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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-Q



(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934



For the quarterly period ended June 30, 2003



or



 ̈TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934



For the transition period from  to



Commission file number: 0-25202



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KITTY HAWK, INC.

(Exact name of registrant as specified in its charter)



|Delaware                                                       |  | 75-2564006                          
|-------------------------------------------------------------- |  | ------------------------------------
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.)



|1515 West 20th Street P.O. Box 612787 Dallas/Fort Worth International Airport, Texas |  | 75261     
|------------------------------------------------------------------------------------ |  | ----------
|(Address of principal executive offices)                                             |  | (Zip Code)



(972) 456-2200

(Registrants telephone number, including area code)



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

Yes ̈No    x



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

Yes ̈No    x



Indicate by check mark
whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.

Yes    x    No ̈



The number of shares of common stock, par value $0.000001 per share, outstanding at August 12, 2003 was 37,744,655.



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KITTY HAWK, INC.



INDEX



|                                                                                                                                        |  | PAGE NUMBER
|--------------------------------------------------------------------------------------------------------------------------------------- |  | -----------
|                                                                                                                                        | 
|PART I. FINANCIAL INFORMATION                                                                                                           |  |            
|                                                                                                                                        | 
|Item 1. Financial Statements                                                                                                            |  |            
|                                                                                                                                        | 
|Condensed Consolidated Balance SheetsJune 30, 2003 and December 31, 2002                                                                |  | 3          
|                                                                                                                                        | 
|Condensed Consolidated Statements of OperationsThree months ended June 30, 2003 and 2002 and theSix months ended June 30, 2003 and 2002 |  | 4          
|                                                                                                                                        | 
|Condensed Consolidated Statement of Stockholders EquitySix months ended June 30, 2003                                                  |  | 5          
|                                                                                                                                        | 
|Condensed Consolidated Statements of Cash FlowsSix months ended June 30, 2003 and 2002                                                  |  | 6          
|                                                                                                                                        | 
|Notes to Condensed Consolidated Financial Statements                                                                                    |  | 7          
|                                                                                                                                        | 
|Item 2. Managements Discussion and Analysis of FinancialCondition and Results of Operations                                            |  | 11         
|                                                                                                                                        | 
|Item 3. Quantitative and Qualitative Disclosures about Market Risk                                                                      |  | 21         
|                                                                                                                                        | 
|Item 4. Controls and Procedures                                                                                                         |  | 21         
|                                                                                                                                        | 
|PART II. OTHER INFORMATION                                                                                                              |  |            
|                                                                                                                                        | 
|Item 1. Legal Proceedings                                                                                                               |  | 21         
|                                                                                                                                        | 
|Item 2. Changes in Securities and Use of Proceeds                                                                                       |  | 22         
|                                                                                                                                        | 
|Item 3. Defaults upon Senior Securities                                                                                                 |  | 22         
|                                                                                                                                        | 
|Item 4. Submission of Matters to a Vote of Security Holders                                                                             |  | 22         
|                                                                                                                                        | 
|Item 5. Other Information                                                                                                               |  | 22         
|                                                                                                                                        | 
|Item 6. Exhibits and Reports on Form 8-K                                                                                                |  | 23         



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PART I. FINANCIAL INFORMATION



ITEM 1. FINANCIAL STATEMENTS



KITTY HAWK, INC. AND SUBSIDIARIES



CONDENSED CONSOLIDATED BALANCE SHEETS



(in thousands,
except share and per share data)



ASSETS



|                                                                                                                                                                                                                                                                                     |  | June 30, 2003 |        |   | December 31, 2002
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ------------- | ------ | - | -----------------
|                                                                                                                                                                                                                                                                                     |  | (unaudited)   |        |   |                  
|                                                                                                                                                                                                                                                                                     |  |              
|Current assets:                                                                                                                                                                                                                                                                      |  |               |        |   |                  
|Cash and cash equivalents                                                                                                                                                                                                                                                            |  | $             | 6,085  |   |                  
|Restricted cash and short-term investments                                                                                                                                                                                                                                           |  |               | 526    |   |                  
|Trade accounts receivable, net of allowance for doubtful accounts of $800 and $500, respectively                                                                                                                                                                                     |  |               | 10,205 |   |                  
|Assets held for sale                                                                                                                                                                                                                                                                 |  |               | 1,707  |   |                  
|Inventory and aircraft supplies                                                                                                                                                                                                                                                      |  |               | 5,792  |   |                  
|Deposits and prepaid expenses                                                                                                                                                                                                                                                        |  |               | 1,937  |   |                  
|Prepaid fuel                                                                                                                                                                                                                                                                         |  |               | 1,457  |   |                  
|Other current assets, net                                                                                                                                                                                                                                                            |  |               | 1,094  |   |                  
|                                                                                                                                                                                                                                                                                     |  |               |        |   |                  
|Total current assets                                                                                                                                                                                                                                                                 |  |               | 28,803 |   |                  
|Property and equipment, net                                                                                                                                                                                                                                                          |  |               | 10,118 |   |                  
|Other assets, net                                                                                                                                                                                                                                                                    |  |               | 692    |   |                  
|                                                                                                                                                                                                                                                                                     |  |               |        |   |                  
|Total assets                                                                                                                                                                                                                                                                         |  | $             | 39,613 |   |                  
|                                                                                                                                                                                                                                                                                     |  |               |        |   |                  
|                                                                                                                                                                                                                                                                                    
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                                                                                                                                                
|                                                                                                                                                                                                                                                                                     |  |              
|Current liabilities:                                                                                                                                                                                                                                                                 |  |               |        |   |                  
|Accounts payable  trade                                                                                                                                                                                                                                                             |  | $             | 2,540  |   |                  
|Accrued wages                                                                                                                                                                                                                                                                        |  |               | 657    |   |                  
|Other accrued expenses                                                                                                                                                                                                                                                               |  |               | 4,447  |   |                  
|Other taxes payable                                                                                                                                                                                                                                                                  |  |               | 2,003  |   |                  
|Accrued maintenance reserves                                                                                                                                                                                                                                                         |  |               | 8,057  |   |                  
|Current maturities of long-term debt                                                                                                                                                                                                                                                 |  |               | 2,965  |   |                  
|                                                                                                                                                                                                                                                                                     |  |               |        |   |                  
|Total current liabilities                                                                                                                                                                                                                                                            |  |               | 20,669 |   |                  
|Long-term debt                                                                                                                                                                                                                                                                       |  |               | 1,211  |   |                  
|Lease return provisions                                                                                                                                                                                                                                                              |  |               | 2,299  |   |                  
|Other long-term liabilities                                                                                                                                                                                                                                                          |  |               | 1,550  |   |                  
|                                                                                                                                                                                                                                                                                     |  |              
|Stockholders equity:                                                                                                                                                                                                                                                                |  |               |        |   |                  
|Preferred stock, $0.01 par value per share: Authorized shares  3,000,000, none issued                                                                                                                                                                                               |  |               |       |   |                  
|Common stock, $0.000001 and $0.01 par value per share at June 30, 2003 and December 31, 2002, respectively; Authorized shares
 62,000,000 at June 30, 2003 and December 31, 2002; issued and outstanding  37,744,655 and none at June 30, 2003 and December 31, 2002, respectively |  |               |       |   |                  
|Additional capital                                                                                                                                                                                                                                                                   |  |               | 16,600 |   |                  
|Retained earnings (accumulated deficit)                                                                                                                                                                                                                                              |  |               | (2,716 | ) |                  
|                                                                                                                                                                                                                                                                                     |  |               |        |   |                  
|Total stockholders equity                                                                                                                                                                                                                                                           |  |               | 13,884 |   |                  
|                                                                                                                                                                                                                                                                                     |  |               |        |   |                  
|Total liabilities and stockholders equity                                                                                                                                                                                                                                           |  | $             | 39,613 |   |                  
|                                                                                                                                                                                                                                                                                     |  |               |        |   |                  



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



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KITTY HAWK, INC. AND SUBSIDIARIES



CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS



(in
thousands, except share and per share data)

(unaudited)



