**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

**FORM 10-Q**

**x****QUARTERLY REPORT PURSUANT TO SECTION 13 OR15(d) OF THESECURITIES EXCHANGE ACT OF 1934.**

**For the quarterly period ended September 30, 2006**

**OR**

**o****TRANSITION REPORT PURSUANT TO SECTION 13 OR15(d) OF THESECURITIES EXCHANGE ACT OF 1934**

**For the transition period from           to**

**Commission File No:  0-17895**

**MAIRHOLDINGS, INC.**

Incorporated under the laws of Minnesota
| **41-1616499**                       |
|--------------------------------------|
| (I.R.S. Employer  ID No.)            |
|                                 |
| **Fifth  Street Towers, Suite 1360** |
| **150  South Fifth Street**          |
| **Minneapolis,  MN  55402**     |
| **(612)  333-0021**                  |

 

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

Yes x    Noo

Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer,or a non-accelerated filer.  Seedefinition of “accelerated filing and large accelerated filer” in Rule 12b-2 ofthe Exchange Act.  (Check one):

Large AcceleratedFiler o                         AcceleratedFiler x                         Non-AcceleratedFiler o

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

Yes o    Nox

Indicate thenumber of shares outstanding of each of the issuer’s classes of common stock,as of the latest practicable date.

| Class                                   | ** ** | **Outstanding as of September 30, 2006** |
|-----------------------------------------|------------|------------------------------------------|
| Common Stock,  par value $.01 per share |       | 20,591,840                               |

 

 

----

# **CAUTIONARYNOTE REGARDING FORWARD-LOOKING STATEMENTS**

Statements in thisQuarterly Report on Form 10-Q of MAIR Holdings, Inc. (“MAIR” or the “Company”)under the caption “Management’s Discussion and Analysis of Financial Conditionand Results of Operations” and elsewhere in this report are forward-looking andare based upon information currently available to the Company.  The Company, through its officers, directorsor employees, may also from time to time make oral forward-lookingstatements.  In connection with the “safeharbor” provisions of the Private Securities Litigation Reform Act of 1995, theCompany notes that a variety of material risks and uncertainties could causeactual results to differ materially from those contained in any forward-lookingstatement made by or on behalf of the Company. Many important factors that could cause such a difference are describedunder the caption “Risk Factors” in Item 1A of Part II of this Quarterly Reporton Form 10-Q.

Unduereliance should not be placed on the Company’s forward-looking statementsbecause the matters they describe are subject to known and unknown risks,uncertainties and other unpredictable factors, many of which are beyond theCompany’s control.  The Company’s forward-looking statements are based onthe information currently available and speak only as of the date on which thisreport was filed with the United States Securities and Exchange Commission (“SEC”). Over time, actual results, performance or achievements will likely differ fromthe anticipated results, performance or achievements that are expressed orimplied by the Company’s forward-looking statements, and such differences mightbe significant and materially adverse to the Company’s shareholders.

Allsubsequent written or oral forward-looking statements attributable to theCompany or persons acting on the Company’s behalf are expressly qualified bythe factors described above.  The Company assumes no obligation, anddisclaims any obligation, to update information contained in this QuarterlyReport on Form 10-Q, including forward-looking statements, as a result offacts, events or circumstances after the date of this report, except asrequired by law in the normal course of its public disclosure practices.

2

----

**PART I. FINANCIALINFORMATION**

**ITEM 1. CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS**

**MAIRHOLDINGS, INC. AND SUBSIDIARIESCONDENSED CONSOLIDATED BALANCE SHEETS(in thousands, except share information)(Unaudited)**
| ** **                                                                                                            | ** ** | **September 30**                                                                        | ** ** | **March 31** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------|------------|-------------------|------------|
| ** **                                                                                                            | ** ** | **       2006       ** | ** ** | **2006**          | ** ** |
| ASSETS                                                                                                                |       |                                                                                         |       |              |       |
| CURRENT ASSETS:                                                                                                       |       |                                                                                         |       |              |       |
| Cash and cash  equivalents                                                                                            |       | $                                                                                            | 36,019     |              | $          | 47,135 |   |
| Short-term  investments                                                                                               |       | 39,285                                                                                       |       | 44,117            |       |
| Accounts  receivable, net of reserve of $33                                                                           |       | 2,165                                                                                        |       | 3,043             |       |
| Income taxes  receivable                                                                                              |       | 527                                                                                          |       | 941               |       |
| Inventories, net                                                                                                      |       | 973                                                                                          |       | 589               |       |
| Prepaid expenses  and deposits                                                                                        |       | 2,107                                                                                        |       | 2,611             |       |
| Total current  assets                                                                                                 |       | 81,076                                                                                       |       | 98,436            |       |
|                                                                                                                  |       |                                                                                         |       |              |       |
| PROPERTY AND EQUIPMENT:                                                                                               |       |                                                                                         |       |              |       |
| Flight equipment                                                                                                      |       | 761                                                                                          |       | 650               |       |
| Other property  and equipment                                                                                         |       | 1,479                                                                                        |       | 1,401             |       |
| Less:  Accumulated depreciation and amortization                                                                      |       | (764                                                                                         | )          | (628              | )          |
| Net property and  equipment                                                                                           |       | 1,476                                                                                        |       | 1,423             |       |
|                                                                                                                  |       |                                                                                         |       |              |       |
| NONCURRENT ASSETS:                                                                                                    |       |                                                                                         |       |              |       |
| Investment in  Mesaba Aviation, Inc.                                                                                  |       | —                                                                                       |       | —            |       |
| Long-term  investments                                                                                                |       | 18,951                                                                                       |       | 19,484            |       |
| Other intangible  assets, net                                                                                         |       | 2,210                                                                                        |       | 2,413             |       |
| Restricted cash                                                                                                       |       | 13,110                                                                                       |       | —            |       |
| Other assets,  net                                                                                                    |       | 197                                                                                          |       | 186               |       |
|                                                                                                                  |       | $                                                                                            | 117,020    |              | $          | 121,942 |   |
|                                                                                                                  |       |                                                                                         |       |              |       |
| LIABILITIES AND SHAREHOLDERS’ EQUITY                                                                             |       |                                                                                         |       |              |       |
| CURRENT LIABILITIES:                                                                                                  |       |                                                                                         |       |              |       |
| Accounts payable                                                                                                      |       | $                                                                                            | 2,724      |              | $          | 2,745 |   |
| Intercompany  payable to Mesaba Aviation, Inc.                                                                        |       | 251                                                                                          |       | 54                |       |
| Accrued  liabilities:                                                                                                 |       |                                                                                         |       |              |       |
| Payroll                                                                                                               |       | 1,259                                                                                        |       | 1,421             |       |
| Deferred income                                                                                                       |       | 680                                                                                          |       | 716               |       |
| Other current  liabilities                                                                                            |       | 7,084                                                                                        |       | 7,635             |       |
| Total current  liabilities                                                                                            |       | 11,998                                                                                       |       | 12,571            |       |
|                                                                                                                  |       |                                                                                         |       |              |       |
| OTHER NONCURRENT  LIABILITIES                                                                                         |       | 1,030                                                                                        |       | 772               |       |
| Total  liabilities                                                                                                    |       | 13,028                                                                                       |       | 13,343            |       |
|                                                                                                                  |       |                                                                                         |       |              |       |
| COMMITMENTS AND  CONTINGENCIES (Note 11)                                                                              |       |                                                                                         |       |              |       |
|                                                                                                                  |       |                                                                                         |       |              |       |
| SHAREHOLDERS’ EQUITY:                                                                                            |       |                                                                                         |       |              |       |
| Undesignated  preferred stock, no specified par value; 1,000,000 shares authorized, no  shares issued and outstanding |       | —                                                                                       |       | —            |       |
| Common stock,  $.01 par value; 60,000,000 shares authorized, 20,591,840 shares issued and  outstanding                |       | 206                                                                                          |       | 206               |       |
| Paid-in capital                                                                                                       |       | 69,761                                                                                       |       | 69,546            |       |
| Accumulated  other comprehensive gain (loss)                                                                          |       | 32                                                                                           |       | (176              | )          |
| Retained  earnings                                                                                                    |       | 33,993                                                                                       |       | 39,023            |       |
| Total  shareholders’ equity                                                                                      |       | 103,992                                                                                      |       | 108,599           |       |
|                                                                                                                  |       | $                                                                                            | 117,020    |              | $          | 121,942 |   |

 

The accompanyingnotes are an integral part of these unaudited condensed consolidated financialstatements.

3

----

**MAIR HOLDINGS, INC. AND SUBSIDIARIESCONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS(in thousands)(Unaudited)**
| ** **                                       | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|--------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                       | ** ** | **September 30**            | ** ** | **September 30**          | ** ** |
| ** **                                       | ** ** | **2006**                         | ** ** | **2005**                       | ** ** | **2006** | ** ** | **2005** | ** ** |
| OPERATING  REVENUES:                             |       |                             |       |                           |       |   |   |   |   |
| Passenger                                        |       | $                                | 3,780      |                           | $          | 103,872 |   | $ | 7,460 |   | $ | 207,655 |   |
| Freight and other                                |       | 2,403                            |       | 11,034                         |       | 4,766 |   | 21,934 |   |
| Total operating revenues                         |       | 6,183                            |       | 114,906                        |       | 12,226 |   | 229,589 |   |
| OPERATING  EXPENSES:                             |       |                             |       |                           |       |   |   |   |   |
| Wages and benefits                               |       | 2,834                            |       | 39,070                         |       | 5,306 |   | 78,458 |   |
| Aircraft fuel                                    |       | 1,516                            |       | 1,254                          |       | 2,967 |   | 2,212 |   |
| Aircraft maintenance                             |       | 1,009                            |       | 22,836                         |       | 1,920 |   | 45,607 |   |
| Aircraft rents                                   |       | 453                              |       | 25,965                         |       | 906 |   | 51,630 |   |
| Landing fees                                     |       | 92                               |       | 2,584                          |       | 187 |   | 5,204 |   |
| Insurance and taxes                              |       | 684                              |       | 1,921                          |       | 1,359 |   | 3,814 |   |
| Depreciation and amortization                    |       | 181                              |       | 3,507                          |       | 359 |   | 7,309 |   |
| Administrative and other                         |       | 2,834                            |       | 21,486                         |       | 6,436 |   | 39,990 |   |
| Impairment and other charges                     |       | —                           |       | 36,509                         |       | — |   | 36,509 |   |
| Total operating expenses                         |       | 9,603                            |       | 155,132                        |       | 19,440 |   | 270,733 |   |
| Operating loss                                   |       | (3,420                           | )          | (40,226                        | )          | (7,214 | ) | (41,144 | ) |
| NONOPERATING  INCOME (EXPENSE):                  |       |                             |       |                           |       |   |   |   |   |
| Interest income and other                        |       | 1,243                            |       | 1,103                          |       | 2,559 |   | 2,115 |   |
| Interest expense                                 |       | (18                              | )          | (16                            | )          | (34 | ) | (32 | ) |
| Arbitration settlement                           |       | —                           |       | —                         |       | — |   | 1,800 |   |
| Nonoperating income, net                         |       | 1,225                            |       | 1,087                          |       | 2,525 |   | 3,883 |   |
| Loss before (provision) benefit for income taxes |       | (2,195                           | )          | (39,139                        | )          | (4,689 | ) | (37,261 | ) |
|                                             |       |                             |       |                           |       |   |   |   |   |
| (PROVISION)  BENEFIT FOR INCOME TAXES            |       | (341                             | )          | 13,635                         |       | (341 | ) | 12,959 |   |
|                                             |       |                             |       |                           |       |   |   |   |   |
| NET LOSS                                         |       | $                                | (2,536     | )                              | $          | (25,504 | ) | $ | (5,030 | ) | $ | (24,302 | ) |
|                                             |       |                             |       |                           |       |   |   |   |   |
| NET LOSS PER  SHARE:                             |       |                             |       |                           |       |   |   |   |   |
| Loss per common share - basic                    |       | $                                | (0.12      | )                              | $          | (1.24 | ) | $ | (0.24 | ) | $ | (1.18 | ) |
| Loss per common share - diluted                  |       | $                                | (0.12      | )                              | $          | (1.24 | ) | $ | (0.24 | ) | $ | (1.18 | ) |
|                                             |       |                             |       |                           |       |   |   |   |   |
| WEIGHTED AVERAGE  SHARES OUTSTANDING:            |       |                             |       |                           |       |   |   |   |   |
| Basic                                            |       | 20,592                           |       | 20,577                         |       | 20,592 |   | 20,576 |   |
| Diluted                                          |       | 20,592                           |       | 20,577                         |       | 20,592 |   | 20,576 |   |

 

The accompanyingnotes are an integral part of these unaudited condensed consolidated financialstatements.

 

4

----

**MAIR HOLDINGS, INC. ANDSUBSIDIARIESCONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS(in thousands)(Unaudited)**
| ** **                                                                   | ** ** | **Six Months Ended** | ** ** |
|------------------------------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                                                   | ** ** | **September**                  | ** ** |
| ** **                                                                   | ** ** | **2006**                       | ** ** | **2005** | ** ** |
| CASH FLOWS FROM  OPERATING ACTIVITIES:                                       |       |                           |       |   |   |
| Net loss                                                                     |       | $                              | (5,030     | ) | $ | (24,302 | ) |
| Adjustments to reconcile net loss to net cash used  in operating activities: |       |                           |       |   |   |
| Depreciation and amortization                                                |       | 359                            |       | 7,309 |   |
| Amortization of deferred credits                                             |       | (45                            | )          | (710 | ) |
| Stock-based compensation                                                     |       | 215                            |       | (1,444 | ) |
| Amortization of investment premiums (discounts)                              |       | (676                           | )          | 855 |   |
| Deferred income taxes                                                        |       | 351                            |       | — |   |
| Provision for loss associated with Northwest  bankruptcy filing              |       | —                         |       | 31,900 |   |
| Impairment of goodwill                                                       |       | —                         |       | 2,503 |   |
| Cancellation of Northwest warrants                                           |       | —                         |       | 2,106 |   |
| Changes in current operating items:                                          |       |                           |       |   |   |
| Accounts receivable                                                          |       | 878                            |       | (31,860 | ) |
| Income taxes receivable                                                      |       | 414                            |       | — |   |
| Inventories                                                                  |       | (384                           | )          | (1,175 | ) |
| Prepaid expenses and deposits                                                |       | 504                            |       | 101 |   |
| Accounts payable and other                                                   |       | (611                           | )          | 674 |   |
| Net cash used in operating activities                                        |       | (4,025                         | )          | (14,043 | ) |
|                                                                         |       |                           |       |   |   |
| CASH FLOWS FROM  INVESTING ACTIVITIES:                                       |       |                           |       |   |   |
| Purchases of investments                                                     |       | (22,936                        | )          | (30,603 | ) |
| Sales of investments                                                         |       | 28,995                         |       | 60,921 |   |
| Purchases of property and equipment                                          |       | (189                           | )          | (5,708 | ) |
| Increase in restricted cash                                                  |       | (13,110                        | )          | (7,100 | ) |
| Net cash (used in) provided by investing activities                          |       | (7,240                         | )          | 17,510 |   |
|                                                                         |       |                           |       |   |   |
| CASH FLOWS FROM  FINANCING ACTIVITIES                                        |       |                           |       |   |   |
| Payment of other noncurrent liabilities                                      |       | (48                            | )          | (67 | ) |
| Proceeds from issuance of common stock                                       |       | —                         |       | 114 |   |
| Increase in intercompany payable to Mesaba Aviation,  Inc.                   |       | 197                            |       | — |   |
| Net cash provided by financing activities                                    |       | 149                            |       | 47 |   |
|                                                                         |       |                           |       |   |   |
| NET (DECREASE)  INCREASE IN CASH AND CASH EQUIVALENTS                        |       | (11,116                        | )          | 3,514 |   |
| CASH AND CASH  EQUIVALENTS:                                                  |       |                           |       |   |   |
| Beginning of year                                                            |       | 47,135                         |       | 57,968 |   |
| End of year                                                                  |       | $                              | 36,019     |   | $ | 61,482 |   |
|                                                                         |       |                           |       |   |   |
| SUPPLEMENTARY  CASH FLOW INFORMATION:                                        |       |                           |       |   |   |
| Cash paid (refund received) during period for:                               |       |                           |       |   |   |
| Interest                                                                     |       | $                              | 21         |   | $ | 33 |   |
| Income taxes                                                                 |       | $                              | (316       | ) | $ | (1,203 | ) |

 

The accompanyingnotes are an integral part of these unaudited condensed consolidated financialstatements.

5

----

**MAIRHOLDINGS, INC. AND SUBSIDIARIESNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Unaudited)**

The condensedconsolidated financial statements included herein have been prepared by theCompany without audit, pursuant to the rules and regulations of the SEC.  The information furnished in the condensedconsolidated financial statements includes normal recurring adjustments, unlessotherwise noted, and reflects all adjustments that are, in the opinion ofmanagement, necessary for the fair presentation of such condensed consolidatedfinancial statements.  The Company’sbusiness is seasonal and, accordingly, interim results are not indicative ofresults for a full year.  Certaininformation and footnote disclosures normally included in financial statementsprepared in accordance with accounting principles generally accepted in theUnited States of America (“GAAP”) have been condensed or omitted pursuant tosuch rules and regulations, although the Company believes that the disclosuresare adequate to make the information presented not misleading.  These condensed consolidated financialstatements should be read in conjunction with the consolidated financialstatements for the year ended March 31, 2006, and the notes thereto, includedin the Company’s Annual Report on Form 10-K filed with the SEC on June 27,2006.

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

*Corporate Organization*

The condensedconsolidated financial statements include the accounts of MAIR and itswholly-owned subsidiaries, Big Sky Transportation Co. (“Big Sky”) and MesabaAviation, Inc. (“Mesaba”) until Mesaba’s bankruptcy filing on October 13, 2005(the “Petition Date”).  All intercompanytransactions and balances have been eliminated in consolidation.  As discussed below, the accounts of Mesabahave been deconsolidated from the Company’s condensed consolidated financialstatements effective as of the Petition Date. Since the Petition Date, intercompany balances between MAIR and Mesabahave not been eliminated.

As discussed in Note 2,Mesaba filed a voluntary petition for relief under Chapter 11 of the UnitedStates Bankruptcy Code (“Bankruptcy Code”) in the United States BankruptcyCourt for the District of Minnesota (the “Bankruptcy Court”) on the PetitionDate. Mesaba is operating its business as a debtor-in-possession pursuant tothe Bankruptcy Code.  Mesaba’s financialstatements have been prepared on a going concern basis, which contemplatescontinuity of operations, realization of assets and liquidation of postpetitionliabilities in the ordinary course of business.

Due to Mesaba’sbankruptcy and the uncertainties surrounding the nature, timing, and specificsof the bankruptcy proceedings, MAIR deconsolidated Mesaba’s financial resultsunder the equity method of accounting effective as of the Petition Date.  As a result, Mesaba’s assets and liabilitieshave been removed from the Company’s condensed consolidated balance sheets asof the Petition Date and through September 30, 2006 (see Note 2).  Mesaba’s results of operations have beenremoved from the Company’s condensed consolidated results of operations andcash flows since the Petition Date, but continue to be included in suchcondensed consolidated financial statements for periods prior to the PetitionDate.

MAIR has accounted forMesaba’s financial results under the equity method of accounting since thePetition Date.  In accordance with APBOpinion No. 18, *The Equity Method of Accounting forInvestments in Common Stock*, at March 31, 2006, MAIR evaluated whetherits investment in Mesaba had experienced an other-than-temporaryimpairment.  MAIR’s evaluation utilized amarket and income approach, including a discounted cash flow analysis.  After analyzing Mesaba’s actual losses infiscal 2006, Mesaba’s projected losses in fiscal 2007 as it transitions to aSaab-only operation, Mesaba’s five-year Saab business plan and Mesaba’sliabilities subject to compromise as of March 31, 2006, MAIR concluded that itsremaining investment in Mesaba had experienced an other-than-temporaryimpairment.  Accordingly, effective March31, 2006, MAIR recorded an $8.9 million impairment charge to write off itsremaining equity investment in Mesaba.

During the sixmonths ended September 30, 2006 Mesaba reported a net loss of $9.0 million.MAIR continues to believe that its investment in Mesaba remainsother-than-temporarily impaired at September 30, 2006 due to the continueduncertainty of Mesaba’s bankruptcy and the significant losses Mesaba projectsover the remainder of fiscal 2007.

6

----

The provisions ofStatement of Position 90-7, *Financial Reporting byEntities in Reorganization Under the Bankruptcy Code*, (“SOP 90-7”),apply to Mesaba’s financial statements while Mesaba operates under theprovisions of Chapter 11.  SOP 90-7 doesnot change the application of GAAP in the preparation of financialstatements.  However, SOP 90-7 doesrequire that the financial statements, for periods including and subsequent tothe filing of the Chapter 11 petition, distinguish transactions and events thatare directly associated with the reorganization from the ongoing operations ofthe business.  See Note 12 for thecondensed financial statements of Mesaba presented in accordance with SOP 90-7on a stand-alone basis as of September 30, 2006 and March 31, 2006 and for thethree and six months ended September 30, 2006 and 2005.

