            
            
            (822
            )Tax
      over book depreciation
            
            
            (13,958
            )
            
            
            (9,058
            )Northwest
      receivable
            
            
            -
            
            
            
            (9,717
            )Other
            
            
            (567
            )
            
            
            (40
            )Net
      deferred tax liabilities
            
            
            (14,728
            )
            
            
            (19,637
            )Net
      deferred tax asset (liability)
            
            $
            92,141
            
            
            $
            (13,927
            )





As of
December 31, 2007, the Company had tax-effected state operating losses of
approximately $1,121, which begin to expire in 2012.  The Company has
recorded a valuation allowance on the state net operating losses of
$363.  A deferred tax asset of $93,383 was recorded for the deferred
income associated with the sale of it unsecured claim from Northwest’s
bankruptcy.  The Company recorded a deferred tax asset of $6,465
related to hedging transactions.  A valuation allowance of $481 was
recorded on these hedging transactions.





The
provision for income tax expense includes the following components for the years
ended December 31:





2007
            
            
            2006
            
            
            2005Current:Federal
            
            $
            105,656
            
            
            $
            27,808
            
            
            $
            21,726State
            
            
            10,887
            
            
            
            3,346
            
            
            
            1,952116,543
            
            
            
            31,154
            
            
            
            23,678Deferred:Federal
            
            
            (90,931
            )
            
            
            14,664
            
            
            
            (7,732
            )State
            
            
            (9,212
            )
            
            
            983
            
            
            
            (233
            )(100,143
            )
            
            
            15,647
            
            
            
            (7,965
            )Total
      income tax expense
            
            $
            16,400
            
            
            $
            46,801
            
            
            $
            15,713





74
 Pinnacle Airlines Corp.
 Notes to Consolidated Financial
Statements
 (All amounts in thousands, except per
share data)




14. Income
Taxes (continued)


The
following is a reconciliation of the provision for income taxes at the
applicable federal statutory income tax rate to the reported income tax expense
for the years ended December 31:





2007
            
            
            2006
            
            
            2005Amount
            
            
            
            Percentage
            
            
            Amount
            
            
            
            Percentage
            
            
            Amount
            
            
            
            PercentageIncome
      tax expense at statutoryrate
            
            $
            17,863
            
            
            
            35.0
            %
            
            $
            43,610
            
            
            
            35.0
            %
            
            $
            14,494
            
            
            
            35.0
            %State
      income taxes, net offederal
      taxes
            
            
            759
            
            
            
            1.5
            %
            
            
            2,722
            
            
            
            2.2
            %
            
            
            832
            
            
            
            2.0
            %Valuation
      allowance
            
            
            363
            
            
            
            0.7
            %
            
            
            (288
            )
            
            
            (0.2
            )%
            
            
            288
            
            
            
            0.7
            %Additional
      provisions
            
            
            -
            
            
            
            -
            
            
            
            1,388
            
            
            
            1.1
            %
            
            
            -
            
            
            
            -Tax-exempt
      interest income
            
            
            (3,638
            )
            
            
            (7.1
            )%
            
            
            (777
            )
            
            
            (0.6
            )%
            
            
            -
            
            
            
            -Other
            
            
            1,053
            
            
            
            2.0
            %
            
            
            146
            
            
            
            0.1
            %
            
            
            99
            
            
            
            0.2
            %Income
      tax expense
            
            $
            16,400
            
            
            
            32.1
            %
            
            $
            46,801
            
            
            
            37.6
            %
            
            $
            15,713
            
            
            
            37.9
            %





As
discussed in Note 4, the Company assigned its Northwest bankruptcy claim during
the first quarter of 2007.  A majority of the proceeds received were
invested in short-term investments earning tax-exempt interest
income.  As a result, the Company’s taxable income excluded these
earnings, thereby lowering the Company’s effective tax rate for the year ended
December 31, 2007.





Income
taxes paid for the years ended December 31, 2007, 2006 and 2005 were
approximately $114,013 and $32,504 and $9,596, respectively.





During
the year ended December 31, 2007, the Company recorded a valuation allowance
against certain deferred tax assets.  The valuation allowance relates
to state net operating losses generated in the current year as well as a portion
of state deferred tax assets recorded through other comprehensive income related
primarily to hedging transactions.  The realization of the future tax
benefits of a deferred tax asset is dependent on future taxable income against
which such tax benefits can be applied.  In assessing the
realizability of deferred tax assets, management considers whether it is more
likely than not that some portion or all of the deferred tax assets will not be
realized.  The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods and in
the jurisdictions in which those temporary differences become
deductible.  Based upon the level of historical taxable income and
projections of future taxable income over the periods which the deferred tax
assets are deductible, management believes it is more likely than not the
Company will not realize the benefit of these assets.





In July
2006, the FASB issued FASB Interpretation No. 48 (“FIN 48”), Accounting for Uncertainty in Income
Taxes, which became effective for and was adopted by the Company
beginning January 1, 2007.  As a result of the implementation of FIN
48, the Company recognized a $500 increase in its liability for unrecognized tax
benefits, which was accounted for as a reduction to the January 1, 2007 balance
of retained earnings.  At the adoption date of January 1, 2007, the
Company had $16,692 of unrecognized tax benefits.  As of December 31,
2007, the Company had $16,694 of unrecognized tax benefits.  The
following table reconciles the Company’s beginning and ending unrecognized tax
benefits balances:





Unrecognized
      tax benefits balance at January 1, 2007
            
            $
            16,692Settlements
            
            
            (74
            )Additions
            
            
            76Unrecognized
      tax benefits balance at December 31, 2007
            
            $
            16,694





The Company
provides for interest and penalties accrued related to unrecognized tax benefits
in nonoperating expenses.  During the year ended December 31, 2007,
the Company recorded interest and penalties of $1,443.  As of December
31, 2007, the Company had $2,495 of accrued interest and penalties, $220 of
which was included in the FIN 48 adjustment to the opening balance of retained
earnings.





75
 Pinnacle Airlines Corp.
 Notes to Consolidated Financial
Statements
 (All amounts in thousands, except per
share data)




14. Income
Taxes (continued)


The
amount of unrecognized tax benefits that would affect our effective tax rate if
recognized is $16,347 as of December 31, 2007 and $16,346 as of January 1,
2007.  The tax years 2003-2006 remain open to examination by major
taxing jurisdictions to which the Company is subject.





The
Company is currently under audit by the Internal Revenue Service (“IRS”) for the
tax years 2003 through 2005.  In May 2007, the IRS proposed certain
adjustments to the Company’s positions related to various exam
matters.  The Company has submitted a protest to the IRS with respect
to these adjustments, and is awaiting the start of an administrative appeals
process.  Should the IRS prevail on these adjustments, the impact on
the Company could be significant.  The Company believes the potential
tax exposure related to the items the IRS has focused on during its examinations
would not exceed $35,000 plus penalties of $9,747.  The Company has
reserved for $16,694 of this exposure.  The Company believes that it
has provided sufficiently for all audit exposures; however, future earnings,
cash flow and liquidity could be materially affected should it receive adverse
rulings on the items under review.  Settlement of this audit or the
expiration of the statute of limitations on the assessment of income taxes for
any tax year may also result in a change in future tax provisions.





15. Share-Based
Compensation





Effective
January 1, 2006, the Company adopted SFAS 123R, which requires recognition of
compensation expense for share-based awards, including employee stock option
grants, using a fair value method.  As allowed under SFAS 123R, the
Company chose the modified prospective adoption method, under which compensation
cost is recognized in the financial statements beginning with the effective
date, for all share based payments granted after that date, and for all unvested
awards granted prior to the effective date of SFAS 123R.  Accordingly,
prior period amounts have not been restated.





The
following table illustrates the effect on net income and earnings per share
assuming the compensation costs for the Company’s stock option plan had been
recorded in the year ended December 31, 2005 based on the fair value method
under SFAS 123.  The Company calculated fair value under SFAS 123
using the Black-Scholes-Merton multiple-option pricing valuation
model.