|                                                   |  | Successor                   |            |   | Predecessor               |   |            | Successor |  |   | Predecessor |  
|-------------------------------------------------- |  | --------------------------- | ---------- | - | ------------------------- | - | ---------- | --------- |  | - | ----------- | -
|                                                   |  | Three months ended June 30, |            |   | Six months ended June 30, |  
|                                                   |  | 2003                        |            |   | 2002                      |   |            | 2003      |  |   | 2002        |  
|Revenue:                                           |  |                             |            |   |                           |   |            |           |  |   |             |  
|Scheduled freight                                  |  | $                           | 29,510     |   |                           | $ | 29,687     |           |  | $ | 57,939      |  
|ACMI                                               |  |                             | 1,610      |   |                           |   | 429        |           |  |   | 3,996       |  
|Miscellaneous                                      |  |                             | 152        |   |                           |   | 479        |           |  |   | 321         |  
|                                                   |  |                             |            |   |                           |   |            |           |  |   |             |  
|Total revenue                                      |  |                             | 31,272     |   |                           |   | 30,595     |           |  |   | 62,256      |  
|Cost of revenue:                                   |  |                             |            |   |                           |   |            |           |  |   |             |  
|Flight expense                                     |  |                             | 6,405      |   |                           |   | 6,722      |           |  |   | 12,668      |  
|Transportation expense                             |  |                             | 4,695      |   |                           |   | 2,194      |           |  |   | 10,734      |  
|Fuel expense                                       |  |                             | 7,254      |   |                           |   | 6,755      |           |  |   | 15,174      |  
|Maintenance expense                                |  |                             | 2,725      |   |                           |   | 3,073      |           |  |   | 6,085       |  
|Freight handling expense                           |  |                             | 6,067      |   |                           |   | 5,840      |           |  |   | 11,798      |  
|Depreciation and amortization                      |  |                             | 888        |   |                           |   | 1,377      |           |  |   | 1,793       |  
|Operating overhead expense                         |  |                             | 2,210      |   |                           |   | 2,627      |           |  |   | 4,644       |  
|                                                   |  |                             |            |   |                           |   |            |           |  |   |             |  
|Total cost of revenue                              |  |                             | 30,244     |   |                           |   | 28,588     |           |  |   | 62,896      |  
|                                                   |  |                             |            |   |                           |   |            |           |  |   |             |  
|Gross profit (loss)                                |  |                             | 1,028      |   |                           |   | 2,007      |           |  |   | (640        | )
|General and administrative expense                 |  |                             | 2,355      |   |                           |   | 1,640      |           |  |   | 5,039       |  
|                                                   |  |                             |            |   |                           |   |            |           |  |   |             |  
|Operating income (loss) from continuing operations |  |                             | (1,327     | ) |                           |   | 367        |           |  |   | (5,679      | )
|Other (income) expense:                            |  |                             |            |   |                           |   |            |           |  |   |             |  
|Interest expense                                   |  |                             | 103        |   |                           |   | 755        |           |  |   | 219         |  
|Reorganization expenses                            |  |                             |           |   |                           |   | 1,244      |           |  |   |            |  
|Other, net                                         |  |                             | (38        | ) |                           |   | (80        | )         |  |   | (519        | )
|                                                   |  |                             |            |   |                           |   |            |           |  |   |             |  
|Loss from continuing operations                    |  |                             | (1,392     | ) |                           |   | (1,552     | )         |  |   | (5,379      | )
|Discontinued operations:                           |  |                             |            |   |                           |   |            |           |  |   |             |  
|Loss from discontinued operations                  |  |                             |           |   |                           |   | (149       | )         |  |   |            |  
|                                                   |  |                             |            |   |                           |   |            |           |  |   |             |  
|Net loss                                           |  | $                           | (1,392     | ) |                           | $ | (1,701     | )         |  | $ | (5,379      | )
|                                                   |  |                             |            |   |                           |   |            |           |  |   |             |  
|Basic and diluted net loss per share:              |  |                             |            |   |                           |   |            |           |  |   |             |  
|Continuing operations                              |  | $                           | (0.03      | ) |                           | $ | (0.09      | )         |  | $ | (0.11       | )
|                                                   |  |                             |            |   |                           |   |            |           |  |   |             |  
|Discontinued operations                            |  | $                           |           |   |                           | $ | (0.01      | )         |  | $ |            |  
|                                                   |  |                             |            |   |                           |   |            |           |  |   |             |  
|Total basic and diluted net loss per share         |  | $                           | (0.03      | ) |                           | $ | (0.10      | )         |  | $ | (0.11       | )
|                                                   |  |                             |            |   |                           |   |            |           |  |   |             |  
|Weighted average common shares outstanding         |  |                             | 49,999,970 |   |                           |   | 17,132,566 |           |  |   | 49,999,970  |  
|                                                   |  |                             |            |   |                           |   |            |           |  |   |             |  



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



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KITTY HAWK, INC. AND SUBSIDIARIES



CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY



(in thousands, except share data)

(unaudited)



|                                       |  | Common Stock     |  | Additional Capital |   | RetainedEarnings(Accumulated Deficit) |   |        | Total |  
|-------------------------------------- |  | ---------------- |  | ------------------ | - | ------------------------------------- | - | ------ | ----- | -
|                                       |  | Number of Shares |  | Amount             |   |                                       |  
|                                       |  |                  |  |                    |  
|Balance at December 31, 2002           |  |                 |  | $                  |  |                                       | $ | 16,600 |       | $
|                                       |  |                  |  |                    |  
|Net loss                               |  |                 |  |                    |  |                                       |   |       |       |  
|                                       |  |                  |  |                    |  
|Issue common stock (see Notes 3 and 6) |  | 37,744,655       |  |                    |  |                                       |   |       |       |  
|                                       |  |                  |  |                    |   |                                       |   |        |       |  
|                                       |  |                  |  |                    |  
|Balance at June 30, 2003               |  | 37,744,655       |  | $                  |  |                                       | $ | 16,600 |       | $
|                                       |  |                  |  |                    |   |                                       |   |        |       |  



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



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KITTY HAWK, INC. AND SUBSIDIARIES



CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS



(in
thousands)

(unaudited)



|                                                                                                       |  | Successor                 |        |   | Predecessor |  
|------------------------------------------------------------------------------------------------------ |  | ------------------------- | ------ | - | ----------- | -
|                                                                                                       |  | Six months ended June 30, |       
|                                                                                                       |  | 2003                      |        |   | 2002        |  
|Operating activities:                                                                                  |  |                           |        |   |             |  
|Net loss                                                                                               |  | $                         | (5,379 | ) |             | $
|Subtract: Loss from discontinued operations                                                            |  |                           |       |   |             |  
|                                                                                                       |  |                           |        |   |             |  
|Loss from continuing operations                                                                        |  |                           | (5,379 | ) |             |  
|Adjustments to reconcile loss from continuing operations to net cash provided by operating activities: |  |                           |        |   |             |  
|Depreciation and amortization expense                                                                  |  |                           | 1,968  |   |             |  
|Gain on disposal of property and equipment                                                             |  |                           | (274   | ) |             |  
|Provision for doubtful accounts                                                                        |  |                           | 265    |   |             |  
|Changes in operating assets and liabilities:                                                           |  |                           |        |   |             |  
|Trade accounts receivable                                                                              |  |                           | 991    |   |             |  
|Inventory and aircraft supplies                                                                        |  |                           | 123    |   |             |  
|Prepaid expenses and other                                                                             |  |                           | (391   | ) |             |  
|Accounts payable and accrued expenses                                                                  |  |                           | (998   | ) |             |  
|Accrued maintenance reserves                                                                           |  |                           | 247    |   |             |  
|                                                                                                       |  |                           |        |   |             |  
|Net cash (used in) provided by operating activities                                                    |  |                           | (3,448 | ) |             |  
|                                                                                                       |  |                          
|Investing activities:                                                                                  |  |                           |        |   |             |  
|Proceeds from sale of assets                                                                           |  |                           | 565    |   |             |  
|Redemption of restricted cash                                                                          |  |                           | 66     |   |             |  
|Capital expenditures                                                                                   |  |                           | (173   | ) |             |  
|                                                                                                       |  |                           |        |   |             |  
|Net cash provided by investing activities                                                              |  |                           | 458    |   |             |  
|                                                                                                       |  |                          
|Financing activities:                                                                                  |  |                           |        |   |             |  
|Payments on liabilities subject to compromise                                                          |  |                           |       |   |             |  
|Proceeds from issuance of debt                                                                         |  |                           | 439    |   |             |  
|Repayments of long-term debt                                                                           |  |                           | (1,717 | ) |             |  
|                                                                                                       |  |                           |        |   |             |  
|Net cash used in financing activities                                                                  |  |                           | (1,278 | ) |             |  
|                                                                                                       |  |                           |        |   |             |  
|                                                                                                       |  |                          
|Cash used in continuing operations                                                                     |  |                           | (4,268 | ) |             |  
|Cash provided by discontinued operations                                                               |  |                           |       |   |             |  
|                                                                                                       |  |                           |        |   |             |  
|Net decrease in cash and cash equivalents                                                              |  |                           | (4,268 | ) |             |  
|Cash and cash equivalents at beginning of period                                                       |  |                           | 10,353 |   |             |  
|                                                                                                       |  |                           |        |   |             |  
|Cash and cash equivalents at end of period                                                             |  | $                         | 6,085  |   |             | $
|                                                                                                       |  |                           |        |   |             |  



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



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KITTY HAWK, INC. AND SUBSIDIARIES



NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS



1. BASIS OF PRESENTATION



The accompanying condensed consolidated financial statements,
which should be read in conjunction with the consolidated financial statements and footnotes included in the Annual Report on Form 10-K for Kitty Hawk, Inc. (the Company or Kitty Hawk) filed with the Securities and Exchange
Commission for the year ended December 31, 2002, are unaudited (except for the December 31, 2002 condensed consolidated balance sheet, which was derived from the Companys audited consolidated balance sheet included in the aforementioned Form
10-K), but have been prepared in accordance with accounting principles generally accepted in the United States of America (US GAAP) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes required by US GAAP for complete financial statements. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) considered necessary
for a fair presentation have been included.



The
preparation of the consolidated financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. On an ongoing
basis, management evaluates its estimates and judgments and incorporates any changes in such estimates and judgments into the accounting records underlying the Companys consolidated financial statements. Management bases its estimates and
judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not
readily apparent from other sources. Actual results may differ from these estimates.



The Company emerged from bankruptcy on September 30, 2002. Therefore, operating results for the three and six month periods ended June 30, 2003 are for the successor company, and the operating results shown for the
three and six month periods ended June 30, 2002 are for the predecessor company. Operating results for the six months ended June 30, 2003 are not necessarily indicative of the results that may be expected for the year ending December 31, 2003.



2. LEGAL PROCEEDINGS



In July 2002, the Company filed a demand for binding arbitration against
EGL, Inc. d/b/a Eagle Global Logistics with the American Arbitration Association to resolve its claim to collect for freight transportation services rendered to EGL in the amount of approximately $3.7 million plus attorneys fees. EGL
subsequently admitted it owed this amount to Kitty Hawk, but asserted that its counterclaims offset its debt to Kitty Hawk. EGL initially asserted a counterclaim for a pass-through of its aircraft lease obligation to Express One International, Inc.
in the amount of $4.1 million under a May 14, 2001 letter agreement between EGL and Kitty Hawk. EGL claimed that under the letter agreement, Kitty Hawk had agreed to assume EGLs lease obligation to Express One International, Inc. The Company
does not believe that the letter agreement obligated the Company to assume EGLs Express One International, Inc. aircraft lease obligation.



Ten days before the arbitration proceedings began, EGL presented two additional counterclaims. First, it claimed $3.8 million in damages for increased
costs of transporting its freight due to the alleged breach of the letter agreement. Second, EGL claimed $10.0 million of lost profits that it claims it would have earned on increased revenues if its relationship with Kitty Hawk under the letter
agreement had continued.



The arbitration hearing started on
June 9, 2003 and concluded on June 13, 2003. The parties submitted their final post-hearing briefs on July 25, 2003. Under the American Arbitration Association rules, the arbitrators award is due on or before August 24, 2003.