*Business*

Mesaba

Mesaba operates as aregional carrier providing scheduled passenger service as MesabaAirlines/Northwest Airlink and Mesaba Airlines/Northwest Jet Airlink under a ten-yearomnibus Airline Services Agreement (“ASA”) with Northwest Airlines, Inc. (“Northwest”)dated August 29, 2005.  The ASA governsMesaba’s operation of Avro RJ85 regional jets (“Avros”), Saab 340 jet-propaircraft (“Saabs”), and Canadair regional jets (“CRJs”).  As of September 30, 2006, Mesaba was operatingnine Avros, 49 Saabs and one CRJ, all of which are subleased fromNorthwest.  Neither Mesaba nor Northwesthas assumed or rejected the ASA in its respective bankruptcy proceedings, andMesaba is continuing to operate under the terms of the ASA (see Note 2regarding Northwest filing for Chapter 11 bankruptcy protection on September14, 2005 and the effect of such filing on the ASA).  As of September 30, 2006, Mesaba served 88cities in the United States and Canada from Northwest’s hub airports located inMinneapolis/St. Paul, Detroit and Memphis.

The ASA provides forincentive payments from Northwest to Mesaba based on achievement of certainoperational goals on a semi-annual basis. Such incentives totaled $0.2 million and $0.8 million for the threemonths ended September 30, 2006 and 2005, respectively.  Incentives totaled $1.5 million and $2.2million for the six months ended September 30, 2006 and 2005, respectively, andare included in passenger revenues in Mesaba’s condensed statements ofoperations (see Note 12).

Approximately $19.4million, or 85.8%, and $25.7 million, or 88.1%, of the respective September 30,2006 and March 31, 2006 net accounts receivable balances in Mesaba’s condensedbalance sheets were due from Northwest and were not collateralized (see Note12).  Approximately 94.0% and 95.4% ofMesaba’s operating revenue recognized for the three months ended September 30,2006 and 2005, respectively, was from Northwest.  Approximately 94.4% and 95.5% of Mesaba’soperating revenue recognized for the six months ended September 30, 2006 and2005, respectively, was from Northwest. Accounts payable owed to Northwest by Mesaba, primarily for groundhandling, was insignificant as of September 30, 2006 and $0.1 million as ofMarch 31, 2006.  Mesaba paid Northwest$5.8 million and $3.6 million for ground handling and other services for thethree months ended September 30, 2006 and 2005, respectively.  Mesaba paid Northwest $11.2 million and $6.9million for ground handling and other services for the six months endedSeptember 30, 2006 and 2005, respectively.

In connection with theASA, and pursuant to its separate agreement with Northwest, MAIR made a capitalcontribution of approximately $31.7 million to Mesaba in September 2005, justprior to Northwest filing for bankruptcy (see Note 2).

There are othersignificant related party transactions and balances between Northwest andMesaba disclosed throughout the Notes to Condensed Consolidated FinancialStatements.  Loss of Mesaba’s businessrelationship with Northwest or Northwest’s failure to make timely payment ofamounts owed to Mesaba would have a material adverse effect on Mesaba’soperations, financial position and cash flows.

Big Sky

Big Sky operates as aregional air carrier based in Billings, Montana, providing scheduled passenger,freight, express package and charter services. As of September 30, 2006, Big Sky provided scheduled air service to 18communities in Montana, Colorado, Idaho, Oregon, Washington and Wyoming.  Big Sky operates daily scheduled flightsproviding interline and online connecting services and local marketservices.  Big Sky also has code-sharingagreements with Alaska Airlines, Horizon Air, US Air and Northwest, where itsservices are marketed jointly with those air carriers for connecting flights.

7

----

Big Sky participates inthe Essential Air Service (“EAS”) program with the Department of Transportation(“DOT”).  The EAS program subsidizes aircarriers to provide air service to designated rural communities throughout theUnited States that could not otherwise economically justify that service basedon their passenger traffic.  The DOT paysEAS subsidies for each departure in a covered market.  Big Sky recognized revenue from EAS subsidiesof $2.1 million for each of the three months ended September 30, 2006 and2005.  During the six months endedSeptember 30, 2006 and 2005, Big Sky recognized revenue from EAS subsidies of$4.3 million and $4.0 million, respectively.

*Recent Developments*

On July 12, 2006, Big Skyentered into an agreement with Flying Boat, Inc., d/b/a Chalk’s InternationalAirlines (“Chalk’s”), to operate up to two Beechcraft 1900D aircraft for Chalk’sfor one year.  Under the agreement, BigSky will initially operate the aircraft between Florida and the Bahamas.  The agreement provides compensation to BigSky for a minimum monthly level of flying and contains two one-year optionalextensions.  Under the terms of theagreement, Big Sky will not assume any risk associated with revenue or fuelexpense. As a result of delays in Chalk’s obtaining governmental approvals, BigSky is scheduled to begin this operation on November 9, 2006.

On October 16, 2006, BigSky announced it will begin service between Abraham Lincoln Capital Airport in Springfield,Illinois and Midway Airport in Chicago, Illinois in December 2006.  This operation is being provided under arevenue guaranty program with the Abraham Lincoln Capital Airport.

*Use of Estimates*

The preparation offinancial statements in conformity with GAAP requires management to makeestimates and assumptions that affect the reported amounts of assets andliabilities and disclosure of contingent assets and liabilities, as well as thereported amounts of revenues and expenses. The most significant uses of estimates relate to the allowance fordoubtful accounts, accrued maintenance expenses, aircraft property andequipment lives, inventory obsolescence reserves, valuation of intangible assets,and accounting for income taxes.  Ultimate results could differ from thoseestimates.

*Reclassification*

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

**2.****              Northwest and MesabaBankruptcy Filings**

*Northwest Bankruptcy Filing*

On September 12, 2005,Northwest failed to make a payment of approximately $18.7 million due to Mesabafor services provided by Mesaba to Northwest from August 15 to August 31,2005.  Subsequently, on September 14,2005, Northwest filed in the Southern District of New York for bankruptcyprotection under Chapter 11 of the Bankruptcy Code.  In the weeks following its bankruptcy filing,Northwest made additional payment adjustments such that Northwest did not payfor services provided by Mesaba to Northwest prior to the date of Northwest’sbankruptcy filing.

At the time of Northwest’sbankruptcy filing on September 14, 2005, Mesaba estimated that Northwest owedMesaba approximately $31.9 million under the ASA and related agreements, net ofamounts that Mesaba owed to Northwest under these agreements.  After analyzing the collectibility of theprepetition receivables due to Mesaba from Northwest, the Company concludedthat it was necessary to establish a reserve of $31.9 million for amounts thatMesaba may not ultimately collect from Northwest.  As of March 31, 2006, Mesaba updated itsreserve balance to $29.1 million, based on revised estimates of $36.4 millionowed by Northwest to Mesaba and $7.3 million owed by Mesaba to Northwest.  Although Mesaba maintained the above reserveas of September 30, 2006, Mesaba will continue to actively seek reimbursementthrough the bankruptcy process and any other means, including any futurediscussions Mesaba may have with Northwest regarding the ASA.

8

----

Generally, collection ofall amounts that Northwest owed to its creditors at the time of its filing wasstayed by the bankruptcy filing.  Mesaba’sclaims relating to such prepetition amounts are unsecured claims.  At any time during Northwest’s bankruptcyproceedings, Northwest has the option to assume or reject the ASA and relatedagreements, subject to approval of the bankruptcy court.  If Northwest assumes the ASA, prepetitionamounts owed to Mesaba would become an administrative claim and Mesaba couldreceive payment in full.  If Northwestrejects the ASA and related contracts, then prepetition amounts owed to Mesabawould remain an unsecured claim, and Mesaba would likely receive only apercentage of the amounts owed to it, and even then would only receive suchamounts after Northwest’s plan of reorganization is approved by its bankruptcycourt.  Mesaba believes that, even ifNorthwest intends to continue its relationship with Mesaba, Northwest willattempt to renegotiate the ASA with Mesaba rather than seek to assume theASA.  This renegotiation could include anegotiation of the amount that Northwest will ultimately pay Mesaba insettlement of the net prepetition amounts that Northwest owes to Mesaba.  However, the exact nature of Mesaba’s futurerelationship with Northwest may not be known until such time as Northwest andMesaba adopt their respective bankruptcy reorganization plans.

Since its bankruptcyfiling, Northwest has also proposed and implemented various changes to Mesaba’sfleet.  As of September 30, 2006,Northwest had removed a total of 26 Avros, 14 Saabs and one CRJ from Mesaba’sfleet.  Northwest intends to terminateall the remaining aircraft, other than 49 Saabs, by December 31, 2006, subjectto final lease negotiations between Northwest and its lessors.  As of September 30, 2006, Mesaba wasoperating nine Avros, 49 Saabs and one CRJ pursuant to the ASA.

*MAIR’s and Mesaba’s Proofs ofClaim Against Northwest*

OnAugust 16, 2006, MAIR and Mesaba each filed their respective proofs of claim inNorthwest’s bankruptcy proceedings.  MAIR filed a proof of claim forapproximately $31.7 million, plus other unliquidated amounts.  The amount of MAIR’s claim reflects thecapital contribution Northwest required MAIR to make to Mesaba prior toNorthwest’s bankruptcy and certain costs MAIR has incurred due to Northwest’smissed payments to Mesaba and Mesaba’s subsequent bankruptcy.  Mesaba filed a proof of claim forapproximately $250 million.  Mesaba’s proof of claim is based on breach ofcontract with respect to the ASA. Neither MAIR nor Mesaba has recorded any amount within its respectivefinancial statements related to the claims due to the significant uncertaintyas to what amount, if any, might ultimately be collected from Northwest.

*Mesaba Bankruptcy Filing*

Northwest’s missedpayments to Mesaba and Northwest’s actions regarding its fleet and schedulechanges adversely affected Mesaba. Specifically, Mesaba determined that due to Northwest’s failure to makethe September 12, 2005 payment, the deductions taken by Northwest againstsubsequent payments and the reduced revenues Mesaba would receive because of thefleet and schedule changes dictated by Northwest, Mesaba could not sustain itsoperations outside of court protection under Chapter 11 of the BankruptcyCode.  As a result, on the Petition Date,Mesaba filed for bankruptcy protection under Chapter 11 of the BankruptcyCode.  Mesaba continues to operate itsbusiness as a debtor-in-possession under the jurisdiction of the BankruptcyCourt and in accordance with the applicable provisions of the Bankruptcy Code,the Federal Rules of Bankruptcy Procedure and applicable court orders.  In general, as a debtor-in-possession, Mesabais authorized under Chapter 11 to continue to operate as an ongoing business,but may not engage in transactions outside the ordinary course of businesswithout the prior approval of the Bankruptcy Court.

All of Mesaba’s vendorsare being paid for all goods furnished and services provided to Mesaba afterthe Petition Date in the ordinary course of business.  However, under Section 362 of the BankruptcyCode, actions to collect most of Mesaba’s prepetition liabilities areautomatically stayed, except for liabilities relating to certain qualifyingaircraft, aircraft engines and other aircraft-related equipment that are leasedor subject to a security interest or conditional sale contract.

As Northwest receivesapproval from its bankruptcy court for rejection of aircraft head leases,Mesaba has made a similar request for approval from its Bankruptcy Court toreject the corresponding subleases. Northwest has negotiated agreements with its head lessors to provide forthe orderly return to the head lessors of the remaining Avro aircraft byDecember 31, 2006.  With theBankruptcy Court’s approval, Mesaba has executed similar agreements withNorthwest to allow for those same Avro aircraft to be returned toNorthwest.  Mesaba anticipates that by December 31, 2006, Mesaba willbe left with a fleet of 49 aircraft (the 49 Saab B+ models currently subleasedfrom Northwest).

9

----

Under Section 365 of theBankruptcy Code, Mesaba may assume, assume and assign, or reject certainexecutory contracts and unexpired leases, including leases of real property,subject to the approval of the Bankruptcy Court and certain otherconditions.  Mesaba’s original Section365 deadline related to real estate leases was December 12, 2005, which waslater extended to the earlier of confirmation of a reorganization plan orDecember 10, 2006.  In general, if Mesabarejects an executory contract or unexpired lease, it is treated as a prepetitionbreach of the lease or contract in question and, subject to certain exceptions,relieves Mesaba of performing any future obligations.  However, such a rejection entitles the lessoror contract counterparty to a prepetition general unsecured claim for damagescaused by such deemed breach and, accordingly, the counterparty may file aclaim against Mesaba for such damages. As a result, liabilities subject to compromise of $59.0 million reportedin Mesaba’s condensed balance sheet as of September 30, 2006 (see Note 12) arelikely to change in the future as a result of damage claims created by Mesaba’srejection of various aircraft leases, executory contracts and unexpiredleases.  Generally, if Mesaba assumes anaircraft financing agreement, executory contract or unexpired lease, Mesaba isrequired to cure existing defaults under such contract or lease as a conditionto such assumption.

The bar date fornon-governmental entities to file proofs of claim against Mesaba was February28, 2006 (the “Bar Date”).  Proofs ofclaim aggregating $217.0 million were filed as of September 30, 2006.  Mesaba’s management and bankruptcy counselhave reviewed and assessed these proofs of claim to eliminate duplicativeclaims and claims without merit, as well as to adjust the amounts of certainproofs of claim based on management’s estimate of the likelihood that the claimwill be allowed by the Bankruptcy Court. As of September 30, 2006, Mesaba estimated the value of the allowableclaims at $59.0 million.  As a result of Mesaba reaching tentativeagreements with its unions in late October 2006 (see below), Mesaba expectsthat the unions will file additional claims totaling $22.7 million based on thepresent value of the wages and benefits concessions contained within thetentative agreements.  See Note 12 for further discussion of Mesaba’sliabilities subject to compromise.

The Bankruptcy Codeprovides special treatment for collective bargaining agreements (“CBAs”). Inparticular, Section 1113(c) of the Bankruptcy Code permits Mesaba to move toreject its CBAs if Mesaba first satisfies a number of statutorily prescribedsubstantive and procedural prerequisites and obtains the Bankruptcy Court’sapproval of the rejection or the expiration of the statutorily prescribed timeperiod. After bargaining in good faith and sharing relevant information withits unions, a debtor must make proposals to modify its existing CBAs based onthe most complete and reliable information available at the time. The proposedmodifications must be necessary to permit the reorganization of a debtor andmust provide that all the affected parties are treated fairly and equitably.Ultimately, rejection of the CBAs is appropriate if the unions refuse to agreeto a debtor’s necessary proposal “without good cause” and the Bankruptcy Courtdetermines that the balance of the equities favors rejection.

In February 2006, Mesabacommenced Section 1113(c) proceedings with unions for its pilots, flightattendants and mechanics.  On July 14,2006, the Bankruptcy Court granted Mesaba’s motion to reject its CBAs.  Although that order was later reversed andremanded, on October 16, 2006, after taking additional evidence, the BankruptcyCourt again authorized Mesaba to reject its CBAs.  Additionally, on October 23, 2006, theBankruptcy Court enjoined the unions from striking or engaging in other workstoppages after Mesaba imposes new contract terms.  In late October 2006, Mesaba reachedtentative agreements with its pilots, flight attendants and mechanics.  Each union must now vote to ratify itsrespective agreement.  The ratificationprocess is expected to conclude by the end of November 2006.  Assuming ratification occurs, the new payrates would take effect on December 1, 2006.

Pursuant to Mesaba’srequest for debtor-in-possession financing, Mesaba received a commitment letterfrom Marathon Structured Finance Fund, L.P. (“Marathon”) to providedebtor-in-possession financing.  OnSeptember 20, 2006, the Bankruptcy Court entered an order authorizing thedebtor-in-possession financing with Marathon. Under the terms of the financing, Mesaba may not receive funds fromMarathon unless certain conditions are met, including that of a laborresolution (whether through consensual agreements or through Mesaba imposingnew contract terms) between Mesaba and its unions.  If Mesaba is unable to satisfy the conditionsto obtain debtor-in-possession financing or otherwise generate sufficient cash,Mesaba could be forced into liquidation. MAIR has no obligation to fund Mesaba’s operations but may considerinvesting in Mesaba once Mesaba develops a plan of reorganization.

To successfully emergefrom Chapter 11, in addition to obtaining exit financing if needed, theBankruptcy Court must confirm a plan of reorganization, the filing of whichwill depend on the timing and outcome of numerous ongoing matters in theChapter 11 process and potentially including the outcome of Northwest’s Chapter11 case.  

10

----

Mesaba intends to file aplan of reorganization as soon as it is able to do so, but there can be noassurance that the Bankruptcy Court will confirm a plan of reorganization orthat any such plan will be implemented successfully.  The reorganization plan will determine therights and claims of various creditors and security holders.  At this time, it is not possible to predictaccurately the effect of the Chapter 11 reorganization process on Mesaba’sbusiness, nor can Mesaba make any predictions concerning how the variouscreditor claims and interests of security holders will be determined in thebankruptcy proceedings.

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

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

Intangible assetsand related accumulated amortization were as follows, in thousands:
| ** **                           | ** ** | **September 30, 2006** | ** ** | **March 31, 2006** | ** ** |
|--------------------------------------|------------|----------------------------------|------------|------------------------------|------------|
| ** **                           | ** ** | ** **                       | ** ** | **Accumulated**              | ** ** | ** ** | ** ** | ** ** | ** ** | **Accumulated** | ** ** | ** ** | ** ** |
| ** **                           | ** ** | **Gross**                        | ** ** | **Amortization**             | ** ** | **Net** | ** ** | **Gross** | ** ** | **Amortization** | ** ** | **Net** | ** ** |
| Indefinite-lived  intangible assets: |       |                             |       |                         |       |   |   |   |   |   |   |   |   |
| Air carrier certificate              |       | $                                | 925        |                         |       |   | $ | 925 |   | $ | 925 |   |   |   | $ | 925 |   |
| Amortizable  intangible asset:       |       |                             |       |                         |       |   |   |   |   |   |   |   |   |
| Pilot labor contract                 |       | 2,840                            |       | (1,555                       | )          | 1,285 |   | 2,840 |   | (1,352 | ) | 1,488 |   |
|                                 |       | $                                | 3,765      |                         | ($1,555    | ) | $ | 2,210 |   | $ | 3,765 |   | ($1,352 | ) | $ | 2,413 |   |

 

The amortizableintangible asset is being amortized over its estimated period of benefit.  Based on the current amount of intangibleassets subject to amortization, estimated amortization expense for each of thesucceeding four fiscal years will be $0.4 million per year.  During the fourth quarter of fiscal 2006, theCompany completed its annual impairment test of intangible assets anddetermined that no additional impairment charge was necessary.

**4.****              Investments**

Investments consistprincipally of government, agency, certificates of deposit, corporate andtaxable municipal securities and are classified as available-for-sale.  Fair value of investments is determined basedon quoted market prices.  The Companyclassifies investments with an original maturity of more than 90 days thatmature within one year as short-term and investments with an original maturitygreater than one year as long-term.

As of September 30, 2006and March 31, 2006, cash, cash equivalents, short-term and long-terminvestments totaled $94.3 million (excluding $13.1 million in restricted cashfor the letter of credit supporting MAIR’s guaranty of Mesaba’s obligations forthe hangar at the Cincinnati/Northern Kentucky International Airport) and$110.7 million, respectively.

Amortized cost,gross unrealized gains and losses and fair value of short- and long-terminvestments classified as securities available for sale were as follows, inthousands:

|                          | ** ** | **September 30, 2006** | ** ** | **March 31, 2006** | ** ** |
|--------------------------|------------|----------------------------------|------------|------------------------------|------------|
| Amortized cost           |       | $                                | 58,256     |                         | $          | 63,761 |   |
| Gross unrealized  gains  |       | 74                               |       | 4                            |       |
| Gross unrealized  losses |       | (94                              | )          | (164                         | )          |
| Fair value               |       | $                                | 58,236     |                         | $          | 63,601 |   |

 

11

----

For the three and sixmonths ended September 30, 2006 and 2005, the Company’s gross realized gainsand losses were insignificant.

At September 30, 2006 andMarch 31, 2006, Mesaba’s amortized cost and fair value of short- and long-terminvestments classified as securities available for sale was $13.7 million and$10.0 million, respectively, of which $4.7 million and $4.5 million,respectively, was pledged as collateral for letters of credit.  For the three and six months ended September30, 2006 and 2005, Mesaba’s gross unrealized gains and losses wereinsignificant.

**5.****              Nonoperating Income**

In the firstquarter of fiscal 2006, the Company recognized $1.8 million as nonoperatingincome as a result of a favorable arbitration settlement with a formerinvestment advisor.

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

*Consolidated*

SFAS No. 109, *Accounting for Income Taxes*, requires all availableevidence, both positive and negative, to be considered to determine whether,based on the weight of that evidence, a valuation allowance for its deferredtax assets is needed.  Future realizationof the deferred tax assets for existing deductible temporary difference orcarryforward ultimately depends on the existence of sufficient taxable incomeof the appropriate character within the carryback or carryforward periodsavailable under the tax law.

The Company has performedsuch an analysis, and a full valuation allowance was provided at the end offiscal 2006.  The Company continues torecord a full valuation allowance against its deferred tax assets due to theuncertainty regarding the ultimate realization of those assets.  Therefore, the Company’s net loss for thethree and six months ended September 30, 2006 was not reduced by any taxbenefit.  The Company recorded a taxprovision of $0.3 million in the current period as a result of finalizing theCompany’s fiscal 2006 tax return. The Company will continue to evaluate therealizability of the deferred tax assets on a quarterly basis.