Year Ended December
      31,2005Net
      income, as reported
            
            $
            25,698Add:
      Restricted stock share-based compensation expense included in reported net
      income, net of tax
            
            
            291Deduct:  Restricted
      stock and stock option share-based compensation expense determined under
      the fair value method, net of tax
            
            
            (2,679
            )Net
      income, including the effects of share-based compensation expense under
      SFAS 123
            
            $
            23,310Net
      income per common share – basic and diluted, as reported
            
            $
            1.17Pro
      forma net income per common share – basic and diluted
            
            $
            1.06





SFAS 123R
also requires the benefits of tax deductions in excess of recognized
compensation cost to be reported as a financing cash flow, rather than as an
operating cash flow as required prior to SFAS 123R.  The impact of
adopting SFAS 123R on future results will depend on, among other things, levels
of share-based payments granted in the future, actual forfeiture rates and the
timing of option exercises.





76
 Pinnacle Airlines Corp.
 Notes to Consolidated Financial
Statements
 (All amounts in thousands, except per
share data)




15. Share-Based Compensation (continued)




The
Company grants share-based compensation, including grants of stock options and
restricted stock, under its 2003 Stock Incentive Plan, for which 2,152 shares
were originally reserved.  The shares may consist, in whole or in
part, on unissued shares or treasury shares.  Awards which terminate
or lapse without the payment of consideration may be granted again under the
plan.  As of December 31, 2007, the Company had 765 shares of common
stock reserved for issuance under the plan.





Stock Options





Under
SFAS 123R, forfeitures are estimated at the time of valuation and reduce expense
ratably over the vesting period. This estimate is adjusted periodically based on
the extent to which actual forfeitures differ, or are expected to differ, from
the previous estimate. Under SFAS 123 and APB 25, the Company elected to account
for forfeitures when awards were actually forfeited, at which time all previous
pro forma expense was reversed to reduce pro forma expense for that
period.





At the
time of the Offering in 2003, the Company awarded options for 858 shares at the
Offering price of $14.  These options were to vest over four years in
annual increments of 25% and will expire ten years after the grant date. In
December 2005, the vesting period for these grants was accelerated and all of
these options are now vested. The Company accelerated the vesting of these
options prior to adopting SFAS 123R to avoid recognizing an expense in future
periods.





In
September 2004, an additional 32 stock options to purchase the Company’s
common stock were granted to non-employee members of the board of directors
under the 2003 Stock Incentive Plan at an exercise price of $10.23. These
options vested one year after the grant date and will expire ten years after the
grant date.





In
January 2007 and 2006, the Company granted 203 and 292 stock options,
respectively, to its executive officers, members of its board of directors and
certain other employees.  The option grants vest ratably over
three-year periods and expire ten years from the grant date.  Under
the provisions of SFAS 123R, the Company recorded pre-tax compensation expense
in the amount of $816 and $305, respectively, related to stock options during
the years ended December 31, 2007 and 2006.  Pre-tax compensation cost
yet to be recognized related to these grants was $1,362 as of December 31,
2007.  This cost will be recognized over the next 1.8 years. During
the year ended December 31, 2007, the Company recorded a financing cash flow of
$693 related to excess tax deductions.  The Company had no excess tax
benefits related to SFAS 123R during the years ended December 31, 2006 and
2005.





The
following table provides certain information with respect to the Company’s stock
options:





Shares
            
            
            Weighted Average Exercise
      Price
            
            
            Fair Value
            
            Weighted
      Average
              Remaining
      Life
            
            Aggregate Intrinsic
      ValueOutstanding
      at January 1, 2007
            
            
            934
            
            
            $
            11.57
            
            
            $
            6,530Granted
            
            
            203
            
            
            
            16.76
            
            
            
            1,740Exercised
            
            
            (246
            )
            
            
            11.77
            
            
            
            (1,754
            )Forfeited
            
            
            (12
            )
            
            
            11.93
            
            
            
            (79
            )Outstanding
      at December 31, 2007
            
            
            879
            
            
            
            12.71
            
            
            
            6,437
            
            7.1
      years
            
            $
            2,235Options
      exercisable at December 31, 2007
            
            
            494
            
            
            $
            13.48
            
            
            $
            4,088
            
            6.0
      years
            
            $
            875





The total
intrinsic value of the 246 options exercised during the year ended December 31,
2007 was $857.  No options were exercised during the years ended
December 31, 2006 and 2005.  During the year ended December 31, 2007,
96 options vested.  These options had a fair value of $340. During the
year ended December 31, 2005, 643 options vested with a fair value of $5,502. No
options vested during the year ended December 31, 2006.





77
 Pinnacle Airlines Corp.
 Notes to Consolidated Financial
Statements
 (All amounts in thousands, except per
share data)




15. Share-Based Compensation (continued)


The fair
value of each option grant is estimated using the Black-Scholes-Merton
multiple-option pricing valuation model.  The application of this
valuation model involves assumptions that are judgmental and highly sensitive in
the determination of compensation expense.  The fair value of each
option is amortized into compensation expense on a straight-line basis between
the grant date for the award and each vesting date.  Under SFAS 123R,
the Company does not recognize expense related to forfeited non-vested stock
options.  The Company’s estimates that 10% of stock options will be
forfeited or cancelled before becoming fully vested, which is based on
historical experience and our expectations of future forfeitures.  An
increase in the forfeiture rate will decrease compensation expense while a
decrease in the forfeiture rate will increase compensation expense.





The
following table presents the assumptions used and fair value of grants in the
years ended December 31, 2007 and 2006.  The Company did not grant any
stock options during the year ended December 31, 2005.





2007
            
            
            2006Expected
      price volatility
            
            
            53.5
            %
            
            
            59.4
            %Risk-free
      interest rate
            
            
            4.6
            %
            
            
            4.3
            %Expected
      lives (years)
            
            
            5.0
            
            
            
            5.0Dividend
      yield
            
            
            0
            %
            
            
            0
            %Expected
      forfeiture rate
            
            
            10
            %
            
            
            10
            %Exercise
      price of option grants
            
            $
            16.76
            
            
            $
            6.47Fair
      value of option grants
            
            $
            8.57
            
            
            $
            3.53





The
following is a summary of the methodology applied to develop each
assumption:





Expected Price Volatility -This is a measure of the amount by which a price has fluctuated or is
expected to fluctuate. The Company uses actual historical changes in the market
value of its stock and the historical volatility of comparable companies to
calculate the volatility assumption as it is management’s belief that this is
the best indicator of future volatility. The Company calculates daily market
value changes from the date of grant over a past period representative of the
expected life of the options to determine volatility. An increase in the
expected volatility will increase compensation expense.





Risk-Free Interest Rate -
This is the U.S. Treasury rate for the week of the grant having a term equal to
the expected life of the option. An increase in the risk-free interest rate will
increase compensation expense.




Expected Lives - This is the
period of time over which the options granted are expected to remain
outstanding.  Options granted have a maximum term of ten years. An
increase in the expected life will increase compensation expense.




Dividend Yield - The Company
has not made any dividend payments nor does it have plans to pay dividends in
the foreseeable future.  An increase in the dividend yield will
decrease compensation expense.





Restricted Stock





In
January 2007 and 2006, the Company awarded 76 and 135 shares, respectively, of
restricted stock to certain officers and members of the board of directors under
the Company's 2003 Stock Incentive Plan.  Using the straight-line
method, this amount is being expensed ratably over the three-year vesting
period.  During the years ended December 31, 2007 and 2006, the
Company recognized $643 and $259, respectively, of pre-tax compensation expense
related to these grants of restricted stock.  Pre-tax compensation
cost yet to be recognized related to these restricted stock grants was $1,037 as
of December 31, 2007.  This cost will be recognized over the next 1.8
years. During the year ended December 31, 2005, the Company recognized $468 of
pre-tax compensation expense from this grant of restricted stock.