The Company is also subject to various other legal proceedings and claims
which have arisen in the ordinary course of business.



While
the outcome of the legal proceedings and claims described above cannot be predicted with certainty, management does not believe that the outcome of any of these legal matters, other than the EGL matter, will have a material adverse effect on the
Companys business. If the outcome of the EGL matter is not in favor of the



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Company, this could have a material adverse effect on the Companys financial position. Management does not
currently believe that EGL will prevail in the matter.



3. BANKRUPTCY
PROCEEDINGS



On or about May 1, 2000 (the
Petition Date), Kitty Hawk and all nine of its subsidiaries filed voluntary petitions for relief under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the Northern District of Texas, Fort Worth
Division (the Bankruptcy Court). These proceedings were jointly administered under case No. 400-42141-BJH-11.



On August 5, 2002, the Bankruptcy Court entered an order dated August 5, 2002 (the Confirmation Order) confirming the Debtors Final
Joint Plan of Reorganization dated August 2, 2002, with certain modifications (as so modified, the Plan of Reorganization). On September 30, 2002, the Plan of Reorganization became effective (the Effective Date).



Kitty Hawk and its two wholly-owned subsidiaries, Kitty Hawk Cargo, Inc.
(hereafter Cargo) and Kitty Hawk Aircargo, Inc. (hereafter Aircargo), emerged from bankruptcy on the Effective Date. Prior to the Effective Date, the seven other subsidiaries of Kitty Hawk that filed for bankruptcy were
merged with and consolidated into Kitty Hawk pursuant to the Plan of Reorganization. As a result, Kitty Hawk, Cargo and Aircargo are the surviving corporate entities pursuant to the Plan of Reorganization.



Kitty Hawk is a holding company and does not currently have any independent
operations. Cargo operates an expedited scheduled freight network through its hub in Fort Wayne, Indiana. Aircargo is a FAR Part 121 certificated air carrier and operates a fleet of Boeing 727-200 cargo aircraft for Cargo and other customers through
short-term contracts and ad-hoc charters. The Company continually evaluates businesses and other opportunities, whether or not related to the current businesses, for investment, acquisition and strategic alliances to enhance shareholder value.



Pursuant to the Plan of Reorganization, all of Kitty
Hawks previously issued common stock and 9.95% Senior Secured Notes due 2004 (the Senior Notes) were cancelled as of the Effective Date. Holders of Kitty Hawks previously issued and outstanding common stock received no
consideration in connection with the cancellation of their shares of common stock.



On or about the Effective Date, in addition to payment of certain administrative claims arising from the Companys bankruptcy proceedings, the Company delivered $29.1 million to HSBC Bank USA, as successor
Trustee and Collateral Trustee (the Trustee), for the benefit of the holders of its Senior Notes (the Noteholders). The Plan of Reorganization provides for the Companys former general unsecured trade creditors to
receive only shares of common stock in exchange for their claims. The Plan of Reorganization also provided for Aircargo to purchase from affiliates of Pegasus Aviation, Inc. (Pegasus) two aircraft and related engines and to continue to
lease four aircraft and related engines from affiliates of Pegasus under modified operating leases as a settlement of Pegasus claims. The purchase of the two aircraft and related engines from Pegasus occurred in 2002.



On December 23, 2002, the Company filed a motion with the Bankruptcy Court
requesting an order modifying the Plan of Reorganization to allow the Company to:



| |  |  | amend its Second Amended and Restated Certificate of Incorporation to reduce the par value of its common stock (the New Stock) from $0.01 per share to $0.000001 per
share;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | modify its Plan of Reorganization to provide that the non-U.S. citizen holders of the former 9.95% Senior Secured Notes would share ratably in a distribution of 21.5% of the common
stock to be issued under the Plan of Reorganization and, to the extent the non-U.S. citizen holders are entitled to more than 21.5% of the common stock to be issued under the Plan of Reorganization, the non-U.S. citizen holders would receive
warrants to purchase the remaining shares of common stock that they would have otherwise been entitled to receive if they were U.S. citizens; and
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | issue warrants under the Bankruptcy Code that would be exempt from federal, state or local laws requiring registration of the warrants or New Stock to be issued upon exercise of the
warrants.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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On January 29, 2003, the Bankruptcy Court granted the Companys motion and entered an order on
January 31, 2003 modifying the Plan of Reorganization in the manner described above.



As of June 30, 2003, the Company has completed all of the cash payments required by the Plan of Reorganization to be made at or near the Effective Date. One administrative claim in the amount of $1.3 million remains.
This claim has been disputed and has not yet been resolved by the Bankruptcy Court. This matter is set for mediation on August 15, 2003.



Because none of the New Stock was issued as of December 31, 2002, the consolidated financial statements at December 31, 2002 reflect no common stock as
being issued or outstanding. In return for debt forgiveness, settlements and other compromises, which were settled in September 2002, the Company issued New Stock and warrants to purchase New Stock to the Companys former creditors in March
2003 in the following amounts:



|Creditor                                                                         |  | Shares ofNew StockIssued |  | Shares ofNew StockRepresentedby Warrants
|-------------------------------------------------------------------------------- |  | ------------------------ |  | ----------------------------------------
|Holders of the Companys former Senior Notes                                     |  | 28,244,655               |  | 12,255,315                              
|Trusts for the benefit of the Companys former general unsecured trade creditors |  | 7,000,000                |  |                                        
|An affiliate of Pegasus Aviation, Inc.                                           |  | 2,500,000                |  |                                        
|                                                                                 |  |                          |  |                                         
|Total                                                                            |  | 37,744,655               |  | 12,255,315                              
|                                                                                 |  |                          |  |                                         



The warrants have an
exercise price of $0.000001 per share, a term of 10 years and are exercisable only by a citizen of the U.S. as defined in 49 U.S.C. § 40102(a)(15). The 7,000,000 shares of New Stock to be issued to the Companys former general unsecured
trade creditors were issued initially to two trusts. These trusts will hold the shares for the benefit of the Companys former general unsecured trade creditors and will distribute the shares once all claims are allowed or dismissed.



4. DISCONTINUED OPERATIONS



Since May 1, 2000, the Company has undergone a significant number of changes
in its operations as it initially entered and later prepared to emerge from bankruptcy. In accordance with SFAS 144, Accounting for the Impairment or Disposal of Long-Lived Assets, the operations that ceased, or were disposed of,
in the last three years have been presented as discontinued operations and include the operations of the Companys wide-body cargo airline, the non-continental U.S. operations of its expedited scheduled freight network and its air logistics
service provider (including a small aircraft maintenance operation). The results of these operations and the related assets and liabilities of these operations have been segregated in the accompanying consolidated financial statements for the three
and six month periods ended June 30, 2002. There were no discontinued operations during the three and six month periods ended June 30, 2003.



On May 1, 2000, the Company ceased the operations of its wide-body cargo airline and the non-continental U.S. operations of its expedited scheduled
freight network. The property and equipment and other assets (inventory and aircraft supplies, airline operating certificates, etc.) related to these operations were taken out of service and either sold in a series of auctions, sold in individual
transactions, or title was relinquished to parties with a secured interest in the assets.



Any assets of the discontinued operations which were not sold or otherwise disposed of as of August 31, 2002 became property of the Company when its subsidiaries merged into it prior to the Effective Date and are
included in the accompanying balance sheets as continuing operations. These assets are comprised mainly of accounts receivable, various deposits and an office building complex in Michigan and are not revenue producing. Any residual liabilities
associated with these operations were treated in accordance with the Companys Plan of Reorganization.



The following table summarizes the components of the Companys discontinued operations :



|                                  |  | Three months ended June 30, 2002 |      |   | Six months ended June 30, 2002 |  
|--------------------------------- |  | -------------------------------- | ---- | - | ------------------------------ | -
|                                  |  | (in thousands)                   |     
|Revenue                           |  | $                                |     |   |                                | $
|Operating expenses                |  |                                  | 178  |   |                                |  
|Other (income) expense            |  |                                  | (29  | ) |                                |  
|                                  |  |                                  |      |   |                                |  
|Loss from discontinued operations |  | $                                | (149 | ) |                                | $
|                                  |  |                                  |      |   |                                |  



9



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##### Table of Contents

5. SEGMENT REPORTING



The Companys current continuing operations are comprised of two segments  an expedited scheduled freight network and a cargo airline. The
cargo airline supports the expedited scheduled freight network by transporting cargo in its fleet of Boeing 727-200 cargo aircraft. Each segments respective financial performance is detailed below. Each segment is currently evaluated on
financial performance at the operating income line.



The
Company currently operates a major independent city-to-city expedited scheduled freight network in the continental U.S. and selected cities in Canada providing next-morning and two-day delivery service. In addition, the Company has business
alliances that allow it to provide service to Alaska and Hawaii. As an independent freight network, the Company does not typically provide ground transportation from shippers to the cargo facilities or from the cargo facilities to recipients. As a
result, the Company primarily provides freight services to freight forwarders who arrange pick up from shippers and final delivery to recipients. On occasion, the Company arranges for the initial pick up of freight from its customers as well as the
final delivery to recipients.



In addition to supporting the
expedited scheduled freight network, the cargo airline also provides dedicated air freight services for a variety of third parties. These services are provided under contractual arrangements where the Company provides the aircraft, crew, maintenance
and insurance (ACMI). Additionally, the cargo airline performs ad hoc charters for third parties. In support of the expedited scheduled freight network, the cargo airline allocates its cost on a block hour basis, which is reflected as revenue from
intersegment operations in the following table.