*Mesaba*

Mesaba performed ananalysis of the recoverability of its deferred tax assets in accordance withSFAS No. 109, and a full valuation allowance was provided at the end of fiscal2006.  Mesaba continues to record avaluation allowance against its deferred tax assets due to the uncertaintyregarding the ultimate realization of those assets. Mesaba’s net loss for thethree months ended September 30, 2006 was not reduced by any tax benefit.   A tax provision of $0.3 million was recordedin the current period to reflect the federal alternative minimum tax assessedin prior periods from a net operating loss carryback to prior years.  Mesaba will continue to evaluate therealizability of the deferred tax assets on a quarterly basis.

In the event thatMesaba experiences a change in ownership, as defined by Internal Revenue CodeSection 382, upon emergence from bankruptcy the annual usage of the remainingtax attributes, primarily net operating losses that were generated prior to thechange in ownership, could be substantially limited. The amount of limitation,if any, will be determined at the time of Mesaba’s emergence from bankruptcy.

**7.****              Stock-BasedCompensation**

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

Under SFAS 123R,forfeitures are estimated at the time of valuation and reduce expense ratablyover the vesting period.  This estimateis adjusted periodically based on the extent to which actual forfeituresdiffer, or are expected to differ, from the previous estimate.  Under SFAS 123 and APB 25, the Companyelected to account for forfeitures when awards are actually forfeited, at whichtime all previous pro forma expense will be reversed to reduce pro formaexpense for that period.

12

----

*StockOption Plans*

The Company has approvedstock option plans for key employees, directors, consultants and advisors to theCompany.  Options have been granted and are presently outstanding underthe Company’s 1994 Stock Option Plan, 1996 Director Stock Option Plan and 2000Stock Incentive Plan.  The 2000 Stock Incentive Plan has a provision thatautomatically increases the authorized shares available for grant on September1 of each year by the lesser of 300,000 or 1% of the then outstanding commonshares.  Under the plans, the compensation committee of the board ofdirectors grants the options and determines the vesting and exercise periods atthe time of the award.  The purchase price of the stock for non-qualifiedand incentive stock options is determined at the time of the award and is equalto the fair market value at the time of the award.

The fair value of eachoption grant is estimated on the date of grant using the Black-Scholes optionpricing model with the following assumptions: risk-free interest rate, stock price volatility and expected life.  The Company establishes the risk-freeinterest rate using the U.S. Treasury yield curve as of the grant date.  The estimated expected term is consistentwith the simplified method identified in SEC Staff Accounting Bulletin (“SAB”)No. 107, *Share-Based Payment,* for share-basedawards granted during the quarter and six months ended September 30, 2006.  The simplified method calculates the expectedterm as the average of the vesting and contractual terms of the award. Theexpected volatility assumption is set based primarily on historicalvolatility.  The expected life assumptionis set based on past exercise behavior of option holders.  For options granted, the Company amortizesthe fair value on a straight-line basis over the vesting period of the options.

For the three monthsended September 30, 2006, SFAS 123R’s fair value method has resulted inadditional expense in the amount of $0.1 million related to stock options.  For the six months ended September 30, 2006,the adoption of SFAS 123R’s fair value method resulted in additional expense inthe amount of $0.2 million related to stock options.  These amounts are included in the “Wages andbenefits” caption in the accompanying condensed consolidated statements ofoperations for the three and six months ended September 30, 2006.  SFAS 123R also requires the benefits of taxdeductions in excess of recognized compensation cost to be reported as afinancing cash flow, rather than as an operating cash flow as required prior toSFAS 123R.  As the Company currently hasno excess tax benefits related to SFAS 123R, its adoption has not affected theCompany’s condensed consolidated statement of cash flows. The impact ofadopting SFAS 123R on future results will depend on, among other things, levelsof stock options granted in the future, actual forfeiture rates and the timingof option exercises.

A summary of stockoption activity since the Company’s most recent fiscal year end is as follows:
| ** **                                 | ** ** | **Stock Options** | ** ** | **Weighted Average  Exercise Price** | ** ** | **Weighted  Average  Remaining  Contractual  Term** | ** ** | **Aggregate Intrinsic  Value** | ** ** |
|--------------------------------------------|------------|------------------------|------------|------------------------------------------------|------------|-----------------------------------------------------|------------|-------------------------------------|------------|
| ** **                                 | ** ** | ** **             | ** ** | ** **                                     | ** ** | ** **                                          | ** ** | **(In thousands)**             | ** ** |
| Outstanding at  March 31, 2006             |       | 1,559,176              |       | $                                              | 6.87       |                                                |       |                                |       |   |
| Granted                                    |       | 45,000                 |       | 5.62                                           |       |                                                |       |                                |       |
| Exercised                                  |       | —                 |       | —                                         |       |                                                |       |                                |       |
| Forfeited                                  |       | 22,500                 |       | 7.66                                           |       |                                                |       |                                |       |
| Outstanding at  September 30, 2006         |       | 1,581,676              |       | 6.82                                           |       | 4.62                                                |       | $                                   | —     |   |
| Options  exercisable at September 30, 2006 |       | 1,381,676              |       | 6.78                                           |       | 4.14                                                |       | $                                   | —     |   |
|                                            |            |                        |            |                                                |            |                                                     |            |                                     |            |  |  |

 

Theaggregate intrinsic value of options outstanding at September 30, 2006 waszero.  The aggregate intrinsic value iscalculated as the difference between the exercise price of the underlyingoption and the market price of the common stock for the options that hadexercise prices that were lower than the $5.71 market price of the Company’scommon stock at September 30, 2006.

TheCompany used the following assumptions to estimate the fair value of theoptions granted during the second quarter of fiscal 2007:

|                          | ** ** | **September 30, 2006** | ** ** |
|--------------------------|------------|----------------------------------|------------|
| Risk-free  interest rate |       | 4.7                              | %          |
| Expected  volatility     |       | 36.6                             | %          |
| Expected term  (years)   |       | 6.25                             |       |
| Expected dividend yield  |       | 0.0                              | %          |

 

13

----

*Mesaba SARs*

During fiscal 2004, Mesaba approved a stock appreciationrights (“SAR”) plan for key employees and directors. The exercise price of eachSAR is equal to the fair market value of the Company’s common stock on the dateof the award. Cash is paid based on the difference between the fair marketvalue at the date of grant and the date the SAR is exercised.  The SARs vest over four years and have aten-year term.

For the three monthsended September 30, 2006, SFAS 123R’s fair value method has resulted in areduction to expense of $0.1 million related to the SARs.  For the six months ended September 30, 2006,the adoption of SFAS 123R’s fair value method has resulted in an insignificantexpense related to the SARs.    Theseamounts have been included in the “Wages and benefits” caption in Mesaba’scondensed statements of operations for the three and six months ended September30, 2006.  The impact of adopting SFAS123R on future results will depend on, among other things, levels of SARSgranted in the future, actual forfeiture rates and the timing of SAR exercises.

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

A summary of Mesaba’s SARactivity since March 31, 2006 is as follows:
| ** **                              | ** ** | **Stock  Appreciation  Rights** | ** ** | **Weighted  Average  Exercise Price** | ** ** | **Weighted  Average  Remaining  Contractual  Term** | ** ** | **Aggregate  Intrinsic Value** | ** ** |
|-----------------------------------------|------------|---------------------------------|------------|--------------------------------------------|------------|-----------------------------------------------------|------------|-------------------------------------|------------|
| ** **                              | ** ** | ** **                      | ** ** | ** **                                 | ** ** | ** **                                          | ** ** | **(In thousands)**                  | ** ** |
| Outstanding at  March 31, 2006          |       | 680,000                         |       | $                                          | 9.23       |                                                |       |                                |       |   |
| Granted                                 |       | —                          |       | —                                     |       |                                                |       |                                |       |
| Exercised                               |       | —                          |       | —                                     |       |                                                |       |                                |       |
| Forfeited                               |       | 125,000                         |       | 9.34                                       |       |                                                |       |                                |       |
| Outstanding at  September 30, 2006      |       | 555,000                         |       | 9.21                                       |       | 7.52                                                |       | $                                   | —     |   |
| SARs exercisable at  September 30, 2006 |       | 345,637                         |       | 9.26                                       |       | 7.50                                                |       | $                                   | —     |   |
|                                         |            |                                 |            |                                            |            |                                                     |            |                                     |            |  |  |

 

Theaggregate intrinsic value of SARs outstanding at September 30, 2006 waszero.  The aggregate intrinsic value iscalculated as the difference between the exercise price of the underlying SARsand the market price of the common stock for the SARs that had exercise pricesthat were lower than the $5.71 market price of the Company’s common stock atSeptember 30, 2006.

Mesaba used thefollowing assumptions to estimate the fair value of the SARs:
| ** **               | ** ** | **September 30, 2006** | ** ** | **June 30, 2006** | ** ** |
|--------------------------|------------|----------------------------------|------------|-----------------------------|------------|
| Risk-free  interest rate |       | 4.7                              | %          | 5.1                         | %          |
| Expected volatility      |       | 36.6                             | %          | 46.4                        | %          |
| Expected term  (years)   |       | 8                                |       | 8                           |       |
| Expected dividend yield  |       | 0.0                              | %          | 0.0                         | %          |

 

14

----

*UnrecognizedCompensation*

As ofSeptember 30, 2006, the Company had $0.5 million of total unrecognizedcompensation cost related to non-vested stock option compensation arrangementsgranted under all equity compensation plans. Total unrecognized compensation will be adjusted for future changes inestimated forfeitures.  The Companyexpects to recognize the cost over a weighted average period of two years.

As ofSeptember 30, 2006, Mesaba had $0.4 million of total unrecognized compensationcost related to non-vested SARs compensation arrangements granted under theSARs plans.  Total unrecognizedcompensation will be adjusted for future changes in estimated forfeitures.  Mesaba expects to recognize the cost over aweighted average period of two years.

*Pro FormaResults*

Prior to April 1, 2006, the Company accounted forshare-based payments using the intrinsic value method prescribed by APB 25 andSFAS 123. Under APB 25, if the exercise price of the Company’s employee stockoptions equaled the market price of the underlying stock on the date of thegrant, no compensation expense was recognized. Because the Company’s stockoptions were granted with exercise prices at the market price of the underlyingstock on the date of grant, no compensation expense had been recognized underAPB 25. The following table illustrates the effect on net income and earningsper share assuming the compensation costs for the Company’s stock option planhad been recorded in the three and six months ended September 30, 2005 based onthe fair value method under SFAS 123R, in thousands:
| ** **                                                                                                                              | ** ** | **Three Months Ended** | ** ** | **Six Months Ended**   | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|----------------------------------|------------|
| ** **                                                                                                                              | ** ** | **September 30, 2005** | ** ** | **September 30, 2005** | ** ** |
| Net income as  reported                                                                                                                 |       | $                                | (25,504    | )                                | $          | (24,302 | ) |
| Add: Stock-based  employee compensation expense (reduction) included in reported net income,  net of related tax effects                |       | (956                             | )          | (942                             | )          |
| Deduct:  Stock-based employee compensation expense determined under fair value based  method for all awards, net of related tax effects |       | (118                             | )          | (328                             | )          |
|                                                                                                                                    |       | $                                | (26,578    | )                                | $          | (25,572 | ) |
| Loss per share -  basic                                                                                                                 |       |                             |       |                             |       |
| As reported                                                                                                                             |       | $                                | (1.24      | )                                | $          | (1.18 | ) |
| Pro forma                                                                                                                               |       | $                                | (1.29      | )                                | $          | (1.24 | ) |
|                                                                                                                                    |       |                             |       |                             |       |
| Loss per share -  diluted                                                                                                               |       |                             |       |                             |       |
| As reported                                                                                                                             |       | $                                | (1.24      | )                                | $          | (1.18 | ) |
| Pro forma                                                                                                                               |       | $                                | (1.29      | )                                | $          | (1.24 | ) |

 

**8.****              Earnings Per Share**

Basic earnings (loss) percommon share is computed by dividing net income (loss) by the weighted averagenumber of shares of common stock outstanding during the period.  Diluted earnings (loss) per share is computedby dividing net income (loss) by the sum of the weighted average number ofshares of common stock outstanding plus all additional common stock that wouldhave been outstanding if potentially dilutive common shares related to stockoptions and warrants had been issued. Stock options and warrants with an exercise price exceeding the fairmarket value of the Company’s common stock are considered antidilutive and areexcluded from the calculation. Incremental shares related to dilutive securities have an anti-dilutiveimpact on earnings per share when a net loss is reported and, therefore, arenot included in the calculation.

15

----

The followingtable reconciles the number of shares utilized in the condensed consolidatedearnings (loss) per share calculations for the periods ended September 30, inthousands:
| ** **                                                                                | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|-------------------------------------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                                                                | ** ** | **September 30**            | ** ** | **September 30**          | ** ** |
| ** **                                                                                | ** ** | **2006**                         | ** ** | **2005**                       | ** ** | **2006** | ** ** | **2005** | ** ** |
| Net loss                                                                                  |       | $                                | (2,536     | )                              | $          | (25,504 | ) | $ | (5,030 | ) | $ | (24,302 | ) |
| For earnings per  share - basic:                                                          |       |                             |       |                           |       |   |   |   |   |
| Weighted average number of issued shares outstanding                                      |       | 20,592                           |       | 20,577                         |       | 20,592 |   | 20,576 |   |
| Effect of  dilutive securities:                                                           |       |                             |       |                           |       |   |   |   |   |
| Computed shares outstanding under stock option plans  utilizing the treasury stock method |       | —                           |       | —                         |       | — |   | — |   |
| Computed shares outstanding under warrants issued utilizing  the treasury stock method    |       | —                           |       | —                         |       | — |   | — |   |
| For earnings per  share - diluted:                                                        |       |                             |       |                           |       |   |   |   |   |
| Weighted average common and potentially dilutive common  shares outstanding               |       | 20,592                           |       | 20,577                         |       | 20,592 |   | 20,576 |   |
|                                                                                      |       |                             |       |                           |       |   |   |   |   |
| Loss per share -  basic                                                                   |       | $                                | (0.12      | )                              | $          | (1.24 | ) | $ | (0.24 | ) | $ | (1.18 | ) |
| Loss per share -  diluted                                                                 |       | $                                | (0.12      | )                              | $          | (1.24 | ) | $ | (0.24 | ) | $ | (1.18 | ) |
|                                                                                      |       |                             |       |                           |       |   |   |   |   |
| Antidilutive options  and warrants                                                        |       | 1,582                            |       | 4,333                          |       | 1,582 |   | 220 |   |

 

**9.****              ConsolidatedComprehensive Income**

The followingtable presents the calculation of comprehensive income.  The components of comprehensive income forthe periods ended September 30 were as follows, in thousands:
| ** **                                     | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                     | ** ** | **September 30**            | ** ** | **September 30**          | ** ** |
| ** **                                     | ** ** | **2006**                         | ** ** | **2005**                       | ** ** | **2006** | ** ** | **2005** | ** ** |
| Net loss                                       |       | $                                | (2,536     | )                              | $          | (25,504 | ) | $ | (5,030 | ) | $ | (24,302 | ) |
| Unrealized gains  on investments classified as |       |                             |       |                           |       |   |   |   |   |
| available for  sale, net of tax in fiscal 2005 |       | 312                              |       | 27                             |       | 208 |   | 116 |   |
| Comprehensive  loss                            |       | $                                | (2,224     | )                              | $          | (25,477 | ) | $ | (4,822 | ) | $ | (24,186 | ) |

 

**10.****       Segment Information**

The Company follows theprovisions of SFAS No. 131, *Disclosures about Segmentsof an Enterprise and Related Information*.  SFAS No. 131 establishes annual and interimreporting standards for an enterprise’s business segments and relateddisclosures about its products, services, geographic areas and majorcustomers.  The method for determiningwhat information to report is based upon the way management organizes theoperating segments within the Company for making operating decisions andassessing financial performance. Although Mesaba has been deconsolidated from the Company’s condensedconsolidated financial statements as of the Petition Date, the segmentinformation presented below continues to include Mesaba in accordance with SFASNo. 131 and related guidance for equity-method investees.  Mesaba’s results of operations after thePetition Date are included in the “Eliminations” column.

16

----

Operating segmentinformation for Mesaba, Big Sky and MAIR were as follows, in thousands:
| ** **                                                                                        | ** ** | **Mesaba** | ** ** | **Big Sky** | ** ** | **Holdings** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|---------------------------------------------------------------------------------------------------|------------|------------|------------|------------------|------------|--------------|------------|------------------|------------|------------------|------------|
| *Three Months Ended September  30, 2006:*                                                         | * *   | * *   | * *   | * *         | * *   | * *     | * *   | * *         | * *   | * *         | * *   |
| Operating revenues                                                                                |       | $          | 71,178     |             | $          | 6,183        |       | $                | 58         |             | $          | (71,236 | ) | $ | 6,183 |   |
| Operating expenses                                                                                |       | 77,209     |       | 7,045            |       | 2,616        |       | (77,267          | )          | 9,603            |       |
| Depreciation and  amortization                                                                    |       | 2,429      |       | 176              |       | 5            |       | (2,429           | )          | 181              |       |
| Interest expense                                                                                  |       | —     |       | 125              |       | —       |       | (107             | )          | 18               |       |
| Reorganization items,  net                                                                        |       | 3,153      |       | —           |       | —       |       | (3,153           | )          | —           |       |
| Income (loss) before  income taxes and Mesaba cumulative effect of change in accounting principle |       | (8,810     | )          | (981             | )          | (1,214       | )          | 8,810            |       | (2,195           | )          |
| Capital expenditures                                                                              |       | 277        |       | 110              |       | —       |       | (277             | )          | 110              |       |
| At end of period:                                                                                 |       |       |       |             |       |         |       |             |       |             |       |
| Current assets                                                                                    |       | 62,095     |       | 3,515            |       | 81,375       |       | (65,909          | )          | 81,076           |       |
| Total assets                                                                                      |       | 95,046     |       | 7,366            |       | 128,800      |       | (114,192         | )          | 117,020          |       |
| Current liabilities                                                                               |       | 40,328     |       | 7,796            |       | 8,016        |       | (44,142          | )          | 11,998           |       |
| Total shareholders’  equity (deficit)                                                        |       | (6,100     | )          | (1,460           | )          | 120,784      |       | (9,232           | )          | 103,992          |       |
| *Three Months Ended September  30, 2005:*                                                         | * *   | * *   | * *   | * *         | * *   | * *     | * *   | * *         | * *   | * *         | * *   |
| Operating revenues                                                                                |       | $          | 109,744    |             | $          | 5,162        |       | $                | 1,496      |             | $          | (1,496 | ) | $ | 114,906 |   |
| Operating expenses                                                                                |       | 148,025    |       | 8,757            |       | (154         | )          | (1,496           | )          | 155,132          |       |
| Depreciation and  amortization                                                                    |       | 3,276      |       | 226              |       | 5            |       | —           |       | 3,507            |       |
| Interest expense                                                                                  |       | —     |       | 88               |       | —       |       | (72              | )          | 16               |       |
| Income (loss) before  income taxes                                                                |       | (38,043    | )          | (3,608           | )          | 2,512        |       | —           |       | (39,139          | )          |
| Capital expenditures                                                                              |       | 2,629      |       | 107              |       | 12           |       | (4               | )          | 2,744            |       |
| At end of period:                                                                                 |       |       |       |             |       |         |       |             |       |             |       |
| Current assets                                                                                    |       | 90,504     |       | 3,587            |       | 114,961      |       | (9,135           | )          | 199,917          |       |
| Total assets                                                                                      |       | 137,254    |       | 9,165            |       | 163,583      |       | (44,595          | )          | 265,407          |       |
| Current liabilities                                                                               |       | 85,354     |       | 9,234            |       | 3,995        |       | (5,231           | )          | 93,352           |       |
| Total shareholders’  equity (deficit)                                                        |       | 47,905     |       | (954             | )          | 159,588      |       | (39,364          | )          | 167,175          |       |
| *Six Months Ended September 30,  2006:*                                                           | * *   | * *   | * *   | * *         | * *   | * *     | * *   | * *         | * *   | * *         | * *   |
| Operating revenues                                                                                |       | $          | 154,618    |             | $          | 12,226       |       | $                | 117        |             | $          | (154,735 | ) | $ | 12,226 |   |
| Operating expenses                                                                                |       | 162,284    |       | 13,708           |       | 5,849        |       | (162,401         | )          | 19,440           |       |
| Depreciation and  amortization                                                                    |       | 4,983      |       | 349              |       | 10           |       | (4,983           | )          | 359              |       |
| Interest expense                                                                                  |       | —     |       | 239              |       | —       |       | (205             | )          | 34               |       |
| Reorganization items,  net                                                                        |       | 1,325      |       | —           |       | —       |       | (1,325           | )          | —           |       |
| Income (loss) before  income taxes and Mesaba cumulative effect of change in accounting principle |       | (8,217     | )          | (1,713           | )          | (2,976       | )          | 8,217            |       | (4,689           | )          |
| Capital expenditures                                                                              |       | 1,245      |       | 189              |       | —       |       | (1,245           | )          | 189              |       |
| *Six Months Ended September 30,  2005:*                                                           | * *   | * *   | * *   | * *         | * *   | * *     | * *   | * *         | * *   | * *         | * *   |
| Operating revenues                                                                                |       | $          | 219,887    |             | $          | 9,702        |       | $                | 2,992      |             | $          | (2,992 | ) | $ | 229,589 |   |
| Operating expenses                                                                                |       | 258,298    |       | 14,115           |       | 1,312        |       | (2,992           | )          | 270,733          |       |
| Depreciation and  amortization                                                                    |       | 6,854      |       | 446              |       | 4            |       | 5                |       | 7,309            |       |
| Interest expense                                                                                  |       | —     |       | 153              |       | —       |       | (121             | )          | 32               |       |
| Income (loss) before  income taxes                                                                |       | (37,969    | )          | (4,488           | )          | 2,684        |       | 2,512            |       | (37,261          | )          |
| Capital expenditures                                                                              |       | 5,300      |       | 388              |       | 12           |       | 8                |       | 5,708            |       |

 

**11.****       Commitments andContingencies**

*Saab Leasing Litigation*

In 2002, FairbrookLeasing, Inc., Lambert Leasing, Inc. and Swedish Aircraft Holdings AB (“SaabLeasing”) filed a declaratory judgment action against Mesaba relating to 20Saab 340A (“340A”) aircraft leased by Mesaba. In 2003, the District Courtdeclared that the term sheet relating to the leases for the 340A aircraft was abinding preliminary agreement requiring Mesaba to negotiate in good faith towardthe execution of long-term agreements for each of the 340A aircraft. AlthoughMesaba appealed this ruling, while the appeal was pending, Saab Leasing(relying on the District Court’s declaratory judgment ruling) filed a separateaction in the District Court alleging approximately $35 million in damages forpast due and future aircraft lease obligations. While the damages action waspending, the U.S. Court of Appeals for the Eighth Circuit affirmed the DistrictCourt’s declaratory judgment ruling. On July 6, 2006, the District Court in thedamages action granted Mesaba’s motion for partial summary judgment, rulingthat Saab Leasing is not eligible to receive damages for the majority of itsclaims against Mesaba. Because the potential damages for the remaining claimagainst Mesaba are not significant, Mesaba has not established any accrual withregard to this litigation within its condensed financial statements.