During
the vesting periods, grantees have voting rights, but the shares may not be
sold, assigned, transferred, pledged, hypothecated or otherwise disposed of,
alienated or encumbered.  Additionally, granted but unvested shares
are forfeited upon a grantee’s separation from service.





78
 Pinnacle Airlines Corp.
 Notes to Consolidated Financial
Statements
 (All amounts in thousands, except per
share data)




15. Share-Based Compensation (continued)


The
following table provides certain information with respect to the Company’s
restricted stock:





Shares
            
            
            Fair ValueNonvested
      at January 1, 2007
            
            
            135
            
            
            $
            875Granted
            
            
            76
            
            
            
            1,279Vested
            
            
            (45
            )
            
            
            (292
            )Forfeited
            
            
            (3
            )
            
            
            (35
            )Nonvested
      at December 31, 2007
            
            
            163
            
            
            $
            1,827





2008 Grants





In
January 2008, the Company granted 284 stock options and 109 shares of restricted
stock to members of its board of directors, its officers and other key
employees.  These grants will vest ratably over three
years.  The Company expects the 2008 expense associated with these
grants to be $1,163.





16. Short-Term
Investments





The
Company invests excess cash balances primarily in short-term money market
instruments, short-term marketable debt securities and highly liquid equity
securities.  Investments in marketable securities are classified as
available-for-sale and presented at their estimated fair values based on quoted
market prices for those securities, in accordance with SFAS No. 115, Accounting
for Certain Investments in Debt and Equity Securities.





At
December 31, 2007, the Company had $186,850 invested in auction rate debt
securities (“ARS”).  At December 31, 2006 the Company had $72,700
invested in ARS, including $12,975 in auction rate preferred securities and
$59,725 in auction rate debt securities.





ARS are
notes that provide for an interest rate reset through a “dutch auction” process
in periods spanning from 7 to 35 days.  The underlying bonds have
long-term maturities, but because of the auction process have heretofore been
viewed as very liquid, short-term investments.  The auction
process resets the interest rate on the securities to current market rates, and
provides a vehicle for investors to buy or sell the securities in what has
historically been a very liquid environment.  All of the Company’s ARS
are currently rated AAA/Aaa by Standard & Poors, Moody’s, or Fitch ratings
services, and are collateralized by student loan receivables that are guaranteed
under the government’s Federal Family Education Loan Program.





In
February 2008, a number of ARS auctions failed to generate enough demand to
successfully reset interest rates.  In these circumstances, the
securities generally require the issuer to pay a maximum interest rate until the
next auction is held.  In the interim, an investor must either hold
the securities until the next successful auction or attempt to sell the
securities through a privately-placed secondary market
transaction.  The Company’s ARS holdings are among those ARS that had
failed auctions, and until the next successful auction the Company is earning a
maximum interest rate on each security.  The maximum rates are
typically calculated based upon a spread to an after tax commercial paper rate
or the BMA index, and are capped at a fixed percentage.  As of
February 22, 2008, the Company had $136,100 invested in ARS.





The
Company is monitoring the ARS market closely.  Because of the
unprecedented events in the ARS market, the Company cannot predict when
liquidity in the ARS market will return.  Although the Company
believes its securities continue to represent good investments due to the
AAA/Aaa credit ratings of the underlying investments, the Company may be forced
to sell some of its ARS portfolio under distressed, illiquid market conditions,
which would result in the Company recognizing a loss on such
sales.  In addition, the Company may reclassify all or a portion of
its ARS portfolio as long-term investments, and the Company may record an
impairment charge in future periods if the Company determines that the decline
in value of its ARS portfolio is other-than-temporary or will not recover before
the investment is sold.





79
 Pinnacle Airlines Corp.
 Notes to Consolidated Financial
Statements
 (All amounts in thousands, except per
share data)




16. Short-Term Investments (continued)


The
Company planned to monetize a portion of its ARS portfolio throughout 2008 to
fund the non-financed portion of its aircraft deliveries.  While the
Company waits for both the ARS market to rationalize and for investor demand to
return, the Company has arranged for a margin loan facility for a total of up to
$60,000 (the “Term loan”) to be used to support its aircraft
purchases.  The Term loan is pre-payable at any time prior to maturity
on February 28, 2009 should the Company elect to sell any of its ARS
portfolio.  The Term loan bears interest at the one month LIBOR plus
2.0%





The
Company classifies investments in ARS as short-term investments on the Company’s
consolidated balance sheets.  The Company believes that the securities
were stated at fair value as of December 31, 2007 based on the existence of
subsequent successful auctions in 2008.  All income generated from
these securities was from earned interest and dividends and there were no
unrealized or realized gains or losses for the years ended December 31, 2007,
2006 and 2005.





17. Employee Benefit
Plans





401(k) Plan





The
Company maintains defined contribution 401(k) plans covering substantially all
of its employees.  Each year, participants may contribute a portion of
their pre-tax annual compensation, subject to Internal Revenue Code
limitations.  The Company made matching contributions of approximately
$2,743, $2,474 and $2,053 for the years ended December 31, 2007, 2006 and
2005.  The Company’s 401(k) plan also contains a profit sharing provision
allowing the Company to make discretionary contributions for the benefit of all
plan participants.  For the years ended December 31, 2007, 2006, and
2005, the Company made no discretionary contributions to its 401(k)
plans.





Retired Pilots’ Insurance Benefit
Plan





The
Company’s Pinnacle subsidiary provides its pilots with health and dental
insurance benefits from their retirement age of 60 until they are eligible for
Medicare coverage at age 65.  The plan’s benefit obligation was $1,091
and $1,522 at December 31, 2007 and 2006, respectively, and the plan had no
assets at either date.  The reduction of the liability in 2007 relates
primarily to the change in the pilots’ mandatory retirement age from 60 to
65.  The rate used to discount future estimated liabilities was 6% in 2007
and 2006.  Net periodic benefit cost was $329 and $1,586 for the years
ended December 31, 2007 and 2006, respectively.  The Company’s estimated
future net benefit payments will be immaterial to the Company’s financial
results and cash flows.





18.  Segment
Reporting





SFAS No.
131, Disclosures about
Segments of an Enterprise and Related Information, requires disclosures
related to components of a company for which separate financial information is
available that is evaluated regularly by a company’s chief operating decision
maker in deciding the allocation of resources and assessing performance. The
Company has two airline reportable segments, its Pinnacle Segment and the Colgan
Segment.  The Pinnacle Segment serves as the Company’s platform for
regional jet operations, whereas the Colgan Segment serves as the
platform for turboprop operations.





80
 Pinnacle Airlines Corp.
 Notes to Consolidated Financial
Statements
 (All amounts in thousands,
except per share data)




18.  Segment Reporting (continued)




The
following represents the Company’s segment data for the year ended December 31,
2007.  Prior to the acquisition of Colgan, the Company consisted of
one reportable segment.  Therefore, segment data for the years ended
December 31, 2006 and 2005 is not presented.