The column
labeled other consists of corporate activities. Business assets are owned by or allocated to each of the business segments. Assets included in the column labeled other include cash, allowance for doubtful accounts and the
corporate headquarters building.



|                                     |  | Scheduled Freight Network |        |   | Cargo Airline |   |        | Other |  |   | DiscontinuedOperations |   |  | Eliminations |          |   | Consolidated Balance |  
|------------------------------------ |  | ------------------------- | ------ | - | ------------- | - | ------ | ----- |  | - | ---------------------- | - |  | ------------ | -------- | - | -------------------- | -
|                                     |  | (in thousands)            |       
|Successor:                           |  |                           |        |   |               |   |        |       |  |   |                        |   |  |              |          |   |                      |  
|Three months ended June 30, 2003:    |  |                           |        |   |               |   |        |       |  |   |                        |   |  |              |          |   |                      |  
|Revenue from external customers      |  | $                         | 29,510 |   |               | $ | 1,762  |       |  | $ |                       |   |  | $            |         |   |                      | $
|Revenue from intersegment operations |  |                           |       |   |               |   | 9,113  |       |  |   |                       |   |  |              |         |   |                      |  
|Depreciation and amortization        |  |                           | 85     |   |               |   | 803    |       |  |   |                       |   |  |              |         |   |                      |  
|Operating income (loss)              |  |                           | (1,642 | ) |               |   | 333    |       |  |   | (18                    | ) |  |              |         |   |                      |  
|Interest expense                     |  |                           |        |   |               |   |        |       |  |   |                        |   |  |              |          |   |                      |  
|Other income                         |  |                           |        |   |               |   |        |       |  |   |                        |   |  |              |          |   |                      |  
|Net loss                             |  |                           |        |   |               |   |        |       |  |   |                        |   |  |              |          |   |                      |  
|Total assets                         |  | $                         | 2,417  |   |               | $ | 18,749 |       |  | $ | 18,447                 |   |  | $            |         |   |                      | $
|                                     |  |                           |        |   |               |  
|Six months ended June 30, 2003:      |  |                           |        |   |               |   |        |       |  |   |                        |   |  |              |          |   |                      |  
|Revenue from external customers      |  | $                         | 57,939 |   |               | $ | 4,317  |       |  | $ |                       |   |  | $            |         |   |                      | $
|Revenue from intersegment operations |  |                           |       |   |               |   | 18,065 |       |  |   |                       |   |  |              |         |   |                      |  
|Depreciation and amortization        |  |                           | 176    |   |               |   | 1,617  |       |  |   |                       |   |  |              |         |   |                      |  
|Operating income (loss)              |  |                           | (6,125 | ) |               |   | 688    |       |  |   | (242                   | ) |  |              |         |   |                      |  
|Interest expense                     |  |                           |        |   |               |   |        |       |  |   |                        |   |  |              |          |   |                      |  
|Other income                         |  |                           |        |   |               |   |        |       |  |   |                        |   |  |              |          |   |                      |  
|Net loss                             |  |                           |        |   |               |   |        |       |  |   |                        |   |  |              |          |   |                      |  
|Total assets                         |  | $                         | 2,417  |   |               | $ | 18,749 |       |  | $ | 18,447                 |   |  | $            |         |   |                      | $
|                                    
|                                     |  |                           |        |   |               |  
|Predecessor:                         |  |                           |        |   |               |   |        |       |  |   |                        |   |  |              |          |   |                      |  
|Three months ended June 30, 2002:    |  |                           |        |   |               |   |        |       |  |   |                        |   |  |              |          |   |                      |  
|Revenue from external customers      |  | $                         | 29,687 |   |               | $ | 908    |       |  | $ |                       |   |  | $            |         |   |                      | $
|Revenue from intersegment operations |  |                           |       |   |               |   | 11,052 |       |  |   |                       |   |  |              |         |   |                      |  
|Depreciation and amortization        |  |                           | 147    |   |               |   | 1,230  |       |  |   |                       |   |  |              |         |   |                      |  
|Operating income (loss)              |  |                           | 463    |   |               |   | (97    | )     |  |   | 1                      |   |  |              |         |   |                      |  
|Interest expense                     |  |                           |        |   |               |   |        |       |  |   |                        |   |  |              |          |   |                      |  
|Other expense                        |  |                           |        |   |               |   |        |       |  |   |                        |   |  |              |          |   |                      |  
|Loss from continuing operations      |  |                           |        |   |               |   |        |       |  |   |                        |   |  |              |          |   |                      |  
|Total assets                         |  | $                         | 12,042 |   |               | $ | 14,408 |       |  | $ | 432,565                |   |  | $            | (208,883 | ) |                      | $
|                                     |  |                           |        |   |               |  
|Six months ended June 30, 2002:      |  |                           |        |   |               |   |        |       |  |   |                        |   |  |              |          |   |                      |  
|Revenue from external customers      |  | $                         | 54,305 |   |               | $ | 1,377  |       |  | $ |                       |   |  | $            |         |   |                      | $
|Revenue from intersegment operations |  |                           |       |   |               |   | 24,305 |       |  |   |                       |   |  |              |         |   |                      |  
|Depreciation and amortization        |  |                           | 297    |   |               |   | 2,815  |       |  |   |                       |   |  |              |         |   |                      |  
|Operating loss                       |  |                           | (5,290 | ) |               |   | (278   | )     |  |   | (615                   | ) |  |              |         |   |                      |  
|Interest expense                     |  |                           |        |   |               |   |        |       |  |   |                        |   |  |              |          |   |                      |  
|Other expense                        |  |                           |        |   |               |   |        |       |  |   |                        |   |  |              |          |   |                      |  
|Loss from continuing operations      |  |                           |        |   |               |   |        |       |  |   |                        |   |  |              |          |   |                      |  
|Total assets                         |  | $                         | 12,042 |   |               | $ | 14,408 |       |  | $ | 432,565                |   |  | $            | (208,883 | ) |                      | $



10



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##### Table of Contents

6. EARNINGS PER SHARE



Predecessor:Basic loss per share, for the three and six month periods ended June 30, 2002, is based upon the weighted average number of common
shares outstanding during the period. There were no dilutive shares outstanding during the period presented. All predecessor shares were cancelled pursuant to the Plan of Reorganization (see Note 3).



Successor:Pursuant to the Plan of Reorganization (see Note 3), in
March 2003, the Company issued common shares and warrants to purchase common shares to its former creditors. Because the exercise price of the warrants is nominal, such warrants are treated as outstanding common shares for purposes of calculating
loss per share. These shares are deemed to be outstanding for the entire period presented. Other than the warrants, at June 30, 2003, the Company had no dilutive securities outstanding.



7. RELATED PARTY TRANSACTIONS



The Company has agreements with Pegasus and the Kitty Hawk Collateral Liquidating Trust (the Trust) to lease or use aircraft and engines. Each
of Pegasus and certain beneficiaries of the Trust own more than 5.0% of New Stock. Additionally, a member of the Companys board of directors is a managing director of one of the beneficiaries of the Trust. See Item 13. Certain
Relationships and Related Transactions of the Companys Annual Report on Form 10-K for the year ended December 31, 2002 for more information related to these agreements.



ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW



Kitty Hawk is a holding company and currently operates through its two wholly-owned subsidiaries, Kitty Hawk Cargo and Kitty Hawk Aircargo. For the six
months ended June 30, 2003, we generated approximately 93% of our revenue from our expedited scheduled freight network, which is operated by Kitty Hawk Cargo. Kitty Hawk Aircargo, our cargo airline, supports Kitty Hawk Cargos expedited
scheduled freight network by transporting cargo in its fleet of Boeing 727-200 cargo aircraft. Kitty Hawk Aircargo also provides dedicated air freight transportation services for a variety of customers through short-term contracts and ad-hoc
charters. In addition, we continually evaluate businesses and other opportunities, whether or not related to our current businesses, for investment, acquisition and strategic alliances to enhance shareholder value.



We currently operate a major independent city-to-city expedited scheduled
freight network in the continental U.S. and selected cities in Canada providing next-morning and two-day delivery service. In addition, we have business alliances that allow us to provide service to Alaska and Hawaii. As an independent freight
network, we typically do not transport freight from shippers to our cargo facilities or from our cargo facilities to recipients. As a result, we primarily provide freight services to freight forwarders who either transport the freight to and from
our cargo facilities in the origin and destination cities we serve or arrange for others to provide these services. On occasion, we arrange for the initial pick up of freight from our customers as well as the final delivery to recipients.



We emerged from bankruptcy on September 30, 2002 and adopted
Statement of Position 90-7, Financial Reporting by Entities in Reorganization under the Bankruptcy Code, or Fresh Start Accounting. In accordance with Fresh Start Accounting, all of our assets and liabilities were restated to
reflect their respective estimated fair market values as of September 30, 2002. Our consolidated financial statements after September 30, 2002 are not comparable to the periods prior to September 30, 2002. Differences between periods due to Fresh
Start Accounting are explained as necessary. The discussion that follows represents the operating results of the successor company as compared to the predecessor company and should be read in conjunction with the information set forth under
Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations of our Annual Report on Form 10-K for the year ended December 31, 2002.