17

----

*Creditors’ Committee Litigation*

Pursuant to theBankruptcy Code, Mesaba’s Creditors’ Committee initiated an investigation oftransactions between MAIR and Mesaba, including the payment of dividends andmanagement services fees from Mesaba to MAIR. In response to thisinvestigation, and to end public speculation regarding the dividends andpayments, MAIR filed a complaint with the Bankruptcy Court requesting adeclaratory judgment that the dividends and fees paid by Mesaba to MAIR werewholly proper and appropriate under law. In its complaint, MAIR asserted factsto demonstrate that each payment and dividend MAIR received from Mesaba wasappropriate under applicable law, occurred in the ordinary course of Mesaba’sbusiness, that Mesaba was solvent at the time it made each payment anddividend, and that Mesaba remained solvent and able to pay its obligationsafter each payment or dividend to MAIR. On October 11, 2006, Mesaba’s Creditors’Committee filed an answer and counterclaim against MAIR, alleging that certainpayments from Mesaba to MAIR were fraudulent under Minnesota law and federalbankruptcy law. The Creditors’ Committee’s counterclaim asserted approximately$16 million in damages. Additionally, the Creditors’ Committee challenged MAIR’sproof of claim filed in Mesaba’s bankruptcy proceedings and requested that itbe disallowed or subordinated. The litigation is in the early stages, and MAIRcannot predict when it will conclude. MAIR has not established any accrual withregard to this litigation because MAIR believes it has valid defenses to theCreditors’ Committee’s claims.

*Other Litigation Matters*

Mesaba and Big Sky arealso defendants in various lawsuits arising in the ordinary course of business.While the outcome of these lawsuits and proceedings cannot be predicted withcertainty, it is the opinion of Mesaba’s and Big Sky’s management, based oncurrent information and legal advice, that the ultimate disposition of thesesuits will not have a material adverse effect on the separate financialstatements of Mesaba or Big Sky or the consolidated financial statements of theCompany as a whole. Additionally, any lawsuit filed against Mesaba prior to thePetition Date is subject to the automatic stay. If and when these casesproceed, the amount of any damages award to the plaintiffs would be deemedunsecured prepetition claims against Mesaba.

*Guaranty*

Mesaba currently leases ahangar facility at the Cincinnati/Northern Kentucky International Airport. MAIRhas unconditionally guaranteed full and prompt payment of the ground lease andthe bonds associated with the initial financing of the facility. In October2005, following its bankruptcy filing, Mesaba vacated the facility due to thereduced number of Avros that will require maintenance in the future. As ofSeptember 30, 2006, Mesaba had not rejected the leases for this facilityin its bankruptcy proceedings.  Inaccordance with its guaranty, MAIR has been making the required ground andfacilities lease payments of $0.1 million per month since November 2005. Additionally,on February 15, 2006, MAIR received notice that UMB Bank, N.A. (“UMB”), the trusteefor the bondholders, declared MAIR’s liability for all sums to be immediatelydue and payable. On April 18, 2006, MAIR entered into an agreement with UMBunder which UMB agreed to forbear acceleration of MAIR’s guaranty obligationsin exchange for MAIR delivering a letter of credit in the amount of $13.1million to secure the payment of the obligations owed by MAIR to UMB.

The letter of credit wasissued by First Interstate Bank of Billings and is currently fullycollateralized by MAIR’s cash account held at First Interstate Bank. Under theagreement with UMB, MAIR is obligated to maintain the letter of credit untilall obligations under the bonds are satisfied. MAIR’s annual obligations withrespect to the bonds and the ground lease for the facility total approximately$1.2 million, and those obligations will continue through July 2029 and willincrease at scheduled intervals in accordance with the terms of the bonddocuments. The UMB agreement and the letter of credit provide that the amountof the letter of credit will automatically decrease each July in accordancewith the redemption schedule for the bonds.

UMB may draw on theletter of credit upon the occurrence of an event of default under its agreementwith MAIR, including if MAIR fails to make any payment when due to UMB, if MAIRfails to provide evidence that the letter of credit has been renewed annually(or if MAIR fails to renew the letter of credit), if UMB receives notice fromFirst Interstate Bank of the bank’s intent not to renew the letter of credit,if the bonds become subject to mandatory redemption, if MAIR fails to complywith the terms of its agreement with UMB or if MAIR commits any event ofdefault under its guaranty of Mesaba’s bond obligations. The cash supportingthe letter of credit was classified as “Restricted cash” on the Company’sconsolidated balance sheet at September 30, 2006.

18

----

Because Mesaba vacated the hangar in October 2005 andMAIR is the guarantor of the facility, MAIR is currently seeking othersublessors to lease the facility. As of March 31, 2006, MAIR established a $4.8million accrual related to this guaranty, which assumes that the facility willremain vacant through March 31, 2008, during which time MAIR will continue tomake bond and lease payments, and that thereafter MAIR will be able to subleasethe facility at a 20% discount. As of September 30, 2006, the balance of theaccrual totaled $4.0 million. MAIR will reassess this reserve in future periodsas material developments occur.

*Other Guarantees*

Mesaba has letters ofcredit to guarantee certain obligations, principally for workers’ compensationpolicies, airport leases and other obligations, which totaled $4.5 million and$4.1 million as of September 30, 2006 and March 31, 2006, respectively. Therewere no amounts drawn on these letters of credit during fiscal 2006 or 2005. Ascollateral for these letters of credit, Mesaba had $4.7 million and $4.5million in cash held in an investment account as of September 30, 2006 andMarch 31, 2006, respectively. This amount is restricted and has been classifiedwithin “Long-term investments” in Mesaba’s condensed balance sheets.

In February 2005,Big Sky obtained a revolving line of credit in the principal amount of $0.3million from First Interstate Bank of Billings. In March 2006, the principalamount available under the line increased to $0.4 million. The line of creditrequires a variable interest rate based on the prime rate published in the *Wall Street Journal*. At September 30, 2006, the rate was8.25%. The line of credit is collateralized by Big Sky’s inventory, accountsreceivable and equipment and is scheduled to mature in January 2007.

*MAIR Pledge for Big Sky*

In August 2006,MAIR entered into a pledge agreement with U.S. Bank, pursuant to which MAIRpledged $0.8 million in exchange for U.S. Bank reducing the amount of fundsthat it holds back from Big Sky when credit card payments are processed. U.S.Bank processes payments for Big Sky tickets made with various credit cards. Inthe past, and consistent with industry practice, U.S. Bank held back aspecified portion of those credit card payments until the tickets had beenused. MAIR agreed to pledge its cash in lieu of the required hold back, whichsubsequently freed up those funds for Big Sky’s use. Under the pledgeagreement, MAIR is free to request a release of its collateral at any time. Followingsuch a request, U.S. Bank would again begin holding back amounts from Big Sky,and MAIR’s collateral would be returned 90 days after the held back amountstotal the requisite level pursuant to U.S. Bank’s credit card processingpolicies. Because MAIR has the right to request a release of its collateral andto terminate the pledge agreement, the amount of cash pledged is not recordedas restricted cash.

**12.****       Financial Information ofMesaba**

The following condensed financial statements of Mesabahave been prepared in conformity with SOP 90-7, which requires that theliabilities subject to compromise by the Bankruptcy Court be segregated fromliabilities not subject to compromise and that all transactions directlyassociated with the reorganization be identified. Liabilities subject tocompromise include prepetition unsecured claims that may be settled at amountsthat differ from those recorded in Mesaba’s condensed financial statements.

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

19

----

**MESABA AVIATION,INC.(DEBTOR-IN-POSSESSION)CONDENSED BALANCE SHEETS(in thousands)(Unaudited)**
| ** **                                                   | ** ** | **September 30** | ** ** | **March 31** | ** ** |
|--------------------------------------------------------------|------------|-----------------------|------------|-------------------|------------|
| ** **                                                   | ** ** | **2006**              | ** ** | **2006**          | ** ** |
| ASSETS                                                       |       |                  |       |              |       |
|                                                         |       |                  |       |              |       |
| CURRENT ASSETS:                                              |       |                  |       |              |       |
| Cash and cash equivalents                                    |       | $                     | 7,667      |              | $          | 20,718 |   |
| Short-term investments                                       |       | 8,926                 |       | 3,262             |       |
| Restricted cash                                              |       | 6,935                 |       | 6,782             |       |
| Accounts receivable, net of reserves of $29,795 and  $29,755 |       | 22,646                |       | 29,181            |       |
| Income taxes receivable                                      |       | 2,931                 |       | 3,288             |       |
| Inventories, net                                             |       | 6,240                 |       | 9,001             |       |
| Prepaid expenses and deposits                                |       | 6,499                 |       | 5,998             |       |
| Intercompany receivable from MAIR Holdings, Inc.             |       | 251                   |       | 54                |       |
| Total current assets                                         |       | 62,095                |       | 78,284            |       |
|                                                         |       |                  |       |              |       |
| PROPERTY AND  EQUIPMENT:                                     |       |                  |       |              |       |
| Flight equipment                                             |       | 92,987                |       | 95,357            |       |
| Other property and equipment                                 |       | 41,757                |       | 41,373            |       |
| Less: Accumulated depreciation and amortization              |       | (107,528              | )          | (104,198          | )          |
| Net property and equipment                                   |       | 27,216                |       | 32,532            |       |
|                                                         |       |                  |       |              |       |
| NONCURRENT  ASSETS:                                          |       |                  |       |              |       |
| Long-term investments                                        |       | 4,736                 |       | 6,761             |       |
| Other assets, net                                            |       | 999                   |       | 864               |       |
|                                                         |       | $                     | 95,046     |              | $          | 118,441 |   |
|                                                         |       |                  |       |              |       |
| LIABILITIES AND SHAREHOLDER’S EQUITY (DEFICIT)          |       |                  |       |              |       |
|                                                         |       |                  |       |              |       |
| CURRENT  LIABILITIES:                                        |       |                  |       |              |       |
| Accounts payable                                             |       | $                     | 5,076      |              | $          | 8,638 |   |
| Accrued liabilities:                                         |       |                  |       |              |       |
| Payroll                                                      |       | 13,768                |       | 14,666            |       |
| Maintenance                                                  |       | 10,108                |       | 17,250            |       |
| Deferred income                                              |       | 2,446                 |       | 2,962             |       |
| Other current liabilities                                    |       | 8,930                 |       | 9,468             |       |
| Total current liabilities                                    |       | 40,328                |       | 52,984            |       |
|                                                         |       |                  |       |              |       |
| OTHER NONCURRENT  LIABILITIES                                |       | 1,769                 |       | 2,547             |       |
| Total liabilities not subject to compromise                  |       | 42,097                |       | 55,531            |       |
|                                                         |       |                  |       |              |       |
| LIABILITIES  SUBJECT TO COMPROMISE (A)                       |       | 59,049                |       | 59,973            |       |
| Total liabilities                                            |       | 101,146               |       | 115,504           |       |
|                                                         |       |                  |       |              |       |
| COMMITMENTS AND  CONTINGENCIES (Note 11)                     |       |                  |       |              |       |
|                                                         |       |                  |       |              |       |
| SHAREHOLDER’S  EQUITY (DEFICIT):                        |       |                  |       |              |       |
| Paid-in capital                                              |       | 48,255                |       | 48,255            |       |
| Accumulated other comprehensive loss                         |       | (3                    | )          | (13               | )          |
| Accumulated deficit                                          |       | (54,352               | )          | (45,305           | )          |
| Total shareholder’s equity (deficit)                    |       | (6,100                | )          | 2,937             |       |
|                                                         |       | $                     | 95,046     |              | $          | 118,441 |   |

 

20

----

**MESABA AVIATION,INC.(DEBTOR-IN-POSSESSION)CONDENSED STATEMENTS OF OPERATIONS(in thousands)(Unaudited)**
| ** **                                                                        | ** ** | **Three Months Ended  September 30** | ** ** | **Six Months Ended  September 30** | ** ** |
|-----------------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                                        | ** ** | **2006**                                            | ** ** | **2005**                                          | ** ** | **2006** | ** ** | **2005** | ** ** |
| OPERATING  REVENUES:                                                              |       |                                                |       |                                              |       |   |   |   |   |
| Passenger                                                                         |       | $                                                   | 64,388     |                                              | $          | 100,805 |   | $ | 139,887 |   | $ | 202,085 |   |
| Freight and other                                                                 |       | 6,790                                               |       | 8,939                                             |       | 14,731 |   | 17,802 |   |
| Total operating revenues                                                          |       | 71,178                                              |       | 109,744                                           |       | 154,618 |   | 219,887 |   |
|                                                                              |       |                                                |       |                                              |       |   |   |   |   |
| OPERATING  EXPENSES:                                                              |       |                                                |       |                                              |       |   |   |   |   |
| Wages and benefits                                                                |       | 30,988                                              |       | 38,264                                            |       | 64,477 |   | 75,555 |   |
| Aircraft maintenance                                                              |       | 14,083                                              |       | 22,032                                            |       | 29,460 |   | 44,085 |   |
| Aircraft rents                                                                    |       | 13,974                                              |       | 25,395                                            |       | 31,379 |   | 50,631 |   |
| Landing fees                                                                      |       | 1,977                                               |       | 2,495                                             |       | 4,140 |   | 5,042 |   |
| Insurance and taxes                                                               |       | 1,580                                               |       | 1,681                                             |       | 2,677 |   | 3,348 |   |
| Depreciation and amortization                                                     |       | 2,429                                               |       | 3,276                                             |       | 4,983 |   | 6,854 |   |
| Administrative and other                                                          |       | 12,178                                              |       | 20,876                                            |       | 25,168 |   | 38,777 |   |
| Impairment and other charges                                                      |       | —                                              |       | 34,006                                            |       | — |   | 34,006 |   |
| Total operating expenses                                                          |       | 77,209                                              |       | 148,025                                           |       | 162,284 |   | 258,298 |   |
| Operating loss                                                                    |       | (6,031                                              | )          | (38,281                                           | )          | (7,666 | ) | (38,411 | ) |
|                                                                              |       |                                                |       |                                              |       |   |   |   |   |
| NONOPERATING  (EXPENSE) INCOME:                                                   |       |                                                |       |                                              |       |   |   |   |   |
| Interest income and other                                                         |       | 374                                                 |       | 238                                               |       | 774 |   | 442 |   |
| Reorganization items, net (B)                                                     |       | (3,153                                              | )          | —                                            |       | (1,325 | ) | — |   |
| Nonoperating (expense) income, net                                                |       | (2,779                                              | )          | 238                                               |       | (551 | ) | 442 |   |
| Loss before income taxes and cumulative effect of  change in accounting principle |       | (8,810                                              | )          | (38,043                                           | )          | (8,217 | ) | (37,969 | ) |
|                                                                              |       |                                                |       |                                              |       |   |   |   |   |
| (PROVISION)  BENEFIT FOR INCOME TAXES                                             |       | (323                                                | )          | 12,205                                            |       | (323 | ) | 12,189 |   |
|                                                                              |       |                                                |       |                                              |       |   |   |   |   |
| LOSS BEFORE  CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE                  |       | (9,133                                              | )          | (25,838                                           | )          | (8,540 | ) | (25,780 | ) |
|                                                                              |       |                                                |       |                                              |       |   |   |   |   |
| CUMULATIVE  EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE (Note 7)                     |       | —                                              |       | —                                            |       | (507 | ) | — |   |
| NET LOSS                                                                          |       | $                                                   | (9,133     | )                                                 | $          | (25,838 | ) | $ | (9,047 | ) | $ | (25,780 | ) |

 

21

----

**MESABA AVIATION,INC.(DEBTOR-IN-POSSESSION)CONDENSED STATEMENTS OF CASH FLOWS(in thousands)(Unaudited)**
| ** **                                                                   | ** ** | **Six Months Ended  September 30** | ** ** |
|------------------------------------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                                   | ** ** | **2006**                                          | ** ** | **2005** | ** ** |
| CASH FLOWS FROM  OPERATING ACTIVITIES:                                       |       |                                              |       |   |   |
| Net loss                                                                     |       | $                                                 | (9,047     | ) | $ | (25,780 | ) |
| Adjustments to reconcile net loss to net cash used in  operating activities: |       |                                              |       |   |   |
| Depreciation and amortization                                                |       | 4,983                                             |       | 6,854 |   |
| Amortization of deferred credits                                             |       | (778                                              | )          | (691 | ) |
| Deferred income taxes                                                        |       | —                                            |       | (11,145 | ) |
| Cumulative effect of change in accounting principle                          |       | 507                                               |       | — |   |
| Changes in current operating items:                                          |       |                                              |       |   |   |
| Accounts receivable                                                          |       | 6,535                                             |       | (29,418 | ) |
| Income tax receivable                                                        |       | 357                                               |       | (2,155 | ) |
| Inventories                                                                  |       | 2,761                                             |       | (1,025 | ) |
| Prepaid expenses and deposits                                                |       | (501                                              | )          | (265 | ) |
| Accounts payable and other                                                   |       | (6,319                                            | )          | 46,299 |   |
| Net cash used in operating activities before reorganization  items           |       | (1,502                                            | )          | (17,326 | ) |
|                                                                         |       |                                              |       |   |   |
| CASH FLOWS FROM  REORGANIZATION ACTIVITIES:                                  |       |                                              |       |   |   |
| Reorganization items, net                                                    |       | (1,325                                            | )          | — |   |
| Decrease in damage claims                                                    |       | (976                                              | )          | — |   |
| Impairment of property and equipment                                         |       | 1,596                                             |       | — |   |
| Reversal of accrued maintenance                                              |       | (5,319                                            | )          | — |   |
| Net cash used in reorganization activities                                   |       | (6,024                                            | )          | — |   |
| Net cash used in operating activities                                        |       | (7,526                                            | )          | (17,326 | ) |
|                                                                         |       |                                              |       |   |   |
| CASH FLOWS FROM  INVESTING ACTIVITIES:                                       |       |                                              |       |   |   |
| Purchases of investments                                                     |       | (4,820                                            | )          | (1,698 | ) |
| Sales of investments                                                         |       | 1,210                                             |       | 1,651 |   |
| Increase in restricted cash                                                  |       | (153                                              | )          | (7,100 | ) |
| Purchases of property and equipment                                          |       | (1,245                                            | )          | (5,300 | ) |
| Net cash used in investing activities                                        |       | (5,008                                            | )          | (12,447 | ) |
|                                                                         |       |                                              |       |   |   |
| CASH FLOWS FROM  FINANCING ACTIVITIES                                        |       |                                              |       |   |   |
| Increase in intercompany receivable from MAIR  Holdings, Inc.                |       | (197                                              | )          | — |   |
| Debt issuance costs                                                          |       | (320                                              | )          | — |   |
| Other equity transactions                                                    |       | —                                            |       | 22,193 |   |
| Net cash (used in) provided by financing activities                          |       | (517                                              | )          | 22,193 |   |
|                                                                         |       |                                              |       |   |   |
| NET DECREASE IN  CASH AND CASH EQUIVALENTS                                   |       | (13,051                                           | )          | (7,580 | ) |
|                                                                         |       |                                              |       |   |   |
| CASH AND CASH  EQUIVALENTS:                                                  |       |                                              |       |   |   |
| Beginning of period, excluding restricted cash and  cash equivalents         |       | 20,718                                            |       | 20,357 |   |
| End of period, excluding restricted cash and cash  equivalents               |       | $                                                 | 7,667      |   | $ | 12,777 |   |
|                                                                         |       |                                              |       |   |   |
| SUPPLEMENTARY  CASH FLOW INFORMATION:                                        |       |                                              |       |   |   |
| Cash paid (refund received) during period for:                               |       |                                              |       |   |   |
| Interest                                                                     |       | $                                                 | —     |   | $ | — |   |
| Income taxes                                                                 |       | $                                                 | (31        | ) | $ | (422 | ) |

 

22

----

**MesabaAviation, Inc.(Debtor-in-Possession)Notes to Condensed Financial Statements**

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

Liabilities subject tocompromise in Mesaba’s condensed balance sheets at September 30, 2006 and March31, 2006 refers to both secured and unsecured obligations that will beaccounted for under a plan of reorganization, including claims incurred priorto the petition date.  They represent theestimated amount expected to be allowed on known or potential claims to beresolved through the Chapter 11 bankruptcy process and remain subject to futureadjustments arising from negotiated settlements, actions of the BankruptcyCourt, rejection of executory contracts and unexpired leases, the determinationas to the value of any collateral securing claims, proofs of claim or otherevents.