Year Ended December 31,
      2007Pinnacle
      Segment
            
            
            Colgan   
      Segment
            
            
            Other/
      Eliminations
            
            
            ConsolidatedOperating
      revenues
            
            $
            595,053
            
            
            $
            192,405
            
            
            $
            (84
            )
            
            $
            787,374Depreciation
      and amortization
            
            
            4,609
            
            
            
            4,656
            
            
            
            -
            
            
            
            9,265Provision
      for (decreases) increases in
              losses
      associated with bankruptcy
              filings
      of Northwest and Mesaba
            
            
            (1,194
            )
            
            
            -
            
            
            
            146
            
            
            
            (1,048
            )Operating
      income (loss)
            
            
            56,591
            
            
            
            (4,503
            )
            
            
            -
            
            
            
            52,088Interest
      expense
            
            
            6,388
            
            
            
            3,060
            
            
            
            (595
            )
            
            
            8,853Interest
      income
            
            
            12,139
            
            
            
            57
            
            
            
            (595
            )
            
            
            11,601Income
      (loss) before income tax
            
            
            58,547
            
            
            
            (7,510
            )
            
            
            -
            
            
            
            51,037Income
      tax expense (benefit)
            
            
            18,496
            
            
            
            (2,096
            )
            
            
            -
            
            
            
            16,400Net
      income (loss)
            
            
            40,051
            
            
            
            (5,414
            )
            
            
            -
            
            
            
            34,637Deferred
      tax asset (liability)
            
            
            94,466
            
            
            
            (2,325
            )
            
            
            -
            
            
            
            92,141Identifiable
      intangible assets, otherthan
      goodwill
            
            
            12,030
            
            
            
            5,041
            
            
            
            -
            
            
            
            17,071Goodwill
            
            
            18,421
            
            
            
            9,785
            
            
            
            -
            
            
            
            28,206Total
      assets
            
            
            620,988
            
            
            
            144,183
            
            
            
            (56,583
            )
            
            
            708,588Capital
      expenditures (including non-cash)
            
            
            116,792
            
            
            
            58,153
            
            
            
            -
            
            
            
            174,945





19.  Commitments and
Contingencies





Employees.  The
Company operates under several collective bargaining agreements with a portion
of its employees.  The following table reflects the Company’s
collective bargaining agreements and their respective amendable
dates:





Employee
      Group
            
            Employees
      Represented
            
            Representing
      Union
            
            Contract Amendable
      DatePinnacle’s
      pilots
            
            1,197
            
            Air
      Line Pilots Association
            
            April
      30, 2005Pinnacle’s
      flight attendants
            
            697
            
            United
      Steel Workers of America
            
            February
      1, 2011Pinnacle’s
      ground operations agents
            
            1,254
            
            United
      Steel Workers of America
            
            March
      19, 2010Pinnacle’s
      flight dispatchers
            
            37
            
            Transport
      Workers Union of America
            
            December
      31, 2013Colgan’s
      flight attendants
            
            193
            
            United
      Steel Workers of America
            
            Initial
      contract currently being negotiated





As of
December 31, 2007, approximately 64% of the Company’s workforce were members of
unions representing pilots (23%), flight attendants (17%), ground operations
agents (23%) and dispatchers (1%).





81
 Pinnacle Airlines Corp.
 Notes to Consolidated Financial
Statements
 (All amounts in thousands, except per
share data)




19.  Commitments and Contingencies
(continued)


The
collective bargaining agreement between Pinnacle and the Air Line Pilots
Association (“ALPA”) became amendable in April 2005. The Company has been
actively negotiating with ALPA since that time.  In August 2006, the
Company filed for mediation with the National Mediation Board.  Since
then, the Company has met with the mediator assigned to our case and with ALPA,
but the Company has not reached resolution on an amended collective bargaining
agreement.





On
November 5, 2007, ALPA filed suit in the U.S. District Court against
Pinnacle.  The suit seeks an injunction prohibiting Pinnacle from
paying certain bonuses to its pilots, asserting that such an action would
violate the Railway Labor Act.  The Company believes that the lawsuit
lacks merit, and accordingly, Pinnacle will vigorously defend its position in
this case.  The Company does not believe that it will incur any
material loss with respect to this lawsuit.  On January 8, 2008,
Pinnacle filed suit in the U.S. District Court for the Western District of
Tennessee against ALPA, alleging bad faith bargaining.  The primary
intent of the lawsuit is to encourage ALPA to negotiate in good faith so that an
agreement can be reached for an amended collective bargaining agreement as soon
as possible.  Pinnacle’s pilots are currently paid at rates less than
the industry average for similarly sized aircraft, and an amended agreement is
expected to contain higher rates of pay prospectively for Pinnacle’s
pilots.





On March
1, 2007, Pinnacle’s flight attendants ratified an amended collective bargaining
agreement with a new amendable date of February 1, 2011.  The previous
collective bargaining agreement became amendable on July 31, 2006.  In
August 2005, Pinnacle’s flight dispatchers elected representation by the
Transport Workers Union of America AFL-CIO, Air Transport Division
(“TWU”).  In early 2007, an agreement was negotiated and ratified by the
TWU membership and Pinnacle.  The Company does not expect either of
these agreements to have a material impact on its consolidated financial
statements.





In
September 2007, Colgan recognized the United Steel Workers of America (“USW”) to
represent Colgan’s flight attendants.  Negotiations will begin shortly
for a flight attendant collective bargaining agreement with the United Steel
Workers.  The Company does not expect this new collective bargaining
agreement to have a material impact on its financial results, as Colgan’s flight
attendants are currently compensated at rates approximating industry
average.





Purchase Commitments.The Company has
contractual obligations and commitments primarily related to future purchases of
aircraft, payment of debt and lease obligations.  The Company’s firm
orders and options to purchase aircraft as of December 31, 2007 were as
follows:





FirmNoncancelable
            
            Firm
      Cancelable
            
            Options
            
            TotalQ4002008
            
            15
            
            -
            
            -
            
            152009
            
            -
            
            8
            
            8
            
            162010
            
            -
            
            2
            
            12
            
            14Total
      Q400
            
            15
            
            10
            
            20
            
            45CRJ-9002008
            
            12
            
            -
            
            -
            
            122009
            
            1
            
            -
            
            -
            
            1Total
      CRJ-900
            
            13
            
            -
            
            -
            
            13Total
            
            28
            
            10
            
            20
            
            58





Firm
cancelable aircraft are aircraft that are on firm order, but for which the
Company has the right of cancellation without penalty prior to April
2008.





The
Company makes pre-delivery payments to the aircraft manufacturer in advance of
the aircraft’s delivery date.  During the year ended December 31,
2007, the Company paid pre-delivery payments of $74,300.  Remaining
pre-delivery payments of $5,600 are due in 2008.





82
 Pinnacle Airlines
Corp.
 Notes to Consolidated Financial
Statements
 (All amounts in thousands, except per
share data)




19.  Commitments and Contingencies
(continued)


Based on
the above delivery schedule, the aggregate purchase price for the 28 firm
noncancelable aircraft commitments is approximately $525,000, and is due as
follows: $501,000 for 2008, and $24,000 for 2009.  The Company has
obtained commitments from a third-party to borrow approximately $446,000 of the
$525,000 for a term of 15 years from the delivery date of each
aircraft.  The Company expects to fund the approximately $79,000
remaining from internal capital resources.  During the year ended
December 31, 2007, the Company purchased aircraft totaling $70,907 under these
purchase commitments. For further information on CRJ-900 and Q400 aircraft, see
Note 4.





Guarantees and
Indemnifications.  The Company is the guarantor of
approximately $2,140 aggregate principal amount of tax-exempt special facilities
revenue bonds and interest thereon. These bonds were issued by the
Memphis-Shelby County Airport Authority (the “Authority”) and are payable solely
from rentals paid under a long-term lease agreement with the
Authority.  The leasing arrangement is accounted for as an operating
lease in the consolidated financial statements.





In the
Company’s aircraft lease agreements with Northwest, the Company typically
indemnifies the prime lessor, financing parties, trustees acting on their behalf
and other related parties against liabilities that arise from the manufacture,
design, ownership, financing, use, operation and maintenance of the aircraft and
for tort liability, whether or not these liabilities arise out of or relate to
the negligence of these indemnified parties, except for their gross negligence
or willful misconduct.





The
Company is party to numerous contracts and real estate leases in which it is
common for it to agree to indemnify third parties for tort liabilities that
arise out of or relate to the subject matter of the contract or occupancy of the
leased premises. In some cases, this indemnity extends to related liabilities
arising from the negligence of the indemnified parties, but usually excludes any
liabilities caused by their gross negligence or willful misconduct.
Additionally, the Company typically indemnifies the lessors and related third
parties for any environmental liability that arises out of or relates to its use
of the leased premises.





Colgan is
a defendant in a lawsuit related to the September 11, 2001 terrorist
attacks.  The Company expects that any adverse outcome from this
litigation will be covered by insurance, and therefore, will have no material
adverse effect on the Company’s financial statements as a whole.