Revenue. Scheduled freight revenue is generated from freight transportation services provided by our expedited
scheduled freight network. Other revenue includes:



| |  |  | ACMI revenue, which is generated from contracts with third-parties by our cargo airline under which we generally provide the aircraft, crew, maintenance and insurance, known
as ACMI; and
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Miscellaneous revenue, which is generated from ad hoc charters provided by our cargo airline and freight handling services provided for third-parties during 2002.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

Cost of Revenue.Included in our cost of revenue are the following major categories:



| |  |  | Flight Expense, which consists of costs related to the flight operations of our cargo airline, including:
| | - |  | ---------------------------------------------------------------------------------------------------------

| |  |  | crew member wages, benefits, training and travel;
| | - |  | -------------------------------------------------

| |  |  | operating lease expense for leased aircraft operated by us;
| | - |  | -----------------------------------------------------------

| |  |  | insurance costs related to aircraft operated by us; and
| | - |  | -------------------------------------------------------

| |  |  | flight operations and airline management costs, wages and benefits.
| | - |  | -------------------------------------------------------------------



| |  |  | Transportation Expense, which consists of costs related to the physical movement of freight between our cargo facilities and which is not otherwise classified as flight
expense, including:
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | third-party aircraft charter expense;
| | - |  | -------------------------------------

| |  |  | aircraft ground operating costs, such as landing and parking fees charged by airports and cost of deicing aircraft;
| | - |  | -------------------------------------------------------------------------------------------------------------------

| |  |  | trucking expenses for cities in our expedited scheduled freight network that are not served by our aircraft; and
| | - |  | ----------------------------------------------------------------------------------------------------------------

| |  |  | pickup and/or final delivery expenses as directed by customers.
| | - |  | ---------------------------------------------------------------



| |  |  | Fuel, which consists of the all-inclusive cost of all jet fuel consumed in our expedited scheduled freight network and on ad hoc charters that include jet fuel in the charter
service, and the cost of all taxes, fees and surcharges necessary to deliver the jet fuel into the aircraft.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Maintenance Expense, which consists of costs to maintain aircraft and aircraft engines operated by our cargo airline, including:
| | - |  | --------------------------------------------------------------------------------------------------------------------------------

| |  |  | wages and benefits for maintenance and records personnel;
| | - |  | ---------------------------------------------------------

| |  |  | costs for contract mechanics at cargo facility outstations;
| | - |  | -----------------------------------------------------------

| |  |  | costs of aircraft parts and supplies; and
| | - |  | -----------------------------------------

| |  |  | accruals for light C-checks and heavy shop visits for engines.
| | - |  | --------------------------------------------------------------



| |  |  | Freight Handling Expense, which consists of costs to handle the loading and unloading of freight on aircraft and trucks operating within our expedited scheduled freight
network, including:
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | wages and benefits for our Fort Wayne, Indiana hub sort and ramp operations personnel;
| | - |  | --------------------------------------------------------------------------------------

| |  |  | contract services to warehouse, load and unload aircraft principally at cargo facility outstations; and
| | - |  | -------------------------------------------------------------------------------------------------------

| |  |  | wages and benefits for our outstation cargo facility personnel.
| | - |  | ---------------------------------------------------------------



| |  |  | Depreciation and Amortization, which consists of depreciation and amortization expenses for our owned airframes and aircraft engines and freight-handling equipment.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Operating Overhead, which consists of direct overhead costs related to operating our expedited scheduled freight network and cargo airline, including:
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | wages and benefits for operational managers of Kitty Hawk Cargo;
| | - |  | ----------------------------------------------------------------

| |  |  | expedited scheduled freight network sales and marketing expenses;
| | - |  | -----------------------------------------------------------------

| |  |  | wages and benefits for customer service personnel;
| | - |  | --------------------------------------------------

| |  |  | rent and utilities;
| | - |  | -------------------

| |  |  | bad debt expense; and
| | - |  | ---------------------

| |  |  | general operational office expenses.
| | - |  | ------------------------------------



General and Administrative Expenses. General and administrative expenses consist of salaries, benefits and expenses for executive management (other
than management of Kitty Hawk Aircargo and Kitty Hawk Cargo), information technology, human resources, accounting, finance, legal and corporate communications personnel. In addition, costs for strategic planning, financial planning and asset
acquisitions are included in general and administrative expenses. Also included are legal and professional fees and consulting fees.



Discontinued Operations.Discontinued operations consist of the activities in the three and six months ended June 30, 2002 related to disposing of
the assets of Kitty Hawk International, our wide-body cargo airline. This business ceased operating during the bankruptcy proceedings. See Item 1. Business  Changes in Our Business Operations Since 2000 in our Annual Report on
Form 10-K for the year ended December 31, 2002.



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##### Table of Contents

Critical Accounting Policies.For a discussion of our critical accounting policies refer to
Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations  Critical Accounting Policies included in our Annual Report on Form 10-K for the year ended December 31, 2002. There have been no
material changes to the critical accounting policies discussed in our Annual Report on Form 10-K for the year ended December 31, 2002.



RESULTS OF OPERATIONS



The following table presents, for the periods indicated, condensed consolidated statement of operations data expressed as a percentage of total revenue:



|                                          |  | Three months ended June 30, |    |  | Six months ended June 30, |   
|----------------------------------------- |  | --------------------------- | -- |  | ------------------------- | --
|                                          |  | 2003                        |    |  | 2002                      |   
|Revenue:                                  |  |                             |    |  |                           |   
|Scheduled freight                         |  | 94.4                        | %  |  | 97.0                      | % 
|Other                                     |  | 5.6                         |    |  | 3.0                       |   
|                                          |  |                             |    |  |                           |   
|Total revenue                             |  | 100.0                       |    |  | 100.0                     |   
|Cost of revenue                           |  | 96.7                        |    |  | 93.4                      |   
|                                          |  |                             |    |  |                           |   
|Gross profit (loss)                       |  | 3.3                         |    |  | 6.6                       |   
|General and administrative expenses       |  | 7.5                         |    |  | 5.4                       |   
|                                          |  |                             |    |  |                           |   
|Operating loss from continuing operations |  | (4.2                        | )  |  | 1.2                       |   
|                                          |  |                             |    |  |                           |   
|Other (income) expense:                   |  |                             |    |  |                           |   
|Interest expense                          |  | 0.3                         |    |  | 2.5                       |   
|Reorganization expense                    |  |                            |    |  | 4.1                       |   
|Other (income) expense                    |  | (0.1                        | )  |  | (0.3                      | ) 
|                                          |  |                             |    |  |                           |   
|Total other (income) expense              |  | (0.2                        | )  |  | 6.3                       |   
|                                          |  |                             |    |  |                           |   
|Loss from continuing operations           |  | (4.4                        | )  |  | (5.1                      | ) 
|Loss from discontinued operations         |  |                            |    |  | (0.5                      | ) 
|                                          |  |                             |    |  |                           |   
|Net loss                                  |  | (4.4                        | )% |  | (5.6                      | )%
|                                          |  |                             |    |  |                           |   



QUARTER ENDED JUNE 30, 2003 COMPARED
TO QUARTER ENDED JUNE 30, 2002



REVENUE



General. The following table presents, for the periods
indicated, the components of our revenue in dollars and as a percentage of our total revenue and the percentage change from period-to-period:



|                  |  | Three months ended June 30, |        |                             |       |  
|----------------- |  | --------------------------- | ------ | --------------------------- | ----- | -
|                  |  | 2003                        |        |                             | 2002  |  
|                  |  | Revenue                     |        | Percentage of Total Revenue |       |  
|                  |  | (dollars in thousands)      |        |                             |       |  
|Scheduled freight |  | $                           | 29,510 |                             | 94.4  | %
|Other:            |  |                             |        |                             |       |  
|ACMI              |  |                             | 1,610  |                             | 5.1   |  
|Miscellaneous     |  |                             | 152    |                             | 0.5   |  
|                  |  |                             |        |                             |       |  
|Total revenue     |  | $                           | 31,272 |                             | 100.0 | %
|                  |  |                             |        |                             |       |  



Scheduled
Freight. For the quarter ended June 30, 2003, the decrease in our scheduled freight revenue was primarily due to a decrease of 5.6% in the chargeable weight carried in our expedited scheduled freight network, due to industry trends related to
the economy. We believe these industry trends were heavily influenced by increased competition in the heavy freight market, a shift to less expensive alternatives such as long-haul truck services and the war in Iraq that depressed the U.S. domestic
economy during the quarter ended June 30, 2003. This decrease was largely offset by a 6.2% increase in our average yield due to price increases, including a fuel surcharge to mitigate increases in our fuel expense.



ACMI. For the quarter ended June 30, 2003, our ACMI revenue was
primarily from a one-year ACMI contract we entered into in December 2002 to provide BAX Global with three Boeing 727-200 cargo aircraft. This contract was cancelled effective May 31, 2003 pursuant to the contracts cancellation clause that
required 30 days notice by either party. The cancellation was principally due to lower than expected freight volumes during of the first four months of 2003. See also Transportation Expense.



13



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##### Table of Contents

Miscellaneous. For the quarter ended June 30, 2003, our miscellaneous revenue resulted from flying
ad-hoc charter services for several customers. During the quarter ended June 30, 2002, our miscellaneous revenue resulted from providing aircraft ground handling for customers at one of our company operated outstations. This activity ceased in July
2002 when we contracted with a third-party to provide our aircraft ground handling services at this same outstation.



COST OF REVENUE



General.The following table presents, for the periods indicated, the components of our cost of revenue in dollars and as a percentage of total
revenue and the percentage change from period-to-period:



|                              |  | Three months ended June 30, |        |                             |      |  
|----------------------------- |  | --------------------------- | ------ | --------------------------- | ---- | -
|                              |  | 2003                        |        |                             | 2002 |  
|                              |  | Cost of Revenue             |        | Percentage of Total Revenue |      |  
|                              |  | (dollars in thousands)      |        |                             |      |  
|Flight expense                |  | $                           | 6,405  |                             | 20.5 | %
|Transportation expense        |  |                             | 4,695  |                             | 15.0 |  
|Fuel                          |  |                             | 7,254  |                             | 23.2 |  
|Maintenance expense           |  |                             | 2,725  |                             | 8.7  |  
|Freight handling expense      |  |                             | 6,067  |                             | 19.4 |  
|Depreciation and amortization |  |                             | 888    |                             | 2.8  |  
|Operating overhead            |  |                             | 2,210  |                             | 7.1  |  
|                              |  |                             |        |                             |      |  
|Total cost of revenue         |  | $                           | 30,244 |                             | 96.7 | %
|                              |  |                             |        |                             |      |  



Flight Expense.
For the quarter ended June 30, 2003, flight expense decreased $0.3 million as a result of reduced aircraft lease expense from renegotiations of our aircraft lease agreements through our bankruptcy proceedings and from the renewal of our aircraft
liability insurance in June 2003 at more competitive rates than we experienced in the prior policy year. Additionally, we flew 6.8% fewer block hours in the quarter ended June 30, 2003 as compared to the quarter ended June 30, 2002.



As a percentage of our total revenue, flight expense decreased to 20.5% for
the quarter ended June 30, 2003 from 22.0% for the quarter ended June 30, 2002. This decrease is due to a shift from flying four of our own aircraft in our expedited scheduled freight network, which is classified as flight expense, to chartering two
third-party aircraft, which is classified as transportation expense. The contract to charter the third-party aircraft was cancelled effective May 31, 2003.