Mesaba has endeavored tonotify all of its known or potential creditors whose claims are subject toMesaba’s Chapter 11 case.  Subject tocertain exceptions under the Bankruptcy Code, Mesaba’s Chapter 11 filing automaticallystayed the continuation of any judicial or administrative proceedings or otheractions against Mesaba or its property to recover, collect or secure a claimarising prior to the Petition Date.  Aproof of claim arising from the rejection of an executory contract or anexpired lease must be filed by the later of the Bar Date or thirty days fromthe effective date of any authorized rejection.

Although Mesaba hasestimated the value of the claims that will be allowed by the Bankruptcy Courtat $59.0 million, the Bankruptcy Court will make the final determinationregarding what portion of the $217.0 million in total proofs of claim filedwill be deemed allowable claims.  Thedetermination of how those liabilities will ultimately be treated will not beknown until the Bankruptcy Court approves a plan of reorganization and theclaims resolution process is complete, which may occur well after aconfirmation of a plan of reorganization. Mesaba will continue to evaluate the amounts of these liabilities throughthe remainder of the Chapter 11 process and recognize any additional amountssubject to compromise that it identifies in the future.  As a result, the amounts of liabilitiessubject to compromise are likely to change.

Liabilitiessubject to compromise at September 30, 2006 and March 31, 2006 were as follows,in thousands:

|                                         | ** ** | **September 30** | ** ** | **March 31** | ** ** |
|-----------------------------------------|------------|-----------------------|------------|-------------------|------------|
| ** **                              | ** ** | **2006**              | ** ** | **2006**          | ** ** |
| Accounts payable  and other liabilities |       | $                     | 34,018     |              | $          | 34,936 |   |
| Damage claims                           |       | 20,060                |       | 20,066            |       |
| Secured claims                          |       | 2,520                 |       | 2,520             |       |
| Priority tax  claims                    |       | 2,451                 |       | 2,451             |       |
|                                    |       | $                     | 59,049     |              | $          | 59,973 |   |

 

**(B)****       Reorganization Items**

Reorganization itemsrecorded from the Petition Date through September 30, 2006 consisted oftransactions and events that were directly associated with the reorganizationof Mesaba.  The reorganization activityincluded aircraft impairment and other rejection charges, legal andprofessional fees to support the restructuring process and the reversal ofmaintenance accruals.  The charge fordamage claims results from estimated claims as a result of Mesaba’s rejectionor renegotiation of certain aircraft and other leases and obligations as partof the bankruptcy process.

23

----

Net reorganizationitems for the three and six months ended September 30, 2006 were as follows, inthousands:
|                                            | ** ** | **Three Months Ended** | ** ** | **Six Months Ended**   | ** ** |
|--------------------------------------------|------------|----------------------------------|------------|----------------------------------|------------|
| ** **                                 | ** ** | **September 30, 2006** | ** ** | **September 30, 2006** | ** ** |
| Addition to  (settlement of) damage claims |       | $                                | 15         |                             | $          | (976 | ) |
| Legal and  professional fees and other     |       | 2,680                            |       | 6,024                            |       |
| Impairment of  property and equipment      |       | 601                              |       | 1,596                            |       |
| Reversal of  accrued maintenance           |       | (143                             | )          | (5,319                           | )          |
|                                       |       | $                                | 3,153      |                             | $          | 1,325 |   |

 

**13.****       New AccountingPronouncements**

In July 2006, the FASBissued FASB Interpretation No. 48, *Accounting for Uncertaintyin Income Taxes*, an interpretation of FASB Statement No. 109 (“FIN 48”),which clarifies the accounting for uncertainty in tax positions. FIN 48requires that the Company recognize in its financial statements, the impact ofa tax position, if that position is more likely than not of being sustained onaudit, based on the technical merits of the position. The accounting provisionsof FIN 48 will be effective for the Company beginning April 1, 2007. TheCompany is in the process of determining what effect, if any, the adoption ofFIN 48 will have on its financial statements.

In September 2006, theFASB issued SFAS No. 157, *Fair Value Measurements*(“SFASNo. 157”), to define fair value, establish a framework for measuring fair valuein accordance with generally accepted accounting principles, and expanddisclosures about fair value measurements. SFAS No. 157 will be effective forthe Company beginning April 1, 2008. The Company is assessing the impact theadoption of SFAS No. 157 will have on its financial statements.

In September 2006, theFASB issued FASB Staff Position AUG AIR-1, *Accounting for PlannedMajor Maintenance Activities*(the “FSP”), that reduces the number ofacceptable methods of accounting for planned major maintenance activities.Under the FSP, Mesaba will be required to change its method of accounting forsome planned maintenance activities for certain aircraft types.  The FSP will be effective for the Companybeginning April 1, 2007 and requires retrospective application to all financialstatements presented unless doing so is impractical.  The Company is assessing the impact theadoption of the FSP will have on its financial position and results ofoperations.

In September 2006, theSEC issued SAB No. 108, *Considering the Effects ofPrior Year Misstatements when Quantifying Misstatements in Current YearFinancial Statements* (“SAB No. 108”). SAB No. 108 provides guidanceon how prior year misstatements should be taken into consideration whenquantifying misstatements in current year financial statements for purposes ofdetermining whether the financial statements are materially misstated.  SAB 108 is effective for annual financialstatements covering the first fiscal year ending after November 15, 2006, orwith respect to the Company’s fiscal year ending March 31, 2007. The implementationof SAB No. 108 did not have a material impact on the Company’s financialstatements.

**ITEM2.  MANAGEMENT’S DISCUSSION AND ANALYSISOF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

*General*

Management’sDiscussion and Analysis of Financial Condition and Results of Operations shouldbe read in conjunction with the accompanying condensed consolidated financialstatements.  The Company’s operations andfinancial results are subject to various risks and uncertainties associatedwith the airline industry.  See “RiskFactors” in Item 1A of Part II.

*Overview*

Mesaba

Since Mesaba filed forbankruptcy on the Petition Date, it has been focused on restructuring its laborand non-labor expenses to calibrate its cost structure to a fleet of 49 Saabs,which Northwest has dictated via its own bankruptcy.  Mesaba intends touse the bankruptcy process to return to profitability as a smaller, competitivelow-cost supplier of regional flights.  Specifically, it intends to:

·                  Downsizeits operations to adjust to the smaller fleet;

·                  Reduceits labor expenses in order to be competitive versus other regional carriers;and

·                  Lower its fixedexpenses by 43%.

24

----

*FleetReduction. *Followingits bankruptcy filing, Northwest implemented various changes to Mesaba’sfleet.  Since September 14, 2005, Northwest has removed multiple aircraftfrom Mesaba’s fleet, and Mesaba anticipates that Northwest will terminate allthe remaining aircraft, other than 49 Saabs, by the end of calendar 2006, subjectto final lease negotiations between Northwest and its lessors.  As ofSeptember 30, 2006, Mesaba was operating nine Avros, 49 Saabs and one CRJpursuant to the ASA.

*LaborCosts Restructuring.*Mesaba is working to achieve a reductionin annual labor costs sufficient to keep it competitive with other regionalcarriers through a combination of agreements negotiated with its employee laborgroups and pay and benefit reductions from its management and hourly non-unionemployees.  On January 31, 2006, the Bankruptcy Court approved thetentative agreement reached between Mesaba and its dispatchers for thenecessary reductions for a portion of its labor expenses.  Mesaba reached tentative agreements with itspilots, flight attendants and mechanics in late October 2006.  Each ofthese unions will vote to ratify its respective agreement; the ratificationprocess is expected to conclude by the end of November 2006.  If the laboragreements are ratified, the new pay rates would become effective December 1,2006.  There is no guarantee that the unions will vote to ratify the newcontract terms.

*Non-laborCost Restructuring**.*  Mesabaplans to achieve non-labor cost reductions by eliminating excess facilities,eliminating Avro-related expenses, reducing vendor costs and reducinginfrastructure to reflect the smaller fleet.

Big Sky

Big Sky has focused ongrowing its Beechcraft 1900D operation by bidding on additional EAS flying andseeking other opportunities to expand its fleet.  Specifically, it has expanded its Boiseoperation, serving Billings, Bozeman and Missoula, Montana, Pocatello, Idaho,Walla Walla, Washington and Jackson Hole, Wyoming.   It has also reached agreement to start acapacity purchase operation in Florida, beginning with two Beechcraft 1900Daircraft in the fall of 2006, and recently announced new service fromSpringfield, Illinois to Chicago Midway Airport starting in December 2006.  Although higher fuel expenses have impactedits profitability, Big Sky will continue throughout the fiscal year to exploreways to expand its operation to become profitable.

MAIR

Separately, MAIR willcontinue to explore additional growth opportunities in fiscal 2007 and willconsider acquisitions to diversify both within and outside the airlineindustry.

**RESULTS OF OPERATIONS**

**Three Months Ended September 30, 2006 and 2005**

The Companyreported a consolidated net loss of $2.5 million or $0.12 per basic and dilutedshare for the quarter ended September 30, 2006, compared to a net loss of $25.5million or $1.24 per basic and diluted share for the quarter ended September30, 2005.  To allow for a more direct andmeaningful comparison, Mesaba’s results of operations have been analyzed forthe three months ended September 30, 2006 and 2005 excluding thedeconsolidation of Mesaba from the Company’s consolidated financial statementsas of the Petition Date.  Mesaba’scondensed financial statements on a stand-alone basis are presented in Note 12of the accompanying Notes to Condensed Consolidated Financial Statements.

25

----

*Mesaba*

Mesaba’soperating statistics for the three months ended September 30 were as follows:
|                                                        | ** ** | **2006** | ** ** | **2005**  | ** ** | **% Change** | ** ** |
|--------------------------------------------------------|------------|----------|------------|-----------|------------|-------------------|------------|
| Passengers                                             |       | 910,144  |       | 1,500,221 |       | (39.3             | )%         |
| Available seat  miles (000s)                           |       | 376,788  |       | 760,568   |       | (50.5             | )%         |
| Revenue  passenger miles (000s)                        |       | 250,543  |       | 515,432   |       | (51.4             | )%         |
| Load Factor                                            |       | 66.5     | %          | 67.8      | %          | (1.9              | )%         |
| Block hours  flown                                     |       | 49,282   |       | 73,595    |       | (33.0             | )%         |
| Departures                                             |       | 36,477   |       | 53,190    |       | (31.4             | )%         |
| Revenue per ASM                                        |       | $        | 0.189      |      | $          | 0.144             |       | 31.3 | % |
| Cost per ASM                                           |       | $        | 0.205      |      | $          | 0.195             |       | 5.1 | % |
| Cost per ASM  (excluding impairment and other charges) |       | $        | 0.205      |      | $          | 0.150             |       | 36.7 | % |
| Aircraft in service  (average)                         |       | 61       |       | 98        |       | (37.8             | )%         |

 

Mesaba Operating Revenues

Total operating revenuesdecreased 35.1% in the second quarter of fiscal 2007 to $71.2 million from$109.7 million in the prior year quarter. The decrease was due primarily to a 22.2% reduction in Saab aircraftfrom 63 in the second quarter of fiscal 2006 to 49 in the second quarter offiscal 2007 and a 74% reduction in Avro aircraft from 35 in the second quarterof fiscal 2006 to nine at the end of the second quarter of fiscal 2007. Thesereductions were modestly offset by one CRJ aircraft in operation at the end ofthe second quarter of fiscal 2007. As a result of these fleet reductions, Saabavailable seat miles (“ASM”) and Avro revenue block hours were significantlylower quarter-over-quarter. These decreases in revenue drivers for the Saab andAvro fleets reduced revenue by $9.3 million and $28.9 million, respectively,quarter-over-quarter. These reductions were offset slightly by the increasedCRJ revenue of $2.1 million.  Groundhandling revenue also decreased by $1.6 million, or 18.5%, due to the reductionof Avro departures and Pinnacle CRJ departures in Minneapolis/St Paul and Detroit.

Mesaba Operating Expenses

Total operatingexpenses decreased 47.8% to $77.2 million in the first quarter of fiscal 2007from $148.0 million in the prior year quarter. The quarter over quarter decrease is primarily due to the $34.0 millionimpairment charge in September 2005. Excluding the impairment charge, expenses in the second quarter offiscal 2007 decreased 32.3% over the prior year quarter.  The cost per ASM increased 4.6% to 20.5 centsin the second quarter of fiscal 2007 from 19.5 cents in the prior yearquarter.  Excluding the impairmentcharge, the cost per ASM in the second quarter of fiscal 2007 increased 23.5%over the prior year quarter.  Thefollowing table compares components of operating cost per ASM for the threemonths ended September 30:
| ** **                     | ** ** | **Operating Expenses**      | ** ** | **Operating Cost Per ASM** | ** ** |
|--------------------------------|------------|----------------------------------|------------|-------------------------------------------|------------|
| ** **                     | ** ** | **Three Months Ended** | ** ** | ** **                                | ** ** | ** ** | ** ** | **Three Months Ended** | ** ** |
| ** **                     | ** ** | **September 30**            | ** ** | ** **                                | ** ** | ** ** | ** ** | **September 30** | ** ** |
| ** **                     | ** ** | **2006**                         | ** ** | **2005**                                  | ** ** | **$ Change** | ** ** | **% Change** | ** ** | **2006** | ** ** | **2005** | ** ** |
| Wages and  benefits            |       | $                                | 30,988     |                                      | $          | 38,264 |   | $ | (7,276 | ) | (19.0 | )% | 8.2 | ¢ | 5.0 | ¢ |
| Aircraft  maintenance          |       | 14,083                           |       | 22,032                                    |       | (7,949 | ) | (36.1 | )% | 3.7 |   | 2.9 |   |
| Aircraft rents                 |       | 13,974                           |       | 25,395                                    |       | (11,421 | ) | (45.0 | )% | 3.7 |   | 3.3 |   |
| Landing fees                   |       | 1,977                            |       | 2,495                                     |       | (518 | ) | (20.8 | )% | 0.5 |   | 0.3 |   |
| Insurance and  taxes           |       | 1,580                            |       | 1,681                                     |       | (101 | ) | (6.0 | )% | 0.4 |   | 0.2 |   |
| Depreciation and  amortization |       | 2,429                            |       | 3,276                                     |       | (847 | ) | (25.9 | )% | 0.6 |   | 0.4 |   |
| Administrative  and other      |       | 12,178                           |       | 20,876                                    |       | (8,698 | ) | (41.7 | )% | 3.4 |   | 4.5 |   |
| Impairment and  other charges  |       | —                           |       | 34,006                                    |       | (34,006 | ) | (100.0 | )% | 0.0 |   | 2.9 |   |
|                           |       | $                                | 77,209     |                                      | $          | 148,025 |   | $ | (70,816 | ) | (47.8 | )% | 20.5 | ¢ | 19.5 | ¢ |

 

Wages and benefitswere lower primarily due to necessary reductions in personnel levels toaccommodate reduced fleet levels. Pilots’ wages decreased 22.0%, or $2.5million; flight attendants’ wages decreased 32.9%, or $1.0 million; mechanics’wages decreased 20.0%, or $0.6 million; and all other wages decreased 17.7%, or$2.3 million. Taxes and benefits decreased proportionately with wages.

26

----

Aircraftmaintenance, excluding wages and benefits, decreased 36.1% to $14.1 million inthe second quarter of fiscal 2007 from $22.0 million in the prior yearquarter.  The reduction in maintenanceexpense was primarily driven by a $7.8 million decrease in Avro maintenance dueto the reduced fleet.

Aircraft rents decreased45.0% to $14.0 million in the second quarter of fiscal 2007 from $25.4 millionin the prior year quarter.  This decreasewas due to the reduction in the number of Saab and Avro aircraftquarter-over-quarter. These reductions were slightly offset by the CRJ aircraftrent.

Landing feesdecreased 20.8% to $2.0 million in second quarter of fiscal 2007 from $2.5million in the prior year quarter due to increased rates offset by reduced Saabflying.

Insurance and taxesdecreased 6.0% to $1.6 million in the second quarter of fiscal 2007 from $1.7million in the prior year quarter. The reduction in insurance and taxes was dueto lower hull insurance on the reduced fleet and a reduced number ofpassengers, offset by a decrease in aircraft property tax reimbursement from Northwest.

Depreciation andamortization decreased 25.9% to $2.4 million in the second quarter of fiscal2007 compared to $3.3 million in the prior year quarter.  The reduced depreciation expense is due toreduced capital spending over the last several years and reduced purchases ofrotable and repairable parts due to the reduced fleet size.

Administrative and otherexpenses decreased 41.7% to $12.2 million in the second quarter of fiscal 2007from $20.9 million in the prior year. Administrative and other expenses wasdown primarily due to reductions in outside services and aircraft trainingexpense due to the CRJ certification in fiscal 2006, strike contingency costsdue to the Northwest mechanics’ strike in fiscal 2006 and the elimination ofmanagement fees paid to MAIR in fiscal 2007.

Impairment and othercharges of $34.0 million were recorded in the second quarter of fiscal 2006 asa result of the $31.9 million charge to establish a reserve on the unsecuredprepetition receivables due from Northwest (net of certain offsettingliabilities) and the $2.1 million write-off of the warrants related to theprior airline services agreements.

Reorganization itemstotaled $3.2 million in the second fiscal quarter of 2007, which included $1.6million of legal fees, $1.1 million of professional fees, outside consultantcosts and other, $0.6 million of fixed asset write-offs and a $0.1 millionreduction to the maintenance accrual.

Mesaba incurred fuelexpenditures of $4.0 million, or 1.1 cents per ASM, in the second quarter offiscal 2007, compared to $4.8 million or 0.6 cents per ASM in the first quarterof fiscal 2006.  In accordance with EITFIssue No. 99-19, *Reporting Revenue Gross as a Principal vs.Net as an Agent*, these costs are classified as a reduction fromrevenue in Mesaba’s condensed statements of operations.  Aircraft fuel decreased due to decreasedflying.   Mesaba’s actual cost of fuelfor the Saab aircraft, including taxes and pumping fees, was 83.5 cents pergallon for both periods.  Mesaba’s actualcost of fuel for the CRJs, including taxes and pumping fees, was 70 cents pergallon for both periods.  These pricesare fixed under the terms of the ASA, thereby insulating Mesaba fromfluctuations in the market price of fuel. Northwest is responsible for all fuel for Mesaba’s Avro operations.

27

----

*Big Sky*

Big Sky’soperating statistics for the three months ended September 30 were as follows:
|                                                        | ** ** | **2006** | ** ** | **2005** | ** ** | **% Change** | ** ** |
|--------------------------------------------------------|------------|----------|------------|----------|------------|-------------------|------------|
| Passengers                                             |       | 30,699   |       | 30,328   |       | 1.2               | %          |
| Available seat  miles (000s)                           |       | 22,156   |       | 20,172   |       | 9.8               | %          |
| Revenue  passenger miles (000s)                        |       | 9,081    |       | 8,714    |       | 4.2               | %          |
| Load Factor                                            |       | 41.0     | %          | 43.2     | %          | (5.1              | )%         |
| Block hours  flown                                     |       | 5,609    |       | 5,331    |       | 5.2               | %          |
| Departures                                             |       | 5,717    |       | 5,672    |       | 0.8               | %          |
| Revenue per ASM                                        |       | $        | 0.279      |     | $          | 0.256             |       | 9.0 | % |
| Cost per ASM                                           |       | $        | 0.318      |     | $          | 0.434             |       | (26.7 | )% |
| Cost per ASM  (excluding impairment and other charges) |       | $        | 0.318      |     | $          | 0.310             |       | 2.6 | % |
| Aircraft in service  (average)                         |       | 10       |       | 10       |       | 0.0               | %          |

 

Big Sky Operating Revenues

Total operating revenuesincreased 19.8% to $6.2 million in the second quarter of fiscal 2007 from $5.2million in the prior year quarter as a result of a 5.2% increase in block hoursflown, a 21.8% increase in average fares and a 3.1% increase in EAS subsidies.

Fiscal 2007 included newservice to Bozeman, Montana, Jackson Hole, Wyoming, Pocatello, Idaho and WallaWalla, Washington.  The additional EASsubsidy revenue is the result of a contract renewal for seven locations inMontana at higher rates per departure. This was offset by the discontinuation of EAS funded service to MosesLake, Washington effective September 3, 2006.