The
Company expects that its levels of insurance coverage (subject to deductibles)
would be adequate to cover most tort liabilities and related indemnities
described above with respect to real estate it leases and aircraft it
operates.  The Company does not expect the potential amount of future
payments under the foregoing indemnities and agreements to be
material.





83
 Pinnacle Airlines Corp.
 Notes to Consolidated Financial
Statements
 (All amounts in thousands, except per
share data)





20.  Quarterly Financial
Data (Unaudited)





Unaudited
summarized financial data by quarter for 2007 and 2006 is as
follows:





Three Months Ended During
      2007March 31(1)
            
            
            June 30(2)
            
            
            September
    30
            
            
            December
    31Operating
      revenue
            
            $
            179,550
            
            
            $
            200,994
            
            
            $
            205,730
            
            
            $
            201,099Operating
      income
            
            
            12,825
            
            
            
            14,822
            
            
            
            15,007
            
            
            
            9,434Net
      income
            
            
            9,365
            
            
            
            7,662
            
            
            
            10,904
            
            
            
            6,706Basic
      earnings per share
            
            $
            0.43
            
            
            $
            0.35
            
            
            $
            0.53
            
            
            $
            0.35Diluted
      earnings per share
            
            $
            0.38
            
            
            $
            0.32
            
            
            $
            0.48
            
            
            $
            0.32Operating
      income as apercentage
      of  operatingrevenues
            
            
            7.1
            %
            
            
            7.4
            %
            
            
            7.3
            %
            
            
            4.7
            %





Three Months Ended During
      2006March 31
            
            
            June 30(3)
            
            
            September 30(4)
            
            
            December 31(4)Operating
      revenue
            
            $
            207,089
            
            
            $
            204,514
            
            
            $
            208,500
            
            
            $
            204,520Operating
      income
            
            
            21,529
            
            
            
            19,495
            
            
            
            25,559
            
            
            
            60,965Net
      income
            
            
            13,296
            
            
            
            11,891
            
            
            
            15,837
            
            
            
            36,775Basic
      earnings per share
            
            $
            0.61
            
            
            $
            0.54
            
            
            $
            0.72
            
            
            $
            1.68Diluted
      earnings per share
            
            $
            0.61
            
            
            $
            0.54
            
            
            $
            0.72
            
            
            $
            1.67Operating
      income as apercentage
      of operatingrevenues
            
            
            10.4
            %
            
            
            9.5
            %
            
            
            12.3
            %
            
            
            29.8
            %





(1)
            The
      Company’s net income for the three months ended March 31, 2007 includes a
      benefit of $1,048 ($666 net of related tax) related to changes in
      estimates of sublease losses.


(2)
            The
      three months ended June 30, 2007 includes a $4,144 loss ($2,631 net of
      related tax) on the sale of the Company’s $42,500 unsecured claim against
      Northwest.


(3)
            The
      Company’s net income for the three months ended June 30, 2006 includes a
      charge of $1,300 ($812 net of related tax) related to the Retired Pilots
      Insurance Benefit outlined in its Pilots’ Collective Bargaining Agreement
      dated May 1, 1999 and a charge of $1,348, ($785 net of related tax)
      related to the bankruptcies of Northwest and
  Mesaba.


(4)
            The
      three months ended September 30, 2006 and December 31, 2006 include a
      benefit of $3,537 and $41,399 ($2,227 and $26,052, net of related tax)
      related to the bankruptcies of Northwest and
  Mesaba.





The sum
of the quarterly earnings per share amounts may not equal the annual amount
reported since per share amounts are computed independently for each quarter,
and for the full year are based on respective weighted-average common shares
outstanding and other dilutive potential common shares.





84




Item
9.Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure





There
were no changes in or disagreements on any matters of accounting principles or
financial statement disclosure between us and our independent
auditors.





85





Item
9A.  Controls and Procedures





Disclosure Controls and
Procedures.  An evaluation was performed under the supervision
and with the participation of our management, including our Chief Executive
Officer, or CEO, and Chief Financial Officer, or CFO, of the effectiveness of
our disclosure controls and procedures as of December 31, 2007.  Based
on that evaluation, our management, including our CEO and CFO, concluded that
our disclosure controls and procedures are effective to ensure that information
required to be disclosed by us in reports that we file or submit under the
Exchange Act is recorded, processed, summarized and reported as specified in the
SEC’s rules and forms.





Management’s Report on Internal
Control over Financial
Reporting.  Management is responsible for establishing and
maintaining adequate internal control over financial reporting, as such term is
defined in Exchange Act Rules 13a-15(f) and 15d-15(f).  Under the
supervision and with the participation of our management, including our CEO and
CFO, we conducted an evaluation of the effectiveness of our internal control
over financial reporting as of December 31, 2007 based on the framework in Internal Control – Integrated
Framework published by the Committee of Sponsoring Organizations (COSO)
of the Treadway Commission.  Based on that evaluation, management
concluded that our internal control over financial reporting was effective as of
December 31, 2007.





Because
of its inherent limitations, internal control over financial reporting can
provide only reasonable assurance that the objectives of the control system are
met and may not prevent or detect misstatements.  In addition, any
evaluation of the effectiveness of internal controls over financial reporting in
future periods is subject to risk that those internal controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.





The
financial statements for each of the years covered in this Annual Report on Form
10-K have been audited by an independent registered public accounting firm,
Ernst & Young LLP whose report is presented page 85 of this Annual Report on
Form 10-K.





Changes in Internal Control over
Financial Reporting.The Company, under the supervision and
participation of its management, including the Chief Executive Officer and the
Chief Financial Officer, evaluated the effectiveness of the design and operation
of our disclosure controls and procedures pursuant to Exchange Act Rules 13a-15
and 15d-15.   Based upon that evaluation, our Chief Executive
Officer and Chief Financial Officer concluded that our disclosure controls and
procedures are effective.  Disclosure controls and procedures are
controls and procedures that are designed to ensure that information required to
be disclosed in our reports filed or submitted under the Exchange Act is
recorded, processed, summarized and completely and accurately reported within
the time periods specified in the Securities and Exchange Commission’s rules and
forms.  Except as discussed below, there has been no change in our
internal control over financial reporting during the year ended December 31,
2007, that has materially affected, or is reasonably likely to materially affect
the our internal control over financial reporting.





As
previously discussed, on January 18, 2007, the Company acquired
Colgan.  Refer to Note 3 in our condensed consolidated financial
statements for more information of this event.  The acquisition of
Colgan had a material effect on the Company’s internal control over financial
reporting.  The revenue attributable to Colgan’s operations for the
year ended December 31, 2007 was 24% of our total revenues.  The
assets attributed as of December 31, 2007 are 20% of our total
assets.  However, this business is excluded from management’s annual
assessment of the effectiveness of our internal control over financial reporting
as of December 31, 2007.




















86





REPORT OF INDEPENDENT
REGISTERED


PUBLIC ACCOUNTING
FIRM





The Board of Directors and Stockholders


Pinnacle
Airlines Corp.





We have
audited Pinnacle Airlines Corp.’s internal control over financial reporting as
of December 31, 2007, based on criteria established in Internal
Control—Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission (the COSO criteria). Pinnacle Airlines Corp.’s
management is responsible for maintaining effective internal control over
financial reporting, and for its assessment of the effectiveness of internal
control over financial reporting included in the accompanying Management’s
Report on Internal Control over Financial Reporting. Our responsibility is to
express an opinion on the company’s internal control over financial reporting
based on our audit.





We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, testing
and evaluating the design and operating effectiveness of internal control based
on the assessed risk, and performing such other procedures as we considered
necessary in the circumstances. We believe that our audit provides a reasonable
basis for our opinion.





A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial
statements.





Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements.  Also, projections of any evaluation
of effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.