Transportation Expense. For the quarter ended June 30, 2003, transportation expense increased $2.5 million, or 114.0%, from the quarter ended June
30, 2002. This increase is primarily due to a one-year agreement signed in December 2002 to charter two Douglas DC-8 aircraft for use in our expedited scheduled freight network. This agreement was with an affiliate of BAX Global and was cancelled
effective May 31, 2003 pursuant to the contracts cancellation clause that required 30 days notice by either party. These chartered aircraft allowed us to carry higher freight volumes at a more economical rate per hour as compared to four
Boeing 727-200s. However, due to lower than expected demand during of the first four months of 2003, the freight volumes did not justify the continued charter of these two Douglas DC-8 aircraft. The use of these chartered aircraft caused
transportation expense to increase as a percent of total revenue as costs were shifted from flight expense.



Fuel. For the quarter ended June 30, 2003, fuel expense increased $0.5 million, or 7.4%, as compared to the quarter ended June 30, 2002. Fuel
expense is comprised of two elements: our average cost per gallon and the number of gallons used by the aircraft. Our average cost per gallon of fuel increased $0.10, or 11.0%, for the quarter ended June 30, 2003 as compared to the quarter ended
June 30, 2002. However, the number of gallons used during the quarter ended June 30, 2003 decreased 232,000 gallons, or 3.0%, as compared to the quarter ended June 30, 2002. This decrease in fuel consumption was due to utilizing two chartered
Douglas DC-8 aircraft during 2003, which are more fuel efficient than utilizing four Boeing 727-200 cargo aircraft in our expedited scheduled freight network. In addition, a jet fuel conservation program was implemented in the first quarter of 2003.
Furthermore, to mitigate the increase in our average cost per gallon of jet fuel, we continue to assess a fuel surcharge.



Maintenance Expense. For the quarter ended June 30, 2003, maintenance expense decreased in absolute dollars and as a percentage of total revenue
primarily due to flying fewer hours and accruing fewer reserves for



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heavy aircraft maintenance. During 2002, we determined that in light of declining fair market values for our Boeing
727-200 cargo aircraft and the general availability of replacement cargo aircraft, it made economic sense for us to permanently retire some of our airframes and aircraft engines at their next scheduled heavy maintenance event, rather than performing
the scheduled heavy maintenance. As a result, we were no longer required to record maintenance reserves for these airframes and aircraft engines, which further reduced our maintenance expense in the second quarter of 2003. We achieved additional
savings in our third-party aircraft maintenance costs as a result of rate negotiations and performing work with our own employees, as well as using spare parts from our owned aircraft that have been permanently parked.



Freight Handling Expense. For the quarter ended June 30, 2003, freight
handling expense increased 3.9% compared to the quarter ended June 30, 2002 despite the fact that we carried 5.6% less chargeable weight pounds in our expedited scheduled freight network. During the first quarter of 2003, we renegotiated many of our
outstation freight handling contracts and obtained more favorable rates. In addition, we closed three of our company operated outstations and substituted third-party freight handling services at lower all-in costs. As a result of closing these
company operated outstations, costs previously included in operating overhead such as rent and utilities, are now included in freight handling expense. See also Operating Overhead.



Depreciation and Amortization. For the quarter ended June 30, 2003, depreciation and amortization expenses declined
in absolute dollars and as a percentage of total revenue primarily due to the adoption of Fresh Start Accounting, which reduced our overall property and equipment net book value.



Operating Overhead. For the quarter ended June 30, 2003, operating overhead decreased in absolute dollars and as a
percentage of revenue due to the reduction in the scope of our operations during the second quarter of 2003 as compared to the second quarter of 2002 and due to savings achieved through our new outstation freight handling contracts. The costs
related to these contracts are included in freight handling expense.



GROSS PROFIT



For the quarter
ended June 30, 2003, we recognized gross profit of $1.0 million, which was a decrease of $1.0 million, or approximately 50.0%, as compared to the quarter ended June 30, 2002. The decrease was primarily due to the lower than expected demand for
services as a result of the sluggish U.S. economy, increased competition in the expedited heavy freight market, a shift to use less expensive alternatives such as long-haul truck services, and the war in Iraq.



GENERAL AND ADMINISTRATIVE EXPENSE



General and administrative expense increased by $0.7 million, or 43.2%,
during the quarter ended June 30, 2003 as compared to the quarter ended June 30, 2002. The increase is primarily due to the EGL arbitration expense, trailing bankruptcy expenses related to claims resolution, and expenses related to filing periodic
and other reports under the Securities and Exchange Act of 1934. In the quarter ended June 30, 2002, all bankruptcy related expenses are recognized in Reorganization expense and we had lower expenses related to being a publicly held company until we
emerged from bankruptcy on September 30, 2002.



INTEREST EXPENSE AND OTHER (INCOME) EXPENSE



Interest
expense decreased by $0.7 million, or 86.4%, during the quarter ended June 30, 2003 as compared to the quarter ended June 30, 2002. This decrease is due to a $10.2 million reduction in outstanding debt since April 2002. Reorganization expense
decreased $1.3 million to zero during the quarter ended June 30, 2003 as compared to the quarter ended June 30, 2002 due to our exit from bankruptcy in September 2002. Other income decreased by $42,000, or 53%, for the quarter ended June 30, 2003 as
compared to the quarter ended June 30, 2002 due to lower interest income resulting from lower cash balances held after effecting the Plan of Reorganization.



LOSS FROM CONTINUING OPERATIONS



Our loss from continuing operations for the quarter ended June 30, 2003 was $1.4 million, a decrease of 10.3%, as compared to the $1.6 million loss from
continuing operations in the quarter ended June 30, 2002.



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LOSS FROM DISCONTINUED OPERATIONS



For the quarter ended June 30, 2003, we had no income or loss from our
discontinued operations as we disposed of substantially all discontinued operations assets and liabilities in September 2002 in connection with our emergence from bankruptcy. Any remaining assets became property of Kitty Hawk. For the quarter ended
June 30, 2002, the losses from discontinued operations were primarily attributable to the disposal of assets at less than estimated fair market values.



SIX MONTHS ENDED JUNE 30, 2003 COMPARED TO SIX MONTHS ENDED JUNE 30, 2002



REVENUE



General. The following table presents, for the periods indicated, the components of our revenue in dollars and as a percentage of our total revenue
and the percentage change from period-to-period:



|                  |  | Six months ended June 30, |        |                             |       |  
|----------------- |  | ------------------------- | ------ | --------------------------- | ----- | -
|                  |  | 2003                      |        |                             | 2002  |  
|                  |  | Revenue                   |        | Percentage of Total Revenue |       |  
|                  |  | (dollars in thousands)    |        |                             |       |  
|Scheduled freight |  | $                         | 57,939 |                             | 93.1  | %
|Other:            |  |                           |        |                             |       |  
|ACMI              |  |                           | 3,996  |                             | 6.4   |  
|Miscellaneous     |  |                           | 321    |                             | 0.5   |  
|                  |  |                           |        |                             |       |  
|Total revenue     |  | $                         | 62,256 |                             | 100.0 | %
|                  |  |                           |        |                             |       |  



Scheduled
Freight. For the six months ended June 30, 2003, the increase in our scheduled freight revenue was primarily due to an increase of 8.7% in our average yield, as our chargeable weight increased less than 1.0%. The yield increase was due to price
increases implemented January 2003 and increases in our fuel surcharges to mitigate increases in our fuel expense.



ACMI. For the six months ended June 30, 2003, our ACMI revenue was derived primarily from a one-year ACMI contract we entered into in December 2002
to provide BAX Global with three Boeing 727-200 cargo aircraft. This contract was cancelled effective May 31, 2003 pursuant to the contracts cancellation clause that required 30 days notice by either party. The cancellation was principally due
to lower than expected freight volumes during the first four months of 2003. See also Transportation Expense.



Miscellaneous. For the six months ended June 30, 2003, our miscellaneous revenue resulted from flying ad-hoc charter services for several
customers. For the six months ended June 30, 2002, our miscellaneous revenue resulted from providing aircraft ground handling for customers at one of our company operated outstations. This activity ceased in July 2002 when we contracted with a
third-party to provide our aircraft ground handling services at this same outstation.



COST OF REVENUE



General.The following table presents, for the periods indicated, the components of our cost of revenue in dollars and as a percentage of total
revenue and the percentage change from period-to-period:



|                              |  | Six months ended June 30, |        |                             |       |  
|----------------------------- |  | ------------------------- | ------ | --------------------------- | ----- | -
|                              |  | 2003                      |        |                             | 2002  |  
|                              |  | Cost of Revenue           |        | Percentage of Total Revenue |       |  
|                              |  | (dollars in thousands)    |        |                             |       |  
|Flight expense                |  | $                         | 12,668 |                             | 20.3  | %
|Transportation expense        |  |                           | 10,734 |                             | 17.2  |  
|Fuel                          |  |                           | 15,174 |                             | 24.4  |  
|Maintenance expense           |  |                           | 6,085  |                             | 9.8   |  
|Freight handling expense      |  |                           | 11,798 |                             | 18.9  |  
|Depreciation and amortization |  |                           | 1,793  |                             | 2.9   |  
|Operating overhead            |  |                           | 4,644  |                             | 7.5   |  
|                              |  |                           |        |                             |       |  
|Total cost of revenue         |  | $                         | 62,896 |                             | 101.0 | %
|                              |  |                           |        |                             |       |  



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Flight Expense. For the six months ended June 30, 2003, flight expense decreased $1.4 million as a
result of reduced aircraft lease expense from renegotiations of our aircraft lease agreements through our bankruptcy proceedings and savings from the renewal of our aircraft liability insurance. Additionally, we flew 4.9% fewer block hours in the
first six months of 2003 as compared to the first six months of 2002.



As a percentage of our total revenue, flight expense decreased to 20.3% for the six months ended June 30, 2003 from 25.2% for the six months ended June 30, 2002. This decrease is due to a shift from flying four of our own aircraft in our
expedited scheduled freight network, which is classified as flight expense, to chartering two third-party aircraft, which is classified as transportation expense.