Big Sky Operating Expenses

Total operating expensesin the second quarter of fiscal 2007 decreased 19.6% to $7.0 million from $8.8million in the prior year.  Thequarter-over-quarter decrease is due to the $2.5 million goodwill impairmentcharge in the second quarter of fiscal 2006. Excluding the impairment charge, second quarter of fiscal 2007 expensesincreased 12.6% over the prior year quarter. The following table compares components of the operating cost per ASMfor the three months ended September 30:
| ** **                     | ** ** | **Operating Expenses**      | ** ** | **Operating Cost Per ASM** | ** ** |
|--------------------------------|------------|----------------------------------|------------|-------------------------------------------|------------|
| ** **                     | ** ** | **Three Months Ended** | ** ** | ** **                                | ** ** | ** ** | ** ** | **Three Months Ended** | ** ** |
| ** **                     | ** ** | **September 30**            | ** ** | ** **                                | ** ** | ** ** | ** ** | **September 30** | ** ** |
| ** **                     | ** ** | **2006**                         | ** ** | **2005**                                  | ** ** | **$ Change** | ** ** | **% Change** | ** ** | **2006** | ** ** | **2005** | ** ** |
| Wages and  benefits            |       | $                                | 2,280      |                                      | $          | 1,775 |   | $ | 505 |   | 28.5 | % | 10.3 | ¢ | 8.8 | ¢ |
| Aircraft fuel                  |       | 1,516                            |       | 1,254                                     |       | 262 |   | 20.9 | % | 6.8 |   | 6.2 |   |
| Aircraft  maintenance          |       | 1,009                            |       | 804                                       |       | 205 |   | 25.5 | % | 4.6 |   | 4 |   |
| Aircraft rents                 |       | 453                              |       | 570                                       |       | (117 | ) | (20.5 | )% | 2.0 |   | 2.8 |   |
| Landing fees                   |       | 92                               |       | 89                                        |       | 3 |   | 3.4 | % | 0.4 |   | 0.4 |   |
| Insurance and  taxes           |       | 108                              |       | 94                                        |       | 14 |   | 14.9 | % | 0.5 |   | 0.5 |   |
| Depreciation and  amortization |       | 176                              |       | 226                                       |       | (50 | ) | (22.1 | )% | 0.8 |   | 1.1 |   |
| Administrative  and other      |       | 1,411                            |       | 1,442                                     |       | (31 | ) | (2.1 | )% | 6.4 |   | 7.2 |   |
| Impairment and  other charges  |       | —                           |       | 2,503                                     |       | (2,503 | ) | (100.0 | )% | 0.0 |   | 12.4 |   |
|                           |       | $                                | 7,045      |                                      | $          | 8,757 |   | $ | (1,712 | ) | (19.6 | )% | 31.8 | ¢ | 43.4 | ¢ |

 

Wages and benefitsincreased $0.5 million or 28.5% as a result of headcount increases for newservice and contractual labor rate changes.

In the second quarter offiscal 2007, Big Sky experienced a 20.9% increase in fuel expense due to anincrease in the average price of jet fuel, from $1.96 per gallon for the secondquarter of fiscal 2006 to $2.35 per gallon in the second quarter of fiscal2007.

28

----

Aircraft maintenance rose$0.2 million or 25.5% due to heavy checks and fuel tank corrosion repairs inthe second quarter of fiscal 2007.

The elimination of Metroaircraft resulted in a decrease in aircraft rents and depreciation expense.

*MAIR*

MAIR Operating Expenses

Total operating expensesin the second quarter of fiscal 2007 increased to $2.6 million from $0.1million in the prior year quarter, primarily due to increased legal,professional and accounting fees of $0.9 million and increased insurance costsof $0.6 million. Operating expenses were lower in the second quarter of fiscal2006 because the Company recorded a reduction to stock based compensationexpense of $1.4 million due to the decline in the price of the Company’s commonstock.

*Consolidated Operating Loss*

Operating lossesfor the second quarter in fiscal 2007 decreased to $3.4 million from $40.2million in the prior year quarter.

*Consolidated Nonoperating Income*

Nonoperating income (net)increased to $1.2 million in the second quarter of fiscal 2007 from $1.1million in the prior year quarter.

*Consolidated Provision for Income Taxes*

MAIRrecorded a provision for income taxes of $0.3 million in the second quarter offiscal 2007 compared to an income tax benefit of $13.6 million in the prioryear quarter.  The tax provision in thesecond quarter resulted from finalizing the Company’s fiscal 2006 taxreturns.  The Company continues to recorda full valuation allowance against its deferred tax assets due to theuncertainty regarding the ultimate realization of those assets. Therefore, theCompany’s net loss in the second quarter of fiscal 2007 was not reduced by anytax benefit.

**Six Months Ended September 30, 2006 and 2005**

The Companyreported a consolidated net loss of $5.0 million or $0.24 per basic and dilutedshare for the six months ended September 30, 2006, compared to a net loss of$24.3 million or $1.18 per basic and diluted share for the six months endedSeptember 30, 2005.  To allow for a moredirect and meaningful comparison, Mesaba’s results of operations have beenanalyzed for the six months ended September 30, 2006 and 2005 excluding thedeconsolidation of Mesaba from the Company’s consolidated financial statementson the Petition Date.  Mesaba’s condensedfinancial statements on a stand-alone basis are presented in Note 12 of theaccompanying Notes to Condensed Consolidated Financial Statements.

29

----

*Mesaba*

Mesaba’soperating statistics for the six months ended September 30 were as follows:
|                                                        | ** ** | **2006**  | ** ** | **2005**  | ** ** | **% Change** | ** ** |
|--------------------------------------------------------|------------|-----------|------------|-----------|------------|-------------------|------------|
| Passengers                                             |       | 2,047,553 |       | 3,001,266 |       | (31.8             | )%         |
| Available seat  miles (000s)                           |       | 885,925   |       | 1,526,586 |       | (42.0             | )%         |
| Revenue  passenger miles (000s)                        |       | 616,470   |       | 1,030,241 |       | (40.2             | )%         |
| Load Factor                                            |       | 69.8      | %          | 67.5      | %          | 3.4               | %          |
| Block hours  flown                                     |       | 103,655   |       | 145,329   |       | (28.7             | )%         |
| Departures                                             |       | 76,417    |       | 106,227   |       | (28.1             | )%         |
| Revenue per ASM                                        |       | $         | 0.175      |      | $          | 0.144             |       | 21.5 | % |
| Cost per ASM                                           |       | $         | 0.184      |      | $          | 0.169             |       | 8.9 | % |
| Cost per ASM  (excluding impairment and other charges) |       | $         | 0.184      |      | $          | 0.147             |       | 25.2 | % |
| Aircraft in service  (average)                         |       | 66        |       | 98        |       | (32.7             | )%         |

 

Mesaba Operating Revenues

Total operating revenuesdecreased 29.7% in fiscal 2007 to $154.6 million from $219.9 million in theprior year period.  The decrease was dueprimarily to a 22.0% reduction in Saab aircraft from 63 aircraft in fiscal 2006to 49 in the current period and a 74% reduction in Avro aircraft from 35 infiscal 2006 to nine in the current period. These reductions were offset by oneCRJ aircraft in operation at the end of the second quarter fiscal 2007. As aresult of these fleet reductions, Saab ASMs and Avro revenue block hours weresignificantly lower for the first six months of fiscal 2007 versus the sameperiod in fiscal 2006.  These decreasesin revenue drivers for the Saab and Avro fleets reduced revenue by $18.8million and $49.0 million period-over-period, respectively. These reductionswere offset slightly by the increased CRJ revenue of $5.2 million.  Ground handling revenue also decreased by$2.4 million, or 15.4%, due to the reduction of Avro departures and PinnacleCRJ departures in Minneapolis/St Paul and Detroit.

Mesaba Operating Expenses

Total operatingexpenses decreased 37.2% to $162.3 million in fiscal 2007 from $258.3 millionin the prior year period.  The decreaseis partially due to the $34.0 million impairment charge in September 2005.  Excluding the impairment charge, expenses infiscal 2007 decreased over fiscal 2006 by 27.6%.  The cost per ASM increased 8.9% to 18.4 centsin fiscal 2007 from 16.9 cents in the prior year period.  Excluding the impairment charge, the cost perASM in fiscal 2007 increased over fiscal 2006 by 29.6%.  The following table compares components ofoperating cost per ASM for the six months ended September 30:
| ** **                     | ** ** | **Operating Expenses**    | ** ** | **Operating Cost Per ASM** | ** ** |
|--------------------------------|------------|--------------------------------|------------|-------------------------------------------|------------|
| ** **                     | ** ** | **Six Months Ended** | ** ** | ** **                                | ** ** | ** ** | ** ** | **Six Months Ended** | ** ** |
| ** **                     | ** ** | **September 30**          | ** ** | ** **                                | ** ** | ** ** | ** ** | **September 30** | ** ** |
| ** **                     | ** ** | **2006**                       | ** ** | **2005**                                  | ** ** | **$ Change** | ** ** | **% Change** | ** ** | **2006** | ** ** | **2005** | ** ** |
| Wages and  benefits            |       | $                              | 64,477     |                                      | $          | 75,555 |   | $ | (11,078 | ) | (14.7 | )% | 7.3 | ¢ | 4.9 | ¢ |
| Aircraft  maintenance          |       | 29,460                         |       | 44,085                                    |       | (14,625 | ) | (33.2 | )% | 3.3 |   | 2.9 |   |
| Aircraft rents                 |       | 31,379                         |       | 50,631                                    |       | (19,252 | ) | (38.0 | )% | 3.6 |   | 3.3 |   |
| Landing fees                   |       | 4,140                          |       | 5,042                                     |       | (902 | ) | (17.9 | )% | 0.5 |   | 0.3 |   |
| Insurance and  taxes           |       | 2,677                          |       | 3,348                                     |       | (671 | ) | (20.0 | )% | 0.3 |   | 0.2 |   |
| Depreciation and  amortization |       | 4,983                          |       | 6,854                                     |       | (1,871 | ) | (27.3 | )% | 0.6 |   | 0.4 |   |
| Administrative  and other      |       | 25,168                         |       | 38,777                                    |       | (13,609 | ) | (35.1 | )% | 2.8 |   | 2.2 |   |
| Impairment and  other charges  |       | —                         |       | 34,006                                    |       | (34,006 | ) | (100.0 | )% | 0.0 |   | 2.7 |   |
|                           |       | $                              | 162,284    |                                      | $          | 258,298 |   | $ | (96,014 | ) | (37.2 | )% | 18.4 | ¢ | 16.9 | ¢ |

 

Wages and benefitswere lower, primarily due to the necessary reductions in personnel levels toaccommodate the reduced fleet levels. Pilots’ wages decreased 19.4%, or $4.4million; flight attendants’ wages decreased 26.9%, or $1.6 million; mechanics’wages decreased 18.1%, or $1.0 million; and all other wages decreased 11.4%, or$2.9 million. Taxes and benefits decreased proportionately with wages.

Aircraftmaintenance, excluding wages and benefits, decreased 33.2% to $29.5 millionfrom $44.1 million in the prior year period. The reduction in maintenance expense was driven by a $14.3 milliondecrease in Avro maintenance due to the reduced fleet.

30

----

Aircraft rents decreased38.0% to $31.4 million from $50.6 million in the prior year period.  This decrease was due to the reduction in thenumber of Saab and Avro aircraft period-over-period. These reductions wereslightly offset by the CRJ aircraft rent.

Landing feesdecreased 17.9% to $4.1 million from $5.0 million period-over-period due toincreased rates offset by reduced Saab flying.

Insurance and taxesdecreased 20.0% to $2.7 million from $3.3 million period-over-period. Thereduction in insurance and taxes was due to lower hull insurance on the reducedfleet and a reduced number of passengers, offset by a decrease in aircraftproperty tax reimbursement from Northwest.

Depreciation andamortization decreased 27.3% to $5.0 million from $6.9 millionperiod-over-period.  The reduceddepreciation expense is due to reduced capital spending over the last severalyears and reduced purchases of rotable and repairable parts due to the reducedfleet size.

Administrative and otherexpenses decreased 35.1% to $25.2 million from $38.8 millionperiod-over-period. Administrative and other expenses was down primarily due toreductions in outside services and aircraft training expense due to the CRJcertification in fiscal 2006, strike contingency costs due to the Northwestmechanics’ strike in fiscal 2006 and the elimination of management fees paid toMAIR in fiscal 2007.

Impairment and othercharges of $34.0 million were recorded in the second quarter of fiscal 2006 asa result of the $31.9 million charge to establish a reserve on the unsecuredprepetition receivables due from Northwest (net of certain offsettingliabilities) and the $2.1 million write-off of the warrants related to theprior airline services agreements.

Reorganization itemstotaled $1.3 million in the first six months of fiscal 2007, which included$3.6 million of legal fees, $2.4 million of professional fees, outsideconsultant costs and other, and $1.6 million of fixed asset write-offs. Theseitems were offset by a reduced maintenance accrual of $5.3 million andsettlement of a damage claim of $1.0 million.

Mesaba incurred fuelexpenditures of $8.1 million, or 0.9 cents per ASM, in fiscal 2007, compared to$9.5 million or 0.6 cents per ASM in the prior year period.  In accordance with EITF Issue No. 99-19, *Reporting Revenue Gross as a Principal vs. Net as an Agent*,these costs are classified as a reduction from revenue in Mesaba’s condensedstatements of operations.  Aircraft fueldecreased due to decreased flying.  Mesaba’s actual cost of fuel for the Saab aircraft, including taxes andpumping fees, was 83.5 cents per gallon for both periods.  Mesaba’s actual cost of fuel for the CRJs,including taxes and pumping fees, was 70 cents per gallon for bothperiods.  These prices are fixed underthe terms of the ASA, thereby insulating Mesaba from fluctuations in the marketprice of fuel.  Northwest is responsiblefor all fuel for Mesaba’s Avro operations.

31

----

*Big Sky*

Big Sky’soperating statistics for the six months ended September 30 were as follows:
|                                                        | ** ** | **2006** | ** ** | **2005** | ** ** | **% Change** | ** ** |
|--------------------------------------------------------|------------|----------|------------|----------|------------|-------------------|------------|
| Passengers                                             |       | 60,268   |       | 56,555   |       | 6.6               | %          |
| Available seat  miles (000s)                           |       | 44,341   |       | 37,311   |       | 18.8              | %          |
| Revenue  passenger miles (000s)                        |       | 17,463   |       | 16,214   |       | 7.7               | %          |
| Load Factor                                            |       | 39.4     | %          | 43.5     | %          | (9.4              | )%         |
| Block hours  flown                                     |       | 11,189   |       | 9,932    |       | 12.7              | %          |
| Departures                                             |       | 11,682   |       | 10,705   |       | 9.1               | %          |
| Revenue per ASM                                        |       | $        | 0.276      |     | $          | 0.260             |       | 6.2 | % |
| Cost per ASM                                           |       | $        | 0.309      |     | $          | 0.378             |       | (18.3 | )% |
| Cost per ASM  (excluding impairment and other charges) |       | $        | 0.309      |     | $          | 0.314             |       | (1.6 | )% |
| Aircraft in service  (average)                         |       | 10       |       | 10       |       | 0.0               | %          |

 

Big Sky Operating Revenues

Total operating revenuesincreased 26.0% to $12.2 million in fiscal 2007 from $9.7 million in the prioryear period as a result of a 12.7% increase in block hours flown, a 25.7%increase in average fares and a 7.9% increase in EAS subsidies.

Fiscal 2007 included newservice to Bozeman, Montana, Jackson Hole, Wyoming, Pocatello, Idaho and Walla Walla,Washington.  The additional EAS subsidyrevenue is the result of a contract renewal for seven locations in Montana athigher rates per departure.  Theadditional EAS revenue was offset by the discontinuation of EAS funded serviceto Moses Lake, Washington effective September 3, 2006.

Big Sky Operating Expenses

Total operatingexpenses in fiscal 2007 decreased 2.9% to $13.7 million from $14.1 million inthe prior year period, due to the $2.5 million goodwill impairment chargerecorded in fiscal 2006. Excluding the impairment charge, expenses in fiscal2007 increased over fiscal 2006 by 18.1%, primarily due to increased flyingperiod-over-period and the associated costs of new service.  The following table compares components ofoperating cost per ASM for the six months ended September 30:
| ** **                     | ** ** | **Operating Expenses**    | ** ** | **Operating Cost Per ASM** | ** ** |
|--------------------------------|------------|--------------------------------|------------|-------------------------------------------|------------|
| ** **                     | ** ** | **Six Months Ended** | ** ** | ** **                                | ** ** | ** ** | ** ** | **Six Months Ended** | ** ** |
| ** **                     | ** ** | **September 30**          | ** ** | ** **                                | ** ** | ** ** | ** ** | **September 30** | ** ** |
| ** **                     | ** ** | **2006**                       | ** ** | **2005**                                  | ** ** | **$ Change** | ** ** | **% Change** | ** ** | **2006** | ** ** | **2005** | ** ** |
| Wages and  benefits            |       | $                              | 4,417      |                                      | $          | 3,347 |   | $ | 1,070 |   | 32.0 | % | 10.0 | ¢ | 9 | ¢ |
| Aircraft fuel                  |       | 2,967                          |       | 2,212                                     |       | 755 |   | 34.1 | % | 6.7 |   | 5.9 |   |
| Aircraft  maintenance          |       | 1,920                          |       | 1,522                                     |       | 398 |   | 26.1 | % | 4.3 |   | 4.1 |   |
| Aircraft rents                 |       | 906                            |       | 999                                       |       | (93 | ) | (9.3 | )% | 2.0 |   | 2.7 |   |
| Landing fees                   |       | 187                            |       | 162                                       |       | 25 |   | 15.4 | % | 0.4 |   | 0.4 |   |
| Insurance and  taxes           |       | 211                            |       | 172                                       |       | 39 |   | 22.7 | % | 0.5 |   | 0.5 |   |
| Depreciation and  amortization |       | 349                            |       | 446                                       |       | (97 | ) | (21.7 | )% | 0.8 |   | 1.2 |   |
| Administrative  and other      |       | 2,751                          |       | 2,752                                     |       | (1 | ) | (0.0 | )% | 6.2 |   | 7.3 |   |
| Impairment and  other charges  |       | —                         |       | 2,503                                     |       | (2,503 | ) | (100.0 | )% | 0.0 |   | 6.7 |   |
|                           |       | $                              | 13,708     |                                      | $          | 14,115 |   | $ | (407 | ) | (2.9 | )% | 30.9 | ¢ | 37.8 | ¢ |

 

Wages and benefitsincreased $1.1 million or 32.0%.  Newservice created additional staffing requirements in flight, maintenance andstations.  In addition, fiscal 2007 hasseen an increase in workers’ compensation and healthcare insurance costs.

In fiscal 2007, Big Skyexperienced a (32.0)% increase in fuel expense, partially due to an increase inthe average price of jet fuel, from $1.96 per gallon for fiscal 2006 to $2.24per gallon in fiscal 2007.

32

----

Aircraft maintenanceincreased $0.4 million, or 26.1%, period-over-period primarily due to heavychecks, fuel corrosion and propeller overhaul events.  Also, engine power-by-the-hour maintenanceexpense increased 12.7% in proportion with the block hour flying increase.

The elimination of Metroaircraft resulted in a decrease in aircraft rents and depreciation expense.

*MAIR*

MAIR Operating Expenses

Total operating expensesin fiscal 2007 increased to $5.8 million from $1.3 million in the prior yearperiod primarily due to increased legal, professional and accounting fees of$3.1 million, increased insurance costs of $1.2 million and $0.2 million inbank charges related to the letter of credit supporting MAIR’s guaranty ofMesaba’s obligations for the Cincinnati/Northern Kentucky International Airporthangar.  Operating expenses were lower infiscal 2006 because the Company recorded a reduction to stock basedcompensation expense of $1.4 million due to the decline in the price of theCompany’s common stock.

*Consolidated Operating Loss*

Operating lossesfor fiscal 2007 decreased to $7.2 million from $41.1 million in the prior yearperiod.

*Consolidated Nonoperating Income*

Nonoperating income (net)decreased to $2.5 million in fiscal 2007 from $3.9 million in the prior yearperiod.  The decrease was primarily dueto a $1.8 million arbitration settlement with an investment advisor in theprior year quarter, partially offset by increased interest income of $0.4million resulting from higher interest rates.

*Consolidated Provision for Income Taxes*

MAIRrecorded a provision for income taxes of $0.3 million for the six months endedSeptember 30, 2006 compared to an income tax benefit of $13.0 million for thesix months ended September 30, 2005.  Thetax provision for the six months ended September 30, 2006 resulted from theCompany finalizing its fiscal 2006 tax return. The Company continues to record a full valuation allowance against itsdeferred tax assets due to the uncertainty regarding the ultimate realizationof those assets. Therefore, the Company’s net loss in fiscal 2007 was notreduced by any tax benefit.