As
indicated in the accompanying Management’s Report on Internal Control over
Financial Reporting, management’s assessment of and conclusion on the
effectiveness of internal control over financial reporting did not include the
internal controls of Colgan Air Inc., which is included in the 2007 consolidated
financial statements of Pinnacle Airlines Corp. and constituted $144.2 million
and $22.1 million of total and net assets, respectively, as of December 31, 2007
and $192.4 million and $5.4 million of revenues and net loss, respectively, for
the year then ended.  Our audit of internal control over financial
reporting of Pinnacle Airlines Corp. also did not include an evaluation of the
internal control over financial reporting of Colgan Air Inc.





In our
opinion, Pinnacle Airlines Corp. maintained, in all material respects, effective
internal control over financial reporting as of December 31, 2007, based on the
COSO criteria.





We have
also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets of Pinnacle
Airlines Corp. as of December 31, 2007 and 2006, and the related consolidated
statements of income, stockholders’ equity, and cash flows for each of the three
years in the period ended December 31, 2007 of Pinnacle Airlines Corp. and our
report dated March 13, 2008 expressed an unqualified opinion
thereon.


/s/
ERNST & YOUNG LLP


Memphis,
Tennessee


March 13,
2008








87








Item
9B. Other Information





None.








88





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 Stockholder
Matters





Item 13.  Certain
Relationships and Related Transactions





Item 14.  Principal
Accountant Fees and Services





The
information required by Items 10 through 14 is incorporated by reference to
the definitive proxy statement for our 2008 annual meeting of stockholdersto be filed within 120 days of December 31,
2007.








89





Part IV





Item
15.  Exhibits and Financial Statement
Schedules





(a)
            Documents
      Filed as Part of this Report





1.
            The
      following financial statements are included in Part II, Item 8.
      Financial Statements and Supplementary
Data:





Report of
Independent Registered Public Accounting Firm:





i)
            Consolidated
      Statements of Income for the Years Ended December 31, 2007, 2006 and
      2005





ii)
            Consolidated
      Balance Sheets as of December 31, 2007 and
2006





iii)
            Consolidated
      Statements of Stockholders’ Equity (Deficiency) for the Years Ended
      December 31, 2007, 2006 and 2005





iv)
            Consolidated
      Statements of Cash Flows for the Years Ended December 31, 2007, 2006 and
      2005





v)
            Notes
      to Consolidated Financial
Statements





vi)
            Report
      of Independent Registered Public Accounting Firm on Management’s
      Assessment and the Effectiveness of Internal Control Over Financial
      Reporting




2.      Financial
Statement Schedule:


Report
      of Independent Registered Public Accounting Firm on Financial Statement
      Schedule
            S-1Schedule
      II—Valuation and Qualifying Accounts
            S-2All
      other schedules have been omitted because they are inapplicable, not
      required, or the information is included elsewhere in the consolidated
      financial statements or notes
thereto.





3.
            Exhibits:
      See accompanying Exhibit Index included after the signature page of this
      report for a list of the exhibits filed or furnished with or incorporated
      by reference in this report.














90





SIGNATURES







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





Pinnacle Airlines
Corp.


(Registrant)





By:
            /s/
      Philip H. TrenaryName:
            Philip
      H. TrenaryMarch
      14, 2008
            
            Title:
            President,
      Chief Executive Officer








Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities indicated on March 14, 2008.








Signature
            
            Title/s/
      Philip H. Trenary
            
            President,
      Chief Executive Officer and DirectorPhilip
      H. Trenary
            
            (Principal
      Executive Officer)





/s/
      Peter D. Hunt
            
            Vice-President,
      Chief Financial OfficerPeter
      D. Hunt
            
            (Principal
      Accounting Officer)








/s/
      Donald J. Breeding
            
            Chairman
      , DirectorDonald
      J. Breeding





/s/
      Ian Massey
            
            DirectorIan
      Massey





/s/
      James E. McGehee, Jr.
            
            DirectorJames
      E. McGehee, Jr.





/s/
      Thomas S. Schreier, Jr.
            
            DirectorThomas
      S. Schreier, Jr.





/s/
      R. Philip Shannon
            
            DirectorR.
      Philip Shannon





/s/
      Alfred T. Spain
            
            DirectorAlfred
      T. Spain





/s/
      Nicholas R. Tomassetti
            
            DirectorNicholas
      R. Tomassetti




















91





Index of
Exhibits





The
following exhibits are filed as part of this Form 10-K.





Exhibit


Number                      Description


3.1
            Amended
      and Restated Certificate of Incorporation of the registrant (Incorporated
      by reference to the Company’s Registration Statement Form S-1
      (Registration No. 333-83359), as amended (the “S-1”) initially filed on
      February 25, 2002)


3.1.1
            Second
      Amended and Restated Certificate of Incorporation of the registrant
      (Incorporated by reference to the
S-1)


3.2
            Certificate
      of Designations for Series A preferred stock of the registrant
      (Incorporated by reference to the
S-1)


3.3
            Bylaws
      of the registrant (Incorporated by reference to the
  S-1)


3.3.1
            Amended
      and Restated Bylaws, dated January 14, 2003, of the registrant
      (Incorporated by reference to the
S-1)


4.1
            Specimen
      Stock Certificate (Incorporated by reference to the
  S-1)


4.2
            Rights
      Agreement between the registrant and EquiServe Trust Company, N.A., as
      Rights Agent (Incorporated by reference to the
  S-1)


4.3
            Indenture,
      3.25% Senior Convertible Notes due 2025, dated as of February 8, 2005, by
      and between Pinnacle Airlines Corp. and Deutsche Bank Trust Company
      (Incorporated by reference to Exhibits 99.2 and 99.3 to the
      Registrant’s Current Report on Form 8-K filed on February 8,
      2005)


4.4
            Registration
      Rights Agreement made pursuant to the Purchase Agreement dated February 3,
      2005, dated as of February 8, 2005, by and among Pinnacle Airlines Corp.,
      Merrill Lynch, Pierce, Fenner & Smith Incorporated and Raymond James
      & Associates, Inc. (Incorporated by reference to Exhibits 99.2
      and 99.3 to the Registrant’s Current Report on Form 8-K filed on
      February 8, 2005)


10.1
            Loan
      Agreement dated as of June 16, 2005 between Pinnacle Airlines, Inc. and
      First Tennessee Bank National Association (Incorporated by reference to
      the Registrant’s Current Report on Form 8-K filed on June 23,
      2005)


10.2
            Sublease
      Agreement between Pinnacle Airlines, Inc. and Northwest Airlines, Inc.
      (Incorporated by reference to the
S-1)


10.2.1
            First
      Amendment to Sublease Agreement between Pinnacle Airlines, Inc. and
      Northwest Airlines, Inc. (Incorporated by reference to the
      S-1)


10.2#
            Guaranty
      Agreement between Pinnacle Airlines, Inc. and First Tennessee Bank
      National Association (Incorporated by reference to the Registrant’s
      Current Report on Form 8-K filed on June 23,
  2005)


10.3
            Engine
      Lease Agreement between Pinnacle Airlines, Inc. and Northwest Airlines,
      Inc. (Incorporated by reference to the
S-1)


10.3.1
            First
      Amendment to Engine Lease Agreement between Pinnacle Airlines, Inc. and
      Northwest Airlines, Inc. (Incorporated by reference to the
      S-1)


10.3#
            Revolving
      Credit Note dated as of June 16, 2005 between Pinnacle Airlines, Inc. and
      First Tennessee Bank National Association (Incorporated by reference to
      the Registrant’s Current Report on Form 8-K filed on June 23,
      2005)


10.4#
            Security
      Agreement dated as of June 16, 2005 between Pinnacle Airlines, Inc. and
      First Tennessee Bank National Association (Incorporated by reference to
      the Registrant’s Current Report on Form 8-K filed on June 23,
      2005)


10.5#
            Negative
      Pledge Agreement dated as of June 16, 2005 between Pinnacle Airlines, Inc.
      and First Tennessee Bank National Association (Incorporated by reference
      to the Registrant’s Current Report on Form 8-K filed on June 23,
      2005)