Transportation Expense. For the six months ended June 30, 2003, transportation expense increased $6.4 million, or
148.6%, from the first six months of 2002. This increase is primarily due to a one-year agreement signed in December 2002 to charter two Douglas DC-8 aircraft for use in our expedited scheduled freight network. This agreement was with an affiliate
of BAX Global and was cancelled effective May 31, 2003 pursuant to the contracts cancellation clause that required 30 days notice by either party. These chartered aircraft allowed us to carry higher freight volumes at a more economical rate
per hour as compared to four Boeing 727-200s. However, due to lower than expected demand during the first four months of 2003, the freight volumes did not justify the continued charter of these two Douglas DC-8 aircraft. The use of these chartered
aircraft caused transportation expense to increase as a percent of total revenue as costs were shifted from flight expense.



Fuel. For the six months ended June 30, 2003, fuel expense increased $3.0 million, or 24.7%, as compared to the six months ended June 30, 2002.
Fuel expense is comprised of two elements: our average cost per gallon and the number of gallons used by the aircraft. Our average cost per gallon of fuel increased $0.23, or 26.7%, for the six months ended June 30, 2003 as compared to the six
months ended June 30, 2002. The number of gallons used for the six months ended June 30, 2003 decreased 337,000 gallons, or 2.3%, as compared to the six months ended June 30, 2002. The decrease in fuel consumption was due to utilizing two chartered
Douglas DC-8 aircraft during 2003, which are more fuel efficient than utilizing four Boeing 727-200 cargo aircraft in our expedited scheduled freight network. In addition, a jet fuel conservation program was implemented in March 2003. Furthermore,
to mitigate the increase in our average cost per gallon of jet fuel, we continue to assess a fuel surcharge.



Maintenance Expense. For the six months ended June 30, 2003, maintenance expense decreased in absolute dollars and as a percentage of total revenue
primarily due to flying fewer hours and accruing fewer reserves for heavy aircraft maintenance. During 2002, we determined that in light of declining fair market values for our Boeing 727-200 cargo aircraft and the general availability of
replacement cargo aircraft, it made economic sense for us to permanently retire some of our airframes and aircraft engines at their next scheduled heavy maintenance event, rather than performing the scheduled heavy maintenance. As a result, we were
no longer required to record maintenance reserves for these airframes and aircraft engines, which further reduced our maintenance expense for the six months ended June 30, 2003. We achieved additional savings in our third-party aircraft maintenance
costs as a result of rate negotiations and performing work with our own employees, as well as using spare parts from our owned aircraft that have been permanently parked.



Freight Handling Expense. For the six months ended June 30, 2003, freight handling expense increased 1.0% as compared
to the six months ended June 30, 2002 despite the fact that we carried less than 1.0% less chargeable weight pounds in our expedited scheduled freight network. During the first quarter of 2003, we renegotiated many of our outstation freight handling
contracts and obtained more favorable rates. In addition, we closed three of our company operated outstations in exchange for third-party freight handling services at lower all-in costs. As a result of closing these company operated outstations,
costs previously included in operating overhead such as rent and utilities, are now included in freight handling expense. See also Operating Overhead.



Depreciation and Amortization. For the six months ended June 30, 2003, depreciation and amortization expenses declined in absolute dollars and as a
percentage of total revenue primarily due to the adoption of Fresh Start Accounting, which reduced our overall property and equipment net book value.



Operating Overhead. For the six months ended June 30, 2003, operating overhead decreased in absolute dollars and as a percentage of revenue due to
the reduction in the scope of our operations as compared to the six months ended June 30, 2002 and due to savings achieved through renegotiated outstation freight handling contracts. The costs related to these contracts are included in freight
handling expense.



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GROSS PROFIT



For the six months ended June 30, 2003, we recognized negative gross profit of $(0.6) million, which was an improvement of
$1.4 million as compared to the six months ended June 30, 2002. The improvement was due to reduced expenses as a percent of total revenue in our operations, the December 2002 ACMI contract with BAX Global to provide three Boeing 727-200 cargo
aircraft and improved yield in our expedited scheduled freight business.



GENERAL AND ADMINISTRATIVE EXPENSE



General and administrative expense increased by $0.9 million, or 21.7%, during the first six months of 2003 as compared to the first six months of 2002. The increase is primarily due to the EGL arbitration expense, trailing bankruptcy
expenses related to the unsecured trade creditors claims resolution, and expenses for filing periodic and other reports under the Securities and Exchange Act of 1934. In the first six months of 2002, all bankruptcy related expenses were recognized
in Reorganization expense and we had lower expenses related to being a public company until we emerged from bankruptcy on September 30, 2002.



INTEREST EXPENSE AND OTHER (INCOME) EXPENSE



Interest expense decreased by $1.0 million, or 82.3%, during the six months ended June 30, 2003 as compared to the six months ended June 30, 2002. This
decrease is due to a $39 million reduction in outstanding debt since December 2001. Reorganization expense decreased $3.2 million to zero in the first six months of 2003 as compared to the six months ended June 30, 2002 due to our exit from
bankruptcy in September 2002. Other income increased by $0.5 million in first six months of 2003 as compared to the first six months of 2002, due to gains recognized on sales of miscellaneous equipment that became surplus as we transitioned three of
our company operated outstations to third-party service providers.



LOSS FROM CONTINUING OPERATIONS



Our loss from continuing operations for the six months ended June 30, 2003 was $(5.4) million, an improvement of $5.3 million as compared to the $(10.7) million loss from continuing operations for the six months ended June 30, 2002.



LOSS FROM DISCONTINUED OPERATIONS



For the first six months of 2003, we had no income or loss from our
discontinued operations as we disposed of substantially all discontinued operations assets and liabilities in September 2002 in connection with our emergence from bankruptcy. Any remaining assets became property of Kitty Hawk. For the six months
ended June 30, 2002, the losses from discontinued operations were primarily attributable to the disposal of assets at less than fair market values.



LIQUIDITY AND CAPITAL RESOURCES



General. Currently, our primary source of liquidity is our cash flow from operations. In addition, we may supplement our liquidity by accessing our
receivables purchase facility with KBK Financial, Inc.



At June
30, 2003, cash and cash equivalents were $6.1 million as compared to $10.4 million at December 31, 2002. The decrease in cash of $4.3 million is a result of payments made related to bankruptcy commitments under our Plan of Reorganization, reductions
in our outstanding debt obligations and funding our operating losses for the six months ended June 30, 2003. Additionally, at June 30, 2003 and December 31, 2002, we had no funds advanced from our receivables purchase facility and, as a result, up
to $5.0 million was available under that facility.



At June 30,
2003, we had net working capital of $8.1 million as compared to $12.2 million at December 31, 2002. The decrease in our net working capital was primarily due to a reduction in cash as stated above and a reduction in accounts receivable due to lower
revenue which was partially offset by a decrease in accrued wages.



We anticipate our capital expenditures for the remainder of 2003 to be less than $1.0 million, excluding heavy airframe maintenance and heavy shop visits for engines. During the last six months of 2003, we anticipate heavy maintenance
events will be less than $1.0 million. Based on our current projections, we believe our current



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assets and cash flow from operations are sufficient to meet our anticipated normal working capital and operating needs
for the next 12 months.



In 2004, the aircraft leases with
affiliates of Pegasus Aviation, Inc. and our agreement with the Kitty Hawk Collateral Liquidating Trust under which we currently operate 14 Boeing 727-200 cargo aircraft are scheduled to expire. These 14 aircraft represent a majority of our current
operating fleet and will represent an increasing percentage of our operating fleet over time as we take non-economically viable owned aircraft out of service at their next scheduled heavy maintenance event. There can be no assurance that the lessors
or owners of these aircraft will continue to make these aircraft available to us on terms and conditions we find acceptable. We currently believe there are sufficient available aircraft in the market to meet our needs if we are unable to, or decide
not to, extend these agreements. However, there may be initial cash requirements or transitional maintenance expenditures to obtain other aircraft or retain some or all of the aircraft covered by these agreements. Without adequate aircraft at an
economically viable cost, we may not be able to continue to operate our businesses or generate operating income or profits. For more information on these agreements, see Item 13. Certain Relationships and Related Transactions in our
Annual Report on Form 10-K for the year ended December 31, 2002.



Receivables Purchase Facility.We entered into an account transfer and purchase agreement with KBK Financial for a $5.0 million receivables purchase facility as part of our plan of reorganization. At December 31, 2002 and June
30, 2003, we had no funds advanced under this facility.



The
receivables purchase facility advances funds to us at a rate of 85% of the invoice amount purchased by KBK Financial. All of our invoices are available for sale under the receivables purchase facility. Our invoices may be offered to KBK Financial on
a daily basis, and we may offer an unlimited number of invoices, subject to the $5.0 million funding limit. KBK Financial can accept or reject offered invoices and is not obligated to purchase any invoices. KBK Financial exercises control over our
incoming receipts via a lockbox in order to ensure that the cash received on purchased invoices is collected. To secure any of our unpaid obligations to KBK Financial, KBK Financial also has liens on our inventory, equipment (excluding airframes and
aircraft engines), accounts, accounts and contract rights, contracts, drafts, acceptances, documents, instruments, chattel paper, deposit accounts and general intangibles. The receivables purchase facility does not have any financial covenants tied
to our operating performance.



The receivables purchase
facility contains fixed and variable discount rate pricing components. The fixed discount is 0.6% of the invoice amount and is payable at the time of funding. The variable rate is KBK Financials base rate as established by KBK from time to
time, plus 2.00% per annum and is payable based on the number of days from the sale of the invoice to KBK Financial through and including the third business day after the invoice is collected. The variable discount rate will not be less than 6.75%.



Because funds advanced under this facility are considered a
contingent sale of the particular invoices sold, we report any funds advanced as a reduction of trade accounts receivables in our consolidated financial statements.



The receivables purchase facility does not have a stated expiration date, but may be terminated by either party without
penalty upon thirty days written notice.



1stSource Bank Note. In November 2000, we executed a promissory
note and entered into a security agreement with 1stSource Bank to settle lease obligations existing prior to our
bankruptcy filing. Under these agreements, 1stSource Bank advanced to us approximately $8.5 million. The promissory
note bears interest at a fixed rate of 8.9% per annum, provides for monthly principal and interest payments of $202,000, is fully amortizing over the term of the loan and matures in February 2005.