**Liquidityand Capital Resources**

*Overview*

Consolidated

Unrestricted cash, cashequivalents and investments decreased 14.8% to $94.3 million at September 30,2006 from $110.7 million at March 31, 2006, primarily due to recordingrestricted cash of $13.1 million for MAIR’s establishment of a letter of creditsupporting MAIR’s guaranty of Mesaba’s obligations for the hangar at theCincinnati/Northern Kentucky International Airport.  The Company’s working capital decreased to$69.1 million at September 30, 2006 compared to working capital of $85.9million at March 31, 2006.

Mesaba

Approximately $19.4million, or 85.8%, of Mesaba’s net accounts receivable balance as of September30, 2006 was due from Northwest.  The Northwest receivables consisted of$7.3 million in prepetition receivables as a result of offsetting prepetitionliabilities and $12.2 million in post petition amounts due fromNorthwest.  As of October 31, 2006, Mesaba had collected $11.7 million ofthe September 30, 2006 postpetition balance from Northwest.  Although Northwest has been payingpostpetition receivables due to Mesaba in the ordinary course of business sinceNorthwest’s bankruptcy, Mesaba’s business is sensitive to events and risksaffecting Northwest.  See previous bankruptcy discussions in Note 2 andrisks related to Northwest and Northwest’s bankruptcy in Part II, Item 1A “RiskFactors.”  Mesaba’s future liquidity will depend on the outcome of itslabor negotiations, obtaining debtor-in-possession financing and thereorganization plan it adopts, among other items.

33

----

*OperatingActivities*

Consolidated

Net cash used inoperating activities for the six months ended September 30, 2006 was $4.0million, primarily due to a net loss of $5.0 million, depreciation andamortization of $0.4 million, decreases in accounts receivable of $0.9 million,income tax receivable of $0.4 million and prepaid expenses of $0.5million.  These were offset by increasesof $0.4 million in inventories and $0.6 million in accounts payable and other.

Mesaba

Net cash used inoperating activities before reorganization items for the six months endedSeptember 30, 2006 was $1.5 million, primarily due to a net loss of $9.0million and a use of cash for accounts payable and other of $6.3 million.  The decreases in cash were offset bydepreciation and amortization of $5.0 million, decreases in accounts receivableof $6.5 million and inventories of $2.8 million.

*ReorganizationActivities*

Mesaba

Net cash used inreorganization activities for the six months ended September 30, 2006 was $6.0million, primarily for legal and professional fees incurred related to Mesaba’sbankruptcy and reorganization.

*InvestingActivities*

Consolidated

Net cash used ininvesting activities for the six months ended September 30, 2006 was $7.2million.  The primary use of cash was forMAIR’s establishment of a $13.1 million letter of credit supporting MAIR’sguaranty of Mesaba’s obligations for the hangar at the Cincinnati/NorthernKentucky International Airport and purchases of property and equipment of $0.2million.  These uses of cash were offsetby net sales of investments of $6.1 million.

Mesaba

Net cash used ininvesting activities for the six months ended September 30, 2006 was $5.0million.  The primary use of cash was forthe net purchases of investments of $3.6 million, purchases of property andequipment for $1.3 million and $0.1 million for the funding of an irrevocabletax trust.

*FinancingActivities*

Consolidated

Net cash provided byfinancing activities for the six months ended September 30, 2006 was $0.2million primarily for MAIR’s intercompany payable to Mesaba for an insurancesettlement received at MAIR.

Mesaba

Net cash used byfinancing activities for the six months ended September 30, 2006 was $0.5million, consisting of $0.2 million for Mesaba’s receivable from MAIR for aninsurance settlement received at MAIR and $0.3 million for a commitment fee forpotential debtor-in-possession financing.

*Outlook*

Consolidated

The Company hashistorically relied on cash and cash equivalents, investments and internallygenerated funds to support its working capital requirements.  Absent adverse factors outside the control ofthe Company, management believes current liquidity and funds from operationswill provide adequate resources for meeting the Company’s obligations throughthe end of fiscal 2007.

34

----

Mesaba

As Mesaba downsizes itsfleet to a Saab-only operation, its reorganization plan will requiresignificant reductions in labor and non-labor expenses.  Mesaba has also received a commitment fromMarathon to provide debtor-in-possession financing; however, this commitment issubject to certain conditions, including Mesaba reaching a resolution with itslabor unions.  If Mesaba is unable tomeet the conditions to receive funds pursuant to its debtor-in-possessionfinancing or is otherwise unable to generate sufficient cash for itsreorganization during the third quarter of fiscal 2007, Mesaba could be forcedinto liquidation.

**CRITICALACCOUNTING POLICIES AND ESTIMATES**

The preparation of theCompany’s consolidated financial statements and Mesaba’s stand-alone condensedfinancial statements in conformity with generally accepted accountingprinciples requires the use of estimates, judgments and assumptions that affectthe reported amounts of assets and liabilities as of the date of the condensedconsolidated financial statements, revenues and expenses during the reportingperiod and related disclosures of contingent assets and liabilities in thecondensed consolidated financial statements and the accompanying notes.  The SEC has defined a company’s most criticalaccounting policies as the ones that are most important to the portrayal of thecompany’s financial condition and results, and which require the company tomake its most difficult and subjective judgments, often as a result of the needto make estimates of matters that are inherently uncertain.  Based on this definition, the Company and itssubsidiaries have identified their critical accounting policies to includethose discussed in the following paragraphs. The Company and its subsidiaries also have other key accounting policiesthat involve the use of estimates, judgments and assumptions.

Mesaba’scondensed financial statements have been prepared in accordance with SOP 90-7,and on a going concern basis, which contemplates continuity of operations,realization of assets and liquidation of post-petition liabilities in theordinary course of business.  In accordance with SOP 90-7, the financialstatements for the periods presented distinguish transactions and events thatare directly associated with the reorganization from the ongoing operations ofthe Company.  While operating as a debtor-in-possession under the protectionof Chapter 11 of the Bankruptcy Code, in some cases, Mesaba may sell orotherwise dispose of assets, or liquidate and settle liabilities, for amountsother than those reflected in the condensed financial statements, subject tothe approval of the Bankruptcy Court or otherwise as permitted in the ordinarycourse of business.  Further, a plan of reorganization could materiallychange the amounts and classifications in the historical financial statements.

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

*Allowance for Doubtful Accounts*–Mesaba and Big Sky grant trade credit to certain approved customers andperform monthly analyses of outstanding trade receivables to assess thelikelihood of collection.  For balanceswhere Mesaba and Big Sky do not expect full payment of amounts owed, anallowance is recorded to adjust the trade receivable to management’s bestestimate of the amount that will ultimately be collected.

As discussed in Note 2,there is a significant amount of uncertainty surrounding the Northwest andMesaba bankruptcy processes, which may include negotiations with Northwestregarding Mesaba’s ASA.  As such, it isreasonably likely that the prepetition amounts Mesaba ultimately collects willbe different, potentially by a material amount, than Mesaba’s currentestimate.  In future periods, Mesaba willappropriately revise its estimate of recoverable amounts as it becomes aware ofnew information.

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

As discussed in Note 2,there is a significant amount of uncertainty surrounding Northwest’s fleetplan.  As such, it is reasonably likelythat Mesaba will alter the estimated useful lives on the aircraft that are tobe returned and 

35

----

accelerate depreciationor impairment charges accordingly.  Infuture periods, Mesaba will appropriately revise its estimates as it becomesaware of new information.

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

As discussed in Note 2,Mesaba’s Saab fleet has been reduced, and its Avro fleet will be eliminated byDecember 31, 2006.  As a result, Mesabamay require additional excess inventory reserves.  In future periods, Mesaba will appropriatelyrevise its estimates as it becomes aware of new information.

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

As discussed in Note 2,there is a significant amount of uncertainty surrounding Northwest’s fleetplan.  As a general rule, Mesaba altersmaintenance accruals on aircraft that are to be returned and reversespreviously established reserves once the aircraft are no longer inservice.  Due to Northwest’s and Mesaba’s bankruptcy proceedings, Mesabahas reversed maintenance accruals on the Avro fleet.  In future periods, Mesaba will appropriatelyrevise its maintenance estimates as it becomes aware of new information.

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

*Income Taxes* –Significant management judgment is required in determining the provisions forincome taxes, deferred tax assets and liabilities and any valuation allowancerecorded against net deferred tax assets. For financial reporting purposes, a valuation allowance is recorded tooffset deferred tax assets that, more likely than not, will not be realizedbased on the Company’s projected future taxable income, the timing of expiringnet operating losses and the Company’s tax planning strategies.  During the fourth quarter of fiscal 2006, theCompany recorded a full valuation allowance against its net deferred taxassets.  In the future, subsequentrevisions to the estimated net realizable value of these deferred tax assetscould cause the Company to reverse its current full valuation allowance on allor a portion of the deferred tax assets. This could cause the provision for income taxes to vary significantlyfrom period to period, although the Company’s cash payments would remainunaffected until the benefit of the net operating losses is completely utilizedor expires unused.

*Workers’ Compensation Insurance*– Mesaba and Big Sky estimate the final cost of an on-the-job injury at thetime of the injury to determine their workers’ compensation insurancereserves.  Mesaba and Big Sky use theservices of their respective insurance carriers and outside brokers to assistin determining the reserve levels. Injury severity, cost of care and the insurance contract affect thefinal estimate.  Management of Mesaba andBig Sky regularly review workers’ compensation activity with outsideconsultants for any changes in the workers’ compensation reserve.

*Health and Dental Insurance*– Mesaba estimates the amount of incurred but not reported health and dentalclaims to determine its health and dental insurance reserves.  Mesaba uses the service of its insurancecarriers and outside brokers to assist in determining the reserve levels.  Historical claims experience claims severityand cost of care affect the ultimate cost and ultimate reserves recorded.  Management of Mesaba regularly reviews healthand dental claims activity with outside consultants for any changes in thehealth and dental insurance reserve. MAIR and Big Sky purchase health and dental insurance and, therefore, donot make estimates for health and dental claims.

*Property Taxes* –Estimated property tax values and assessments are used to record property taxreserves for the various jurisdictions in which Mesaba and Big Skyoperate.  Aircraft and parts values,aircraft flight activity, ground 

36

----

equipment values and thelocation of personnel may affect the ultimate property tax obligation.  Management of Mesaba and Big Sky periodicallyreview the above items for any changes in the property tax reserves.

**NEWACCOUNTING PRONOUNCEMENTS**

In July 2006, the FASBissued FIN 48, which clarifies the accounting for uncertainty in taxpositions. FIN 48 requires that the Company recognize in its financialstatements, the impact of a tax position, if that position is more likely thannot of being sustained on audit, based on the technical merits of the position.The accounting provisions of FIN 48 will be effective for the Company beginningApril 1, 2007. The Company is in the process of determining what effect, ifany, the adoption of FIN 48 will have on its financial statements.

In September 2006, theFASB issued SFAS No. 157, to define fair value, establish a framework formeasuring fair value in accordance with generally accepted accountingprinciples and expand disclosures about fair value measurements. SFAS No. 157will be effective for the Company beginning April 1, 2008. The Company isassessing the impact the adoption of SFAS No. 157 will have on its financialstatements.

In September 2006, theFASB issued the FSP that reduces the number of acceptable methods of accountingfor planned major maintenance activities. Under the FSP, Mesaba would be requiredto change its method of accounting for some planned maintenance activities forcertain aircraft types.  The FSP will beeffective for the Company beginning April 1, 2007 and requires retrospectiveapplication to all financial statements presented unless doing so isimpractical.  The Company is assessingthe impact the adoption of the FSP will have on its financial position andresults of operations.

In September 2006, theSEC issued SAB No. 108. SAB No. 108 provides guidance on how prior yearmisstatements should be taken into consideration when quantifying misstatementsin current year financial statements for purposes of determining whether thefinancial statements are materially misstated. SAB 108 is effective for annual financial statements covering the firstfiscal year ending after November 15, 2006, or with respect to the Company’sfiscal year ending March 31, 2007. The implementation of SAB No. 108 did nothave a material impact on the Company’s financial statements.

## **Item 3.  QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

The Company’sprincipal market risks are the availability and price of jet fuel and changesin interest rates.

*Aircraft Fuel*

TheCompany believes that Mesaba’s arrangements for fuel with Northwest assure anadequate supply of fuel for current and future operations, provided thatNorthwest does not experience a supply shortage.  As a part of the ASA, Northwest bears theeconomic risk of fuel price fluctuations for Mesaba’s Saab and CRJ fuelrequirements, as the fuel price for Mesaba’s Saabs is fixed at 83.5 cents pergallon, and the fuel for Mesaba’s CRJ is fixed at 70 cents per gallon.  The ASA also requires Northwest to provideall fuel at its expense to support Mesaba’s Avro operations.  Big Sky is subject to fluctuations in fuelprices.  A hypothetical 10% increase inthe March 31, 2006 cost per gallon of fuel, assuming projected fiscal 2007usage at Big Sky, would result in an increase to aircraft fuel expense ofapproximately $0.6 million in fiscal 2007.  As of September 30, 2006, BigSky had no fuel hedges in place for fiscal 2007.

*InterestRates*

TheCompany’s earnings are affected by changes in interest rates due to the impactthose changes have on its interest income from cash equivalents and short- andlong-term investments.  If interest rates were to decrease by 100 basispoints for a full year, based on the Company’s cash equivalents, short-term andlong-term investments balance at September 30, 2006, the Company’s interestincome would decrease by approximately $1.1 million.

TheCompany does not purchase or hold any derivative financial instruments fortrading or speculative purposes.

**ITEM4.  CONTROLS AND PROCEDURES**

*Evaluationof Disclosure Controls Procedures*

The Company’s managementdoes not expect that its disclosure controls and procedures will prevent allerrors and all fraud. A control system, no matter how well conceived andoperated, can provide only reasonable, not absolute, assurance that theobjectives of the control system are met. Because of the inherent limitationsin all control systems, no evaluation of controls can provide absoluteassurance that all control issues and instances of fraud, if any, within theCompany have been detected. The design of any system of controls also is basedin part upon certain assumptions about the likelihood of future events, andthere can be no assurance that any design will succeed in achieving its statedgoals under all potential future conditions; over time, control may becomeinadequate because of 

37

----

changes in conditions, orthe degree of compliance with the policies or procedures may deteriorate.Because of the inherent limitations in a cost-effective control system,misstatements due to error or fraud may occur and not be detected.

As of September 30, 2006,the Company conducted an evaluation under the supervision and with theparticipation of the Company’s management, including the Company’s ChiefExecutive Officer and Chief Financial Officer, regarding the effectiveness ofthe design and operation of the Company’s disclosure controls and procedures(as that term is defined in Rules 13a-15(e) and 15d-15(e) underthe Securities Exchange Act of 1934, as amended).  Based upon thatevaluation, the Chief Executive Officer and Chief Financial Officer concludedthat the Company’s disclosure controls and procedures were effective as of thedate of such evaluation.

*Changesin Internal Controls*

During the quarter endedSeptember 30, 2006, there were no changes in internal controls over financialreporting that had a material effect on internal control over financialreporting or were reasonably likely to have a material effect on internalcontrol over financial reporting.

# **PART II.OTHER INFORMATION**

## **ITEM 1.  LEGALPROCEEDINGS**

*Mesaba Bankruptcy*

On the Petition Date,Mesaba filed a voluntary petition for relief under Chapter 11 of the UnitedStates Bankruptcy Code with the United States Bankruptcy Court for the Districtof Minnesota.  The Bankruptcy Court isadministering Mesaba’s case under the caption “In re Mesaba Aviation, Inc., dbaMesaba Airlines, Case No. 05/39258(GFK).” Mesaba continues to operate its business and manage its property as adebtor-in-possession pursuant to the Bankruptcy Code.  As a result of the Chapter 11 filing,attempts to collect, secure or enforce remedies with respect to prepetitionclaims against Mesaba are subject to the automatic stay provisions of Section 362(a)of the Bankruptcy Code, including the Mesaba litigation described below.

*Saab Leasing Litigation*

In 2002, Saab Leasingfiled a declaratory judgment action against Mesaba relating to 20 340A aircraftleased by Mesaba.  In 2003, the District Court declared that the termsheet relating to the leases for the 340A aircraft was a binding preliminaryagreement requiring Mesaba to negotiate in good faith toward the execution oflong-term agreements for each of the 340A aircraft.  Although Mesabaappealed this ruling, while the appeal was pending, Saab Leasing (relying onthe District Court’s declaratory judgment ruling) filed a separate action inthe District Court alleging approximately $35 million in damages for past dueand future aircraft lease obligations.  While the damages action waspending, the U.S. Court of Appeals for the Eighth Circuit affirmed the DistrictCourt’s declaratory judgment ruling.  On July 6, 2006, the District Courtin the damages action granted Mesaba’s motion for partial summary judgment,ruling that Saab Leasing is not eligible to receive damages for the majority ofits claims against Mesaba.  Because thepotential damages for the remaining claim against Mesaba are not significant,Mesaba has not established any accrual with regard to this litigation withinits condensed financial statements.

*Creditors’ Committee Litigation*

Pursuantto the Bankruptcy Code, Mesaba’s Creditors’ Committee initiated aninvestigation of transactions between MAIR and Mesaba, including the payment ofdividends and management services fees from Mesaba to MAIR.  In response to this investigation, and to endpublic speculation regarding the dividends and payments, MAIR filed a complaintwith the Bankruptcy Court requesting a declaratory judgment that the dividendsand fees paid by Mesaba to MAIR were wholly proper and appropriate underlaw.  In its complaint, MAIR assertedfacts to demonstrate that each payment and dividend MAIR received from Mesabawas appropriate under applicable law, occurred in the ordinary course of Mesaba’sbusiness, that Mesaba was solvent at the time it made each payment anddividend, and that Mesaba remained solvent and able to pay its obligationsafter each payment or dividend to MAIR. On October 11, 2006, Mesaba’s Creditors’ Committee filed an answer andcounterclaim against MAIR, alleging that certain payments from Mesaba to MAIRwere fraudulent under Minnesota law and federal bankruptcy law.  The Creditors’ Committee’s counterclaimasserted approximately $16 million in damages. Additionally, the Creditors’ Committee challenged MAIR’s proof of claimfiled in Mesaba’s bankruptcy proceedings and requested that it be disallowed orsubordinated.

38

----

*Other Litigation Matters*

Mesaba and Big Sky arealso defendants in various lawsuits arising in the ordinary course of business.While the outcome of these lawsuits and proceedings cannot be predicted withcertainty, it is the opinion of Mesaba’s and Big Sky’s management, based oncurrent information and legal advice, that the ultimate disposition of thesesuits will not have a material adverse effect on the separate financialstatements of Mesaba or Big Sky or the consolidated financial statements of theCompany as a whole.  Additionally, anylawsuit filed against Mesaba prior to the Petition Date is subject to theautomatic stay.  If and when these casesproceed, the amount of any damages award to the plaintiffs would be deemedunsecured prepetition claims against Mesaba.

## **ITEM 1A.  RISK FACTORS**

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

**RisksRelated to Mesaba’s Bankruptcy**

*Mesaba’ssuccessful operation during bankruptcy and its successful emergence frombankruptcy will depend on Mesaba’s relationship with its Creditors’ Committee.*

The United States Trusteefor the District of Minnesota has appointed a Creditors’ Committee in Mesaba’sbankruptcy case.  The Creditors’Committee and its legal representatives have a right to be heard on all mattersthat come before the Bankruptcy Court concerning Mesaba’s reorganization.  There can be no assurance that the Creditors’Committee will support Mesaba’s positions or its plan of reorganization, andany disagreements between the Creditors’ Committee and Mesaba could protractthe Chapter 11 process, hinder Mesaba’s ability to operate during the Chapter11 process and delay Mesaba’s emergence from Chapter 11.

*If Mesabais unable to obtain debtor-in-possession financing, it may be unable to emergefrom bankruptcy.*

Mesaba has received acommitment from Marathon to provide $24 million of debtor-in-possessionfinancing.  In September 2006, theBankruptcy Court approved the debtor-in-possession financing to Mesaba.  However, the disbursement of the funds toMesaba is contingent upon certain occurrences, including Mesaba reaching aresolution with its labor unions.  Mesabahas reached tentative agreements with its pilots, flight attendants andmechanics, but there is no guarantee that these unions will ratify thetentative agreements.  If Mesaba isunable to meet all of the lender’s contingencies, Mesaba will not be able todraw on the financing.  In such event,Mesaba could run out of cash and be forced into liquidation.

*Mesabamay need exit financing to emerge from bankruptcy, and there is no assuranceMesaba can obtain exit financing.*

The terms of thedebtor-in-possession financing offered to Mesaba by Marathon require suchfinancing to be repaid upon Mesaba’s exit from bankruptcy.  Accordingly, Mesaba will need to provide forthe repayment of its debtor-in-possession financing through a source of exitfinancing or through some other means. There is no assurance that such exit financing will be available toMesaba upon its exit from bankruptcy or that Mesaba will have the means torepay any debtor-in-possession financing without exit financing.

*If Mesabais unable to adopt a successful reorganization plan, it may be unable to emergefrom bankruptcy.*

In order for Mesaba toemerge from bankruptcy, the Bankruptcy Court must approve a reorganization planfor Mesaba.  The reorganization plan willbe subject to a vote by certain classes of creditors, including Mesaba’ssecured and unsecured creditors.  TheBankruptcy Court will generally not approve a reorganization plan unless allimpaired classes of creditors vote to accept the plan; however, Mesaba mayelect to invoke certain provisions of the Bankruptcy Code in order to obtainconfirmation of the plan over the vote of a dissenting class of creditors. In addition to the voting requirements for confirmation, Mesaba willhave to satisfy other provisions of the Bankruptcy Code in order to confirm itsreorganization plan, including showing that the plan is feasible.  If Mesaba is unable to meet theseconfirmation requirements, it may be unable to emerge from bankruptcy.