10.6#
            Negative
      Pledge Agreement dated as of June 16, 2005 between Pinnacle Airlines Corp.
      and First Tennessee Bank National Association (Incorporated by reference
      to the Registrant’s Current Report on Form 8-K filed on June 23,
      2005)


10.8†
            Pinnacle
      Airlines Corp. 2003 Stock Incentive Plan (Incorporated by reference to the
      S-1)





92





Exhibit


Number                      Description


10.9
            Non-Qualified
      Stock Option Agreement for options granted under the Pinnacle Airlines
      Corp. 2003 Stock Incentive Plan (Incorporated by reference to the
      S-1)


10.10†
            Pinnacle
      Airlines, Inc. Annual Management Bonus Plan (Incorporated by reference to
      the S-1)


10.11
            Amended
      and Restated Sublease Agreement dated as of January 14, 2003 between
      Pinnacle Airlines, Inc. and Northwest Airlines, Inc. (SBN Facilities)
      (Incorporated by reference to the
S-1)


10.12
            Sublease
      Agreement dated as of August 1, 2002 between Pinnacle Airlines, Inc. and
      Northwest Airlines, Inc. (TYS Facilities) (Incorporated by reference to
      the S-1)


10.13
            Amended
      and Restated Facilities Use Agreement between Pinnacle Airlines, Inc. and
      Northwest Airlines, Inc. (DTW Facilities) (Incorporated by reference to
      the S-1)


10.14
            Amended
      and Restated Facilities Use Agreement between Pinnacle Airlines, Inc. and
      Northwest Airlines, Inc. (MEM Facilities) (Incorporated by reference to
      the S-1)


10.15
            Amended
      and Restated Facilities Use Agreement between Pinnacle Airlines, Inc. and
      Northwest Airlines, Inc. (MSP Facilities) (Incorporated by reference to
      the S-1)


10.16
            Intentionally
      omitted


10.17
            Intentionally
      omitted


10.18
            Lease
      Guaranty issued by the registrant to Northwest Airlines, Inc.
      (Incorporated by reference to the
S-1)


10.19
            Sublease
      Guaranty issued by the registrant to Northwest Airlines, Inc.
      (Incorporated by reference to the
S-1)


10.20
            Airline
      Services Agreement dated as of March 1, 2002 among the registrant,
      Pinnacle Airlines, Inc. and Northwest Airlines, Inc. (Incorporated by
      reference to the S-1)


10.21
            Airline
      Services Agreement dated as of January 14, 2003 among the registrant,
      Pinnacle Airlines, Inc. and Northwest Airlines, Inc. (Incorporated by
      reference to the S-1)


10.21.1
            Amendment
      No. 1 dated as of September 11, 2003 to the Airline Services Agreement
      dated as of January 14, 2003 among the registrant, Pinnacle Airlines, Inc.
      and Northwest Airlines, Inc. (Incorporated by reference to the
      S-1)


10.21.2
            Amendment
      No. 2 dated as of November 26, 2003 to the Airline Services Agreement
      dated as of January 14, 2003 among the registrant, Pinnacle Airlines, Inc.
      and Northwest Airlines, Inc. (Incorporated by reference to the
      S-1)


10.22
            Amended
      and Restated Ground Handling Agreement between Pinnacle Airlines, Inc. and
      Northwest Airlines, Inc. (Incorporated by reference to the
      S-1)


10.23
            Amended
      and Restated Information Technology Services Agreement between Pinnacle
      Airlines, Inc. and Northwest Airlines, Inc. (Incorporated by reference to
      the S-1)


10.24
            Amended
      and Restated Family Assistance Services Agreement between Pinnacle
      Airlines, Inc. and Northwest Airlines, Inc. (Incorporated by reference to
      the S-1)


10.25
            Amended
      and Restated Manufacturer Benefits Agreement between Pinnacle Airlines,
      Inc. and Northwest Airlines, Inc. (Incorporated by reference to the
      S-1)


10.26
            Form
      of Amended and Restated Preferential Hiring Agreement between Pinnacle
      Airlines, Inc. and Northwest Airlines, Inc. (Incorporated by reference to
      the S-1)


10.27
            Purchase
      Agreement, Senior Convertible Notes due 2025, dated as of February 3,
      2005, by and among, Pinnacle Airlines Corp., Merrill Lynch, Pierce, Fenner
      & Smith Incorporated and Raymond James & Associates, Inc.
      (Incorporated by reference to the Registrant’s Current Report on Form 8-K
      filed on February 8, 2005)


10.28†
            Amended
      and Restated Management Compensation Agreement between Pinnacle Airlines,
      Inc. and Philip H. Trenary (Incorporated by reference to the Registrant’s
      Current Report on Form 8-K filed on August 12,
  2005)


10.29†
            Amended
      and Restated Management Compensation Agreement between Pinnacle Airlines,
      Inc. and Peter D. Hunt (Incorporated by reference to the Registrant’s
      Current Report on Form 8-K filed on August 12,
  2005)


10.30†
            Amended
      and Restated Management Compensation Agreement between Pinnacle Airlines,
      Inc. and Douglas W. Shockey (Incorporated by reference to the Registrant’s
      Current Report on Form 8-K filed on August 12,
  2005)





93





Exhibit


Number                      Description


10.31†
            Form
      of Indemnity Agreement between Pinnacle Airlines Corp. and its directors
      and officers (Incorporated by reference to the Registrant’s Current Report
      on Form 8-K filed on January 26,
2006)


10.32
            Assignment
      of Claim Agreement between Pinnacle Airlines, Inc. and Goldman Sachs
      Credit Partners, L.P., dated as of October 5, 2006 (Incorporated by
      reference to the Registrant’s Form 10-K filed on March 8,
      2007)


10.40
            Assumption
      and Claim Resolution Agreement between Pinnacle Airlines Corp. and
      Northwest Airlines, Inc., dated as of December 20, 2006 (Incorporated
      by reference to the Registrant’s Current Report on Form 8-K filed on
      January 3, 2007)


10.41
            Amended
      and Restated Airline Services Agreement by and among Pinnacle Airlines,
      Inc., Pinnacle Airlines Corp. and Northwest Airlines, Inc., dated December
      15, 2006, effective as of January 1, 2007 (Incorporated by reference to
      the Registrant’s Form 10-K filed on March 8,
  2007)


10.42*
            Amendment
      No. 1 dated as of November 21, 2007 to the Amended and Restated Airline
      Services Agreement by and among Pinnacle Airlines, Inc., Pinnacle Airlines
      Corp. and Northwest Airlines, Inc., dated December 15,
  2006


10.43*
            CF34-3B1
      Engine Hourly Rate Program Repair and Services Agreement between Northwest
      Airlines, Inc. and Standard Aero Ltd., dated as of September 1,
      2007


10.50
            Stock
      Purchase Agreement, dated as of January 18, 2007, by and among Colgan Air,
      Inc. and Pinnacle Airlines Corp.  (Incorporated by reference to
      the Registrant’s Current Report on Form 8-K filed on January 24,
      2007)


10.60
            Capacity
      Purchase Agreement between Continental Airlines, Inc., Pinnacle Airlines
      Corp. and Colgan Air, Inc., dated as of February 2, 2007 (Incorporated by
      reference to the Registrant’s Form 10-Q filed on November 2,
      2007)


10.61*
            Purchase
      Agreement between Bombardier Inc. and Pinnacle Airlines Corp., relating to
      the purchase of twenty-five (25) Bombardier Q400 series aircraft, dated as
      of February 17, 2007


10.62*
            Form
      of Loan Agreement, between Pinnacle Airlines Corp. and Export Development
      Canada, for the financing of Q400 and CRJ-900
  aircraft


10.65
            Delta
      Connection Agreement among Delta Air Lines, Inc., Pinnacle Airlines Corp.
      and Pinnacle Airlines, Inc., dated as of April 27, 2007 (Incorporated by
      reference to the Registrant’s Form 10-Q filed on November 2,
      2007)