The promissory note is guaranteed by us and is secured by two Boeing 727-200
airframes and five aircraft engines. At June 30, 2003, we owed 1stSource Bank approximately $3.4 million under this
note and the collateral had a carrying value of substantially less than the amount owed. Under these agreements, we are required to perform light and heavy maintenance on the airframes and aircraft engines and to keep them airworthy. These
agreements do not have any minimum collateral value or financial covenants.



In July 2003, we completed the sale of our office and warehouse building complex in Ypsilanti, Michigan for net proceeds of $1.0 million. This building was classified as held for sale.



In August 2003, we completed a settlement with one of our cargo aircraft
lessors. This aircraft lease was scheduled to expire in December 2003 and we estimated that the remaining payments under the lease combined with



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the airframe and engine return conditions would have required net cash expenditures of approximately $1.5 million. The
settlement of this lease provided for complete satisfaction of all of our financial obligations under the lease and we acquired the Boeing 727-200 cargo aircraft and the three related JT8D-7B engines for $1.3 million.



SEASONALITY OF RESULTS AND OPERATING LEVERAGE



Our current business is seasonal in nature. In a typical calendar year, we
experience increasing revenue with each passing quarter, beginning with the first quarter. The U.S. economy entered a downturn in late 2000. During 2001, the demand for our expedited scheduled freight services generally trended downward the entire
year. When it became apparent that there would not be an improvement in the third and fourth quarters of 2001, we reduced the size of our expedited scheduled freight network and our expenses as rapidly as possible.



In 2002 and for the first quarter of 2003, we experienced normal seasonal
trends in our expedited scheduled freight business. However, during the second quarter of 2003, we did not experience normal seasonal trends in the scheduled freight business. We believe the lower than normal seasonal trend was a result of the war
in Iraq that has had a dampening effect on the demand for U.S. domestic expedited freight shipments, increased competition in the expedited heavy freight market and a shift to use less expensive alternatives such as long-haul truck services.



We currently derive substantially all of our revenue from our
expedited scheduled freight business. This business has significant operating costs that are fixed and cannot be materially reduced in the short-term if the expedited scheduled freight business cannot generate expected levels of revenue. Once
revenue reaches the break-even point in a given period, each additional dollar of revenue contributes a relatively high percentage to operating income. However, if revenue does not reach the break-even point in a given period, the operations will
sustain losses, which could be significant depending on the amount of the deficit. We have, and will continue to have, capital requirements for the requisite periodic and major overhaul maintenance checks for our fleet and for debt service. We also
have seasonal working capital needs, because we generate higher revenue in the fourth calendar quarter and lower revenue in the first calendar quarter. Funding requirements have historically been met through internally generated funds, bank
borrowings and aircraft and other asset sales and from public and private offerings of equity and debt securities. From time to time, we have entered into sale/leaseback transactions to acquire aircraft and may do so in the future.



FORWARD LOOKING STATEMENTS



This Quarterly Report on Form 10-Q contains forward-looking
statements concerning our industry, business, operations and financial performance and condition. When we use the words estimates, expects, forecasts, anticipates, projects,
plans, intends, believes and variations of such words or similar expressions, we intend to identify forward-looking statements.



We have based our forward-looking statements on our current assumptions and expectations about future events. We have
expressed our assumptions and expectations in good faith, and we believe there is a reasonable basis for them. However, we cannot assure you that our assumptions or expectations will prove to be accurate.



A number of risks and uncertainties could cause our actual results to differ
materially from the forward-looking statements contained in this Quarterly Report on Form 10-Q. Important factors that could cause our actual results to differ materially from the forward-looking statements include, among others:



| |  |  | loss of key suppliers or significant customers;
| | - |  | -----------------------------------------------



| |  |  | increased competition;
| | - |  | ----------------------



| |  |  | limited operating flexibility due to our limited capital resources and liquidity and lack of profitability;
| | - |  | -----------------------------------------------------------------------------------------------------------



| |  |  | financial costs and operating limitations imposed by the unionization of our workforce;
| | - |  | ---------------------------------------------------------------------------------------



| |  |  | changes in economic conditions;
| | - |  | -------------------------------



| |  |  | changes in the cost and availability of jet fuel;
| | - |  | -------------------------------------------------



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| |  |  | changes in the cost and availability of ground handling and storage services;
| | - |  | -----------------------------------------------------------------------------



| |  |  | changes in the cost and availability of aircraft or replacement parts;
| | - |  | ----------------------------------------------------------------------



| |  |  | changes in our business strategy or development plans;
| | - |  | ------------------------------------------------------



| |  |  | changes in government regulation and policies; and
| | - |  | --------------------------------------------------



| |  |  | increased foreign political instability and acts of war or terrorism.
| | - |  | ---------------------------------------------------------------------



The impact of any terrorist activities or international conflicts on the U.S. and global economies in general, or the transportation industry in
particular, could have a material adverse effect on our business and liquidity. Other factors may cause our actual results to differ materially from the forward-looking statements contained in this Quarterly Report on Form 10-Q. These
forward-looking statements speak only as of the date of this Quarterly Report on Form 10-Q and, except as required by law, we do not undertake any obligation to publicly update or revise our forward-looking statements. We caution you not to place
undue reliance on these forward-looking statements.



ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK



We have not experienced any significant changes in our market risk since the disclosures made in Part 1. Financial Information, Item 3. Quantitative and Qualitative Disclosures About Market Risk in our Form 10-Q for
the quarterly period ended March 31, 2003.



ITEM 4. CONTROLS AND PROCEDURES



(a)
Evaluation of Disclosure Controls and Procedures. The term disclosure controls and procedures is defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, or the Exchange Act. This term refers to the controls and
procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files under the Exchange Act is recorded, processed, summarized and reported within required time periods specified by
the Securities and Exchange Commission. Our management, including our Chief Executive Officer and our Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this
quarterly report. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective as of the end of the period covered by this quarterly report.



(b) Changes in Internal Controls. There were no changes to our internal
control over financial reporting during our last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.



PART II. OTHER INFORMATION



ITEM 1. LEGAL PROCEEDINGS



Bankruptcy Proceedings



There have been no significant changes in our bankruptcy
proceedings. For a complete discussion of our bankruptcy proceedings, refer to Part II. Other Information, Item 1. Legal Proceedings in our Form 10-Q for the quarterly period ended March 31, 2003. The following issues regarding our bankruptcy
proceedings remain open:



| |  | Unsecured Claims.We are in the process of resolving a number of general unsecured claims which were filed during the bankruptcy proceedings. Once all claims are allowed or
dismissed, the 7,000,000 shares of common stock which are currently being held in two trust accounts for the benefit of the general unsecured creditors will be distributed.
|- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Administrative Claim. One administrative claim in the amount of $1.3 million remains open. This claim has been disputed and has not yet been resolved by the Bankruptcy Court.
This matter is set for mediation on August 15, 2003.
|- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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Eagle Global Logistics



In July 2002, we filed a demand for binding arbitration against EGL, Inc. d/b/a Eagle Global Logistics with the American Arbitration Association
to resolve our claim to collect for freight transportation services rendered to EGL in the amount of approximately $3.7 million plus attorneys fees. EGL subsequently admitted it owed this amount to us, but asserted that its counterclaims
offset its debt to us. EGL initially asserted a counterclaim for a pass-through of its aircraft lease obligation to Express One International, Inc. in the amount of $4.1 million under a May 14, 2001 letter agreement signed between EGL and Kitty
Hawk. EGL claimed that under the letter agreement, we had agreed to assume EGLs lease obligation to Express One International, Inc. We do not believe that the letter agreement obligated us to assume EGLs Express One International, Inc.
aircraft lease obligations.



Ten days before the arbitration
proceedings began, EGL presented two additional counterclaims. First, EGL claimed $3.8 million in damages for increased costs of transporting its freight due to the alleged breach of the letter agreement. Second, EGL claimed $10.0 million of lost
profits that it claims it would have earned on increased revenues if its relationship with us under the letter agreement had continued.



The arbitration hearing started on June 9, 2003 and concluded on June 13, 2003. The parties submitted their final post-hearing briefs on July 25, 2003.
Under the American Arbitration Association rules, the arbitrators award is due on or before August 24, 2003.



If the outcome of the EGL matter is not in our favor, this could have a material adverse effect on our financial position. We do not currently believe
that EGL will prevail in the matter.



Other Proceedings



We are also subject to various other legal proceedings and claims
which have arisen in the ordinary course of business.



While
the outcome of the legal proceedings and claims described above cannot be predicted with certainty, management does not believe that the outcome of any of these legal matters will have a material adverse effect on our business.



ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS



Not applicable.



ITEM 3. DEFAULTS UPON SENIOR SECURITIES



Not applicable.



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



Not applicable.



ITEM 5. OTHER INFORMATION



In late
July 2003, our board of directors approved the Kitty Hawk 2003 Long Term Equity Incentive Plan and granted 5,125,000 stock options. Kitty Hawk is currently seeking stockholder approval of the plan and the options granted under the plan. For more
information, please see our Consent Solicitation Statement filed with the Securities and Exchange Commission in August 2003.



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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K



|(a) |  | Exhibits:
|--- |  | ---------



The following exhibits are filed herewith or are incorporated by reference to exhibits previously filed with the Securities and Exchange Commission.



|Exhibit No. |  |   |  | Exhibit                                                                                                                
|----------- |  | - |  | -----------------------------------------------------------------------------------------------------------------------
|31.1*       |  |  |  | Certification of Chief Executive Officer.                                                                              
|31.2*       |  |  |  | Certification of Chief Financial Officer.                                                                              
|32.1*       |  |  |  | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

---

|* |  | Each document marked with an asterisk is filed herewith.
|- |  | --------------------------------------------------------



|(b) |  | Reports on Form 8-K:
|--- |  | --------------------



None.



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SIGNATURES



Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, on August 13, 2003.



KITTY HAWK, INC.By:

/s/    DREW KEITHDrew Keith Vice President  Finance and Chief Financial Officer (Authorized officer and principal financial officer)




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