39

----

*If MAIRis unable to find an alternate sublessee for Mesaba’s Cincinnati/NorthernKentucky Airport facility, MAIR may incur additional expense related to thebonds associated with the initial financing of the facility.*

Mesaba currently leases afacility at the Cincinnati/Northern Kentucky International Airport, but vacatedthe facility and ceased making the required lease payments on it in November2005.  MAIR unconditionally guaranteedfull and prompt payment of the ground lease and the bonds associated with theinitial financing of the facility.  Inaccordance with this guaranty, MAIR has made the required bond and ground leasepayments due since November 2005.  InApril 2006, in exchange for the bondholders forbearing acceleration of thebonds, MAIR delivered a $13.1 million letter of credit to the bondholders toassure payment of the bonds.  As of September30, 2006, MAIR recorded a $4.0 million liability with respect to the lease andguaranty, which assumed that the facility would remain vacant until March 31,2008, during which time MAIR would continue to make the bond and leasepayments, and that thereafter MAIR would be able to sublease the facility at a20% discount.  If MAIR is unable to findan alternate sublessee for the facility, MAIR may be required to record anadditional expense.

*Anycourt-approved reorganization by Mesaba could result in MAIR losing all or aportion of its equity in Mesaba*.

In general, the absolutepriority rule in the Bankruptcy Code requires that all of the debtor’screditors must be paid in full; otherwise the equity holders in the debtor arenot entitled to retain their equity interests, unless certain exceptions to theabsolute priority rule are met.  It willlikely be some time before Mesaba proposes a reorganization plan.  However, the outcome of any vote on Mesaba’sreorganization plan, as well as the terms and conditions of the plan itself,will determine whether MAIR risks losing some or all of its ownership in Mesabadue to the application of the absolute priority rule.

*Part ofMesaba’s bankruptcy strategy is to achieve labor cost savings, the threat ofwhich could cause slowdowns or other labor unrest by Mesaba’s labor unions orhamper Mesaba’s ability to emerge from bankruptcy.*

Mesaba has been engagedin negotiations with all of its unions to address the need for contracts thatare consistent with changing company and industry conditions.  To that end, Mesaba filed a motion with theBankruptcy Court requesting authorization to reject its labor contracts.  Following protracted court proceedings thatbegan at the end of fiscal 2006, on October 16, 2006, the Bankruptcy Courtauthorized Mesaba to rejects its CBAs. Additionally, on October 23, 2006, the Bankruptcy Court enjoined theunions from striking or engaging in other work stoppages if Mesaba imposes newcontract terms.  The unions have vowed toappeal the decision enjoining them from engaging in self help.  If the unions are successful on appeal, theywill have the right to strike and engage in other work stoppages, which wouldhave a material adverse effect on Mesaba’s business, financial condition andresults of operations.

Mesaba reached tentativeagreements with its pilots, flight attendants and mechanics in late October2006.  Each of these unions will now voteto ratify its respective agreement; the ratification process is expected toconclude by the end of November 2006. Assuming ratification occurs, the new pay rates would take effect onDecember 1, 2006.  There is no guaranteethat the unions will vote to ratify their agreements.  If Mesaba is not able to obtain suchratification and reach consensual deals with its unions, it may be unable toemerge from bankruptcy.

*MAIR isengaged in litigation with Mesaba’s Creditors’ Committee and a negative outcometo such litigation could have a material adverse effect on MAIR.*

Certain provisions of theBankruptcy Code allow a debtor-in-possession to recover transfers of cash orother property that were made prior to the debtor’s bankruptcy filing.  As a result, one of the traditional duties ofan official committee of unsecured creditors appointed in a bankruptcy case isto examine transactions between a debtor-in-possession and its affiliates.  In Mesaba’s bankruptcy case, the Creditors’Committee requested the right to review various documents concerningtransactions between MAIR and Mesaba, including the payment of dividends fromMesaba to MAIR, and to take depositions in order to understand thesetransactions.  In order to address anyquestions about the relationship between MAIR and Mesaba, MAIR entered into anagreed protective order with the Creditors’ Committee to voluntarily providedocuments explaining the relationship between MAIR and Mesaba and to providewitness testimony concerning the documents provided.   MAIR believes all dividends paid by Mesabawere appropriate and in compliance with the requirements of the MinnesotaBusiness Corporation Act.  To that end, 

40

----

MAIR filed a declaratoryjudgment action requesting an order that the dividends and other payments fromMesaba to MAIR were legal and appropriate. In response, the Creditors’ Committee filed a counterclaim alleging thatthe cash payments were fraudulent under Minnesota law and federal bankruptcylaw.  Any negative outcome to thislawsuit could have a material adverse effect on the financial condition andresults of operations of MAIR.

*Mesaba has experienced a highattrition rate in its accounting, finance and information technologydepartments, and if Mesaba is unable to replace individuals in these areas,Mesaba’s internal control over financial reporting may be adversely affected.*

Sincethe Petition Date, Mesaba has experienced resignations of key personnel in theaccounting and SEC reporting functions as well as the information technologyarea, which provides technical support to the finance department. Additionally, Mesaba has begun to implement company-wide staff reductions and areorganization of its operations.  Mesaba has added contract workers andconsultants as temporary replacements of the key personnel who have resigned,and Mesaba expects that it will be able to continue to engage consultants andother temporary replacements for these positions in the near future. However, if Mesaba is not able to successfully attract qualified permanentemployees to fill these key positions, Mesaba’s internal control over financialreporting could be adversely affected.

**RisksRelated to Mesaba’s Relationship with Northwest**

*Mesaba isdependent on its relationship with Northwest as its major customer, and theloss of this relationship would substantially harm the Company’s financialresults.*

During fiscal 2006,Northwest accounted for 94.8% of Mesaba’s operating revenues.  Additionally, Mesaba consistently carries areceivable due from Northwest between $11 million and $15 million that is notcollateralized.  Due to Northwest’smissed payments prior to and following its bankruptcy filing, Mesaba recordedan impairment charge to reflect the receivable due from Northwest, net ofcertain offsetting liabilities, through September 13, 2005, the date ofNorthwest’s bankruptcy filing.  Mesaba’sfuture success will depend upon Northwest’s ability to successfully restructurethrough bankruptcy.  Further, Northwest’sbankruptcy has effectively placed Mesaba’s contracts with Northwest at risk, asNorthwest has the option to assume or reject or renegotiate each of such contractsin connection with its bankruptcy proceedings.

Mesaba is currentlycontinuing to operate flights for Northwest, but the exact nature of Mesaba’sfuture relationship with Northwest may not be known until such time asNorthwest adopts its bankruptcy reorganization plan.  As of September 30, 2006, Northwest hadremoved 26 Avros, 14 Saabs and one CRJ from Mesaba’s fleet.  In January 2006, Northwest advised Mesabathat the remaining Avros operated by Mesaba will be removed by the end ofDecember 2006.  Finally, Northwest issueda request for proposal for flying up to 126 CRJs and notified Mesaba that if itis not awarded any additional CRJs, Northwest will remove the remaining CRJoperated by Mesaba.  Mesaba intends tocompete to operate the additional CRJs. However, Mesaba also expects that its competitors, many with greaterfinancial resources, will also seek to operate such aircraft.    As of September 30, 2006, Mesaba was operatingnine Avros, 49 Saabs and one CRJ pursuant to the ASA.  If Northwest rejects the ASA or negotiates anew ASA (and such renegotiation does not include a waiver by Mesaba of itsclaims against Northwest), the prepetition amounts owed to Mesaba would remainan unsecured claim, and Mesaba would likely receive only a small percentage ofthe amounts owed to it, and even then would only receive such amounts after aplan of reorganization is approved by Northwest’s bankruptcy court.

*Northwesthas not guaranteed that it will grow Mesaba’s regional fleet, and Northwestcould opt to operate new regional aircraft with its own new subsidiary orutilize other regional airlines.*

With a few exceptions,the ASA does not prohibit Northwest from contracting with other regionalairlines to provide the same services that Mesaba currently provides.  Northwest currently has an airline servicesagreement with Pinnacle, and Pinnacle serves many of the same cities asMesaba.  Northwest has issued a requestfor proposal for the operation of up to 126 CRJs (the total number of CRJs thatwere operated by Mesaba and Pinnacle combined), and Northwest’s subsidiary,Compass, or any other regional airlines, could ultimately operate regionalaircraft for Northwest.  Additionally,subject to its bankruptcy court’s approval, Northwest has placed orders withboth Bombardier and Embraer for 70-seat regional jets, with delivery beginningin 2007.  As Northwest determines its 

41

----

post-bankruptcy fleetplan, it could choose to expand its agreement with Pinnacle in competition withMesaba, contract with other regional airlines or replace one or both of itscurrent regional airline partners with Compass.

**RisksRelated to the Company’s Business and Operation**

*Mesaba’sand Big Sky’s success is dependent on their ability to obtain all necessaryaircraft, engines, parts and related maintenance and support from variousaircraft manufacturers and vendors.*

Mesaba and Big Sky aredependent on various aircraft manufacturers and other vendors to providesufficient parts and related maintenance and support services on a timelybasis.  Additionally, Mesaba and Big Skyrely on various engine manufacturers for parts, repair and overhaul servicesand other types of support services. Mesaba’s bankruptcy and nonpayment for prepetition goods and serviceshas adversely affected its relationship with certain vendors.  The failure of aircraft or enginemanufacturers and other vendors to provide parts or related services on atimely, cost-effective basis could materially and adversely affect Mesaba’s orBig Sky’s business, financial condition and results of operations.

*BecauseMesaba is unable to pass along increased operating costs, Mesaba’s earningswill be negatively affected as its fleet continues to age.*

As Mesaba’s fleet ofaircraft age, the cost of maintaining the aircraft will likely increase.  Because many aircraft components are requiredto be replaced after a specified time, numbers of flight hours or take-off andlanding cycles, and because new aviation technology may require certain partsto be retrofitted, the cost to maintain aging aircraft will generally exceedthe cost to maintain newer aircraft.  Anymaterial increase in such costs will have a material adverse effect on Mesaba’sbusiness, financial condition and results of operations.

*If Mesabaloses certain of its ground handling business, Mesaba’s results of operationswould be materially affected.*

Mesaba performs variousground handling services for Northwest, Pinnacle and other airlines atMinneapolis, Detroit and certain other airport locations.  The ground handling business is highlycompetitive, and airlines are constantly reviewing their cost structures tolocate the most cost-effective ground handling providers.  Mesaba does not have long-term agreementswith Northwest or Pinnacle. If Northwest or Pinnacle terminate Mesaba’s groundhandling services, Mesaba’s financial results would be materially affected,both through a loss of revenue and increased transition expenses.

*Mesabaand Big Sky could incur significant costs if they experience difficultyfinding, training and retaining employees.*

Mesaba’s and Big Sky’sbusinesses are labor-intensive and require large numbers of pilots, flightattendants, maintenance technicians and other personnel.  The airline industry has from time to timeexperienced a shortage of qualified personnel, specifically pilots andmaintenance technicians.  In addition, asis common with most airline competitors, Mesaba and Big Sky have faced turnoverof their employees.  For example, Mesaba’sand Big Sky’s pilots and maintenance technicians, as well as Mesaba’s flightattendants, occasionally leave to work for larger airlines which generallyoffer higher salaries and more extensive benefit programs than regionalairlines are financially able to offer. In the event of a significant increase in the turnover of employees,Mesaba and Big Sky would incur significantly higher training costs than wouldotherwise be necessary.  Mesaba and BigSky cannot provide assurance that they will be able to recruit, train andretain the qualified employees they require to carry out their business plans.

*Mesabaand Big Sky could be adversely affected by the highly competitive nature of theairline industry.*

The airline industry ishighly competitive, and Northwest competes not only with other regionalcarriers, but also with low-cost airlines and major airlines on many of itsroutes, including the routes that Mesaba flies. Some of these competitors are significantly larger and possess greaterresources than Northwest.  Moreover, anynew entry in the markets Mesaba serves could lessen the economic benefitsNorthwest derives from servicing these markets. Finally, 

42

----

Big Sky also competeswith low-cost and regional carriers on its routes, and it faces the samecompetitive challenges described above.

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

In January 2004, MAIRentered into a letter agreement with Mesaba’s pilot union that may limit thetypes of aircraft Big Sky may fly and may place additional requirements on MAIRif it forms or acquires any other airline subsidiary.  These possiblelimitations were included in Mesaba’s negotiations with its pilots in Mesaba’sbankruptcy proceedings, and the Bankruptcy Court ruled that Mesaba cannot rejectthe letter agreement.  In light of this ruling, MAIR is currentlyassessing its alternatives with respect to the letter agreement.

*Mesaba’sand Big Sky’s compliance with various regulations governing the airlineindustry can be costly, and Mesaba and Big Sky could be harmed if they fail tocomply with such regulations.*

Airlines are subject toextensive regulatory and legal requirements that involve significant compliancecosts that can result in increased costs for passengers and the airline.  The Federal Aviation Administration, DOT andTransportation Security Administration periodically propose additional laws,regulations, taxes and airport fees and charges.  Such measures could have the effect ofraising ticket prices, reducing revenue, increasing costs or reducing demandfor air travel.  Mesaba and Big Skyexpect to continue incurring expenses to comply with existing and futureregulations.  Moreover, if either Mesabaor Big Sky fails to comply with applicable regulations, they may be subject tosanctions, including the following:

·                  warningletters;

·                  fines;

·                  injunctions;

·                  ordersrelating to grounding of aircraft, inspection of aircraft, installation of newsafety-related items and removal and replacement of certain aircraft parts; or

·                  criminalprosecutions.

*Futureterrorists attacks, other world events, general economic conditions and otherfactors beyond the Company’s control could substantially harm the Company.*

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

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

Mesaba’s and Big Sky’soperations are also subject to delays caused by factors beyond their control,including air traffic congestion at airports, adverse weather conditions andincreased security measures.  Such delaysfrustrate passengers, reduce aircraft utilization and increase costs, all ofwhich may affect profitability and harm the Company’s financial condition andresults of operations.

43

----

*Mesabaand Big Sky are increasingly dependent upon technology in their operation andany failure of such technology could adversely affect them.*

Mesaba and Big Sky havemade substantial investments in technology to manage their operations.  In particular, the systems operations controlcenters, which oversee daily flight operations, are dependent on a number oftechnology systems to operate effectively. These technology systems may be vulnerable to various sources ofinterruption due to events beyond Mesaba’s or Big Sky’s control, includingnatural disasters, terrorist attacks, computer viruses and hackers.  In addition, large-scale interruption intechnology on which Mesaba and Big Sky depend, such as power,telecommunications or the Internet, could substantially disrupt their operations.

*Anyairline accident in which Mesaba or Big Sky is involved could subject Mesaba orBig Sky to substantial liability and seriously harm the Company’s financialcondition and results of operations.*

An accident involvingMesaba or Big Sky aircraft could result in injuries and loss of life and,therefore, result in significant claims from injured persons and survivingrelatives.  An accident could also resultin substantial property damage, loss of aircraft from service and adversepublicity for the affected airline.  TheDOT requires airlines to carry liability insurance.  Although Mesaba and Big Sky believe theirliability insurance is in amounts and of the type generally consistent withindustry practice, substantial claims resulting from an accident in excess ofinsurance coverage would harm the Company’s business and financialresults.  Any resulting claims would alsobe costly to defend and could harm Mesaba’s or Big Sky’s reputation.  Moreover, any aircraft accident, even iffully insured or not directly involving Mesaba or Big Sky, could cause a publicperception that flying is less safe or reliable than other transportationalternatives, which could harm the Company’s financial condition and results ofoperations.

**RisksRelated to the Company’s Stock**

*Together,certain of the Company’s shareholders own or have the right to acquire asignificant portion of the Company’s stock and could ultimately controldecisions regarding the Company.*

Northwest owns 27.5% ofthe Company’s common stock.  Northwestalso owns a warrant to purchase an aggregate of 4,112,500 shares of the Company’scommon stock, subject to certain vesting restrictions related to the futuredelivery by Northwest of CRJ aircraft. It is possible that if Mesaba is awarded additional CRJ aircraft byNorthwest, Mesaba and Northwest may negotiate a new airline services agreement,and the Company and Northwest may then also renegotiate the terms of anywarrant that may be issued. Additionally, several other shareholders also own significant blocks ofthe Company’s common stock.  Because theparties described above currently own a large portion of the Company’s stock,they may be able to determine or significantly influence the outcome ofcorporate actions requiring shareholder approval.  As a result, these parties may be in aposition to control matters affecting the Company, including decisions as tothe Company’s direction and policies; future issuances of securities,incurrence of debt, amendments to the Company’s articles of incorporation andbylaws, payment of dividends on the Company’s common stock; and acquisitions,sales of the Company’s assets, mergers or similar transactions, includingtransactions involving a change of control. As a result, some investors may be unwilling to purchase the Company’scommon stock.  In addition, if the demandfor the Company’s common stock is reduced because of these shareholders’control of the Company, the price of the Company’s common stock could bematerially depressed.

*Futuresales of the Company’s common stock by its shareholders could depress the priceof the Company’s stock.*

Sales of a large numberof shares of the Company’s common stock or the availability of a large numberof shares for sale could adversely affect the market price of the Company’scommon stock.  As of September 30, 2006, theCompany had 20,591,840 shares of common stock outstanding.  Several of the Company’s shareholders ownsubstantial blocks of the Company’s common stock.  Additionally, along with the shares of stockit currently owns, Northwest could own an additional large block of the Company’scommon stock upon exercise of its warrant. In connection with the ASA, the Company entered into a registrationrights agreement to register the shares of stock owned by Northwest (includingthose shares underlying its warrant). The registration statement has not been filed, and will likely not befiled until a final resolution is reached with respect to the ASA.  Nevertheless, following any registration,future sales of those shares, or future sales of other large blocks of theCompany’s common stock that are already registered, could substantially depressthe Company’s stock price.

44

----

*Anyfuture exercise of the warrant by Northwest could substantially dilute theCompany’s common stock.*

As of September 30, 2006,Northwest held a warrant exercisable for an aggregate of 4,112,500 shares ofthe Company’s common stock at an exercise price of $8.74 per share.  To date, this warrant has not vested, and itwill not begin to vest until Northwest delivers a total of 15 CRJs toMesaba.  In such event, the Company andNorthwest may also renegotiate the terms of the warrant.  If and when the warrant does vest, holders ofthe Company’s common stock could experience substantial ownership dilution ifNorthwest elects to exercise the warrant.

*The Company’sstock price may continue to be volatile.*

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

·                  failureof the Company’s operating results to meet analysts’ or investors’ expectationsin any quarter;

·                  securitiesanalysts’ estimates;

·                  materialannouncements by the Company, Northwest or the Company’s, Mesaba’s or Big Sky’scompetitors;

·                  publicsales of a substantial number of shares of the Company’s common stock;

·                  increasedshort sales due to the uncertainty surrounding Mesaba’s bankruptcy, as well asany purchase to cover short positions;

·                  regulatoryactions; or

·                  general marketconditions.

*Anti-takeoverprovisions of the Company’s articles of incorporation and bylaws and ofMinnesota law could discourage, delay or prevent a change in control.*

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

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

**ITEM4.  SUBMISSION OF MATTERS TO A VOTE OFSECURITY HOLDERS**

On August 16,2006, the Company held its 2006 annual meeting of shareholders, at which PaulF. Foley, James A. Lee and Robert C. Pohlad were reelected as directors of theCompany to serve until 2009.  Theshareholders also ratified the appointment of Deloitte & Touche LLP toserve as the Company’s independent registered public accounting firm for thefiscal year ending March 31, 2007.  Mr.Foley received 18,830,962 votes for his reelection and 1,080,466 votes againsthis reelection; Mr. Lee received 18,857,869 votes for his reelection and1,053,559 votes against his reelection; Mr. Pohlad received 18,831,315 votesfor his reelection and 1,080,113 votes against his reelection.  There were 18,908,131 votes cast forratification of Deloitte & Touche LLP, 999,216 votes cast againstratification, 4,081 abstentions and no broker non-votes.

45

----

**ITEM6.  EXHIBITS**

| **Exhibit  Number** | ** ** | **Document Description**                                                                                          |
|---------------------|------------|-------------------------------------------------------------------------------------------------------------------|
|                |       |                                                                                                              |
| 31.1                |       | Chief Executive Officer Certification Pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002. Filed herewith. |
| 31.2                |       | Chief Financial Officer Certification Pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002. Filed herewith. |
| 32.1                |       | Certification Pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002. Filed herewith.                         |

 

46

----

**SIGNATURES**

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned, thereuntoduly authorized.
|                          | MAIR Holdings, Inc.                                                                                                              |
|--------------------------|----------------------------------------------------------------------------------------------------------------------------------|
|                     |                                                                                                                             |
|                     |                                                                                                                             |
| Dated: November  8, 2006 | By:                                                                                                                              | /s/ Robert E. Weil |
|                     | Robert E. Weil  Vice President, Chief Financial Officer and Treasurer  (principal financial officer and an authorized signatory) |

 

47

----