10.66*
            Purchase
      Agreement between Bombardier Inc. and Pinnacle Airlines, Inc., relating to
      the purchase of sixteen (16) Bombardier CRJ-900 series aircraft, dated as
      of April 26, 2007


10.99.1#
            Promissory
      Note issued by Pinnacle Airlines, Inc. to Northwest Airlines, Inc.
      (Incorporated by reference to the
S-1)


10.99.2#
            Guarantee
      of Promissory Note issued by registrant to Northwest Airlines, Inc.
      (Incorporated by reference to the
S-1)


10.99.3#
            Revolving
      Credit Facility dated as of January 14, 2003 between Pinnacle Airlines,
      Inc. and Northwest Airlines, Inc. (Incorporated by reference to the
      S-1)


10.99.4#
            First
      Amendment dated as of February 5, 2003 to Revolving Credit Facility dated
      as of January 14, 2003 between Pinnacle Airlines, Inc. and Northwest
      Airlines, Inc. (Incorporated by reference to the
  S-1)


10.99.5#
            Second
      Amendment dated as of November 28, 2003 to Revolving Credit Facility dated
      as of January 14, 2003 between Pinnacle Airlines, Inc. and Northwest
      Airlines, Inc. (Incorporated by reference to the
  S-1)


10.99.6#
            Third
      Amendment dated as of December 13, 2004 to Revolving Credit Facility dated
      as of January 14, 2003 between Pinnacle Airlines, Inc. and Northwest
      Airlines, Inc. (Incorporated by reference to the Registrant’s Current
      Report on Form 8-K filed on February 8,
  2005)


10.99.7#
            Fourth
      Amendment dated as of February 8, 2005 to Revolving Credit Facility dated
      as of January 14, 2003 between Pinnacle Airlines, Inc. and Northwest
      Airlines, Inc. (Incorporated by reference to the Registrant’s Current
      Report on Form 8-K filed on February 8,
  2005)


10.99.8#
            Guaranty
      dated as of January 14, 2003 issued by registrant to Northwest Airlines,
      Inc. (Incorporated by reference to the
S-1)





94





21.1
            List
      of Subsidiaries (Incorporated by reference to the
  S-1)


23.1*                     Consent
of Independent Registered Public Accounting Firm


31.1*                      Certification
of Chief Executive Officer


31.2*                      Certification
of Chief Financial Officer


32*                        
Certifications of CEO and CFO





*
            Filed
      herewith


†
            Management
      contract or compensatory plan or
arrangement


#                          
  Cancelled agreement referenced in this Form 10-K





95





REPORT OF INDEPENDENT
REGISTERED


PUBLIC ACCOUNTING
FIRM








The Board
of Directors and Stockholders


Pinnacle
Airlines Corp.





We have
audited the consolidated financial statements of Pinnacle Airlines Corp. as of
December 31, 2007 and 2006, and for each of the three years in the period ended
December 31, 2007, and have issued our report thereon dated March 13, 2008
(included elsewhere in this Form 10-K). Our audits also included the financial
statement schedule listed in Item 15(a) of this Form 10-K. This schedule is the
responsibility of the Company's management. Our responsibility is to express an
opinion based on our audits.





In our
opinion, the financial statement schedule referred to above, when considered in
relation to the basic financial statements taken as a whole, presents fairly in
all material respects the information set forth therein.











/s/ ERNST & YOUNG
LLP








Memphis,
Tennessee


March 13,
2008














96





(d) Schedule II


Pinnacle Airlines
Corp.


Valuation and Qualifying
Accounts


(in thousands)


AdditionsDescription
                
                Balance
                  at Beginning of
      Period
                
                Charged
                  to
                  Costs and
      Expenses
                
                Charged to Other
      Accounts
                
                Deductions
                
                Balance at End of
      PeriodYear
      Ended December 31, 2007Allowance
      deducted from asset accounts:Allowance
      for doubtful accounts
                
                $      7,860
                
                $           131
                
                $               -
                
                $        (7,860)
                (3)
                $        131Allowance
      for obsolete inventory parts
                
                1,517
                
                1,019
                
                -
                
                -
                
                2,536Year
      Ended December 31, 2006Allowance
      deducted from asset accounts:Allowance
      for doubtful accounts
                
                51,523
                
                (43,663)
                (1)
                -
                
                -
                
                7,860Allowance
      for obsolete inventory
                
                1,084
                
                433
                
                -
                
                -
                
                1,517Year
      Ended December 31, 2005Allowance
      deducted from asset accounts:Allowance
      for doubtful accounts
                
                34
                
                51,523
                
                (31)
                
                (3)
                (2)
                51,523Allowance
      for obsolete inventory
                
                494
                
                590
                
                -
                
                -
                
                1,084


(1)
            On
      January 3, 2007, the Company agreed to assign an aggregate of $335,000 of
      its $377,500 stipulated unsecured claim against Northwest that was agree
      to in the Assumption Agreement to several third parties for aggregate
      proceeds of approximately $283,000, net of expenses. As a result, the
      Company lowered  its reserve against its pre-petition
      receivables from 95% to 15.5%.(2)
            Dispositions
      and write-offs.(3)
            Bankruptcy
      related amounts settled as part of the unsecured claim the Company
      received from Northwest.








97





Pinnacle Airlines
Corp.


Ratio of Earnings to Fixed Charges -
Unaudited


(in thousands, except
ratios)








Years Ended December
      31,2007
            
            
            2006
            
            
            2005
            
            
            2004
            
            
            2003Earnings:Income
      from operations before taxes (1)
            
            $
            51,037
            
            
            $
            124,600
            
            
            $
            41,411
            
            
            $
            63,125
            
            
            $
            57,399Additions:Interest
      expense, net of capitalized interest
            
            
            8,853
            
            
            
            5,578
            
            
            
            4,772
            
            
            
            4,907
            
            
            
            7,387Portion
      of rent expense representativeof
      interest factor(2)
            
            
            79,968
            
            
            
            127,046
            
            
            
            134,442
            
            
            
            107,118
            
            
            
            71,072Earnings
      as adjusted
            
            $
            139,858
            
            
            $
            257,224
            
            
            $
            180,625
            
            
            $
            175,150
            
            
            $
            135,858Fixed
      charges:Interest
      expense, net of capitalized interest
            
            $
            8,853
            
            
            $
            5,578
            
            
            $
            4,772
            
            
            $
            4,907
            
            
            $
            7,387Capitalized
      interest
            
            
            2,930
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Portion
      of rent expense representativeof
      interest factor(2)
            
            
            79,968
            
            
            
            127,046
            
            
            
            134,442
            
            
            
            107,118
            
            
            
            71,072$
            91,751
            
            
            $
            132,624
            
            
            $
            139,214
            
            
            $
            112,025
            
            
            $
            78,459Ratio
      of earnings to fixed charges
            
            
            1.52
            
            
            
            1.94
            
            
            
            1.30
            
            
            
            1.56
            
            
            
            1.73




(1)
            The
      decrease in income from operations before taxes for the year ended
      December 31, 2007 from the year ended December 31, 2006 is primarily
      attributed to the change in the terms of the amended ASA with Northwest
      and is also attributed to the addition of Colgan.  Income from
      operations before taxes for the year ended December 31, 2006 includes a
      $43,571 benefit for the changes in estimates and sale of the bankruptcy
      claims related to the bankruptcy filings of Northwest and Mesaba and the
      year ended December 31, 2005 includes a gain of $18,000 related to the
      repurchase of the Northwest note payable in February 2005 and a $59,599
      charge for provisions related to the bankruptcy filings of Northwest and
      Mesaba.


(2)
            Aircraft
      rental expense decreased due to the terms of the amended ASA with
      Northwest. Effective January 1, 2007, our monthly lease rates were reduced
      to rates that approximated market conditions at that time.  The
      decrease in rent is slightly offset by rent expense attributable to
      Colgan.








98