**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

**FORM 10-Q**

| **x****QUARTERLY REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934.**                                                                                        |                                 |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------------------------------------|
| ** **                                                                                                                                                                                 |                                 |
| **For the  quarterly period ended June 30, 2007**                                                                                                                                          |                                 |
| ** **                                                                                                                                                                                 |                                 |
| **OR**                                                                                                                                                                                     |                                 |
| ** **                                                                                                                                                                                 |                                 |
| **o****TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934**                                                                                        |                                 |
| ** **                                                                                                                                                                                 |                                 |
| **For the  transition period from               to              ** |                                 |
| ** **                                                                                                                                                                                 |                                 |
| **Commission  File No: 0-17895**                                                                                                                                                           |                                 |
| ** **                                                                                                                                                                                 |                                 |
| **MAIR  HOLDINGS, INC.**                                                                                                                                                                   |                                 |
|                                                                                                                                                                                       |                                 |
| 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 ý    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 Accelerated Filer o |   | Accelerated Filer ý |   | Non-Accelerated Filer o |
|---------------------------|--------|--------------------------|--------|-------------------------|

 

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

Yes o    No ý

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 June 30, 2007** |
|-----------------------------------------|--------|--------------------------------------|
| Common Stock,  par value $.01 per share |   | 15,068,267                           |

 

 

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# **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 I of the Company’s AnnualReport on Form 10-K, filed with the Securities and Exchange Commission on June19, 2007.

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 (the“SEC”).  Over time, actual results, performance or achievements willlikely differ from the anticipated results, performance or achievements thatare expressed or implied by the Company’s forward-looking statements, and suchdifferences might be significant and materially adverse to the Company’sshareholders.

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.

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**PARTI.  FINANCIAL INFORMATION**

**ITEM 1.  CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**MAIR HOLDINGS, INC. ANDSUBSIDIARIES**

**CONDENSED CONSOLIDATED BALANCESHEETS**

**(in thousands, except shareinformation)**

**(Unaudited)**
| ** **                                                                                                           | ** ** | **June 30** | ** ** | **March 31** | ** ** |
|----------------------------------------------------------------------------------------------------------------------|------------|------------------|------------|-------------------|------------|
| ** **                                                                                                           | ** ** | **2007**         | ** ** | **2007**          | ** ** |
| ASSETS                                                                                                               |       |             |       |              |       |
| CURRENT ASSETS:                                                                                                      |       |             |       |              |       |
| Cash and cash equivalents                                                                                            |       | $                | 31,002     |              | $          | 28,593 |   |
| Short-term investments                                                                                               |       | 13,455           |       | 26,068            |       |
| Accounts receivable, net of reserves of $573 and  $570                                                               |       | 3,405            |       | 2,882             |       |
| Receivable from liquidating trust of Mesaba  Aviation, Inc.                                                          |       | 9,429            |       | —            |       |
| Inventories, net                                                                                                     |       | 826              |       | 650               |       |
| Prepaid expenses and deposits                                                                                        |       | 4,517            |       | 4,592             |       |
| Restricted cash                                                                                                      |       | 681              |       | 554               |       |
| Total current assets                                                                                                 |       | 63,315           |       | 63,339            |       |
|                                                                                                                 |       |             |       |              |       |
| PROPERTY AND  EQUIPMENT:                                                                                             |       |             |       |              |       |
| Flight equipment                                                                                                     |       | 924              |       | 847               |       |
| Other property and equipment                                                                                         |       | 2,226            |       | 1,724             |       |
| Less: Accumulated depreciation and amortization                                                                      |       | (989             | )          | (891              | )          |
| Net property and equipment                                                                                           |       | 2,161            |       | 1,680             |       |
|                                                                                                                 |       |             |       |              |       |
| NONCURRENT  ASSETS:                                                                                                  |       |             |       |              |       |
| Long-term investments                                                                                                |       | 16,990           |       | 11,357            |       |
| Other intangible assets, net                                                                                         |       | 1,905            |       | 2,007             |       |
| Restricted cash                                                                                                      |       | 13,110           |       | 13,110            |       |
| Other assets, net                                                                                                    |       | 197              |       | 197               |       |
|                                                                                                                 |       | $                | 97,678     |              | $          | 91,690 |   |
|                                                                                                                 |       |             |       |              |       |
| LIABILITIES AND SHAREHOLDERS’ EQUITY                                                                            |       |             |       |              |       |
| CURRENT  LIABILITIES:                                                                                                |       |             |       |              |       |
| Intercompany payable to Mesaba Aviation, Inc.                                                                        |       | $                | —     |              | $          | 813 |   |
| Accounts payable                                                                                                     |       | 3,863            |       | 3,063             |       |
| Stock repurchase payable to Northwest Airlines, Inc.                                                                 |       | 11,071           |       | 10,905            |       |
| Accrued liabilities:                                                                                                 |       |             |       |              |       |
| Payroll                                                                                                              |       | 1,175            |       | 1,575             |       |
| Deferred income                                                                                                      |       | 679              |       | 737               |       |
| Other current liabilities                                                                                            |       | 5,562            |       | 6,310             |       |
| Total current liabilities                                                                                            |       | 22,350           |       | 23,403            |       |
|                                                                                                                 |       |             |       |              |       |
| OTHER NONCURRENT  LIABILITIES                                                                                        |       | 1,295            |       | 1,081             |       |
| Total liabilities                                                                                                    |       | 23,645           |       | 24,484            |       |
|                                                                                                                 |       |             |       |              |       |
| SHAREHOLDERS’  EQUITY:                                                                                          |       |             |       |              |       |
| Undesignated preferred stock, no specified par  value; 1,000,000 shares authorized, no shares issued and outstanding |       | —           |       | —            |       |
| Common stock, $.01 par value; 60,000,000 shares  authorized, 15,068,267 and 15,008,285 shares issued and outstanding |       | 150              |       | 150               |       |
| Paid-in capital                                                                                                      |       | 35,839           |       | 35,438            |       |
| Accumulated other comprehensive loss                                                                                 |       | (70              | )          | —            |       |
| Retained earnings                                                                                                    |       | 38,114           |       | 31,618            |       |
| Total shareholders’ equity                                                                                      |       | 74,033           |       | 67,206            |       |
|                                                                                                                 |       | $                | 97,678     |              | $          | 91,690 |   |

 

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

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**MAIR HOLDINGS, INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED STATEMENTSOF OPERATIONS**

**(in thousands, except share information)**

**(Unaudited)**
| ** **                                          | ** ** | **Three Months Ended** | ** ** |
|-----------------------------------------------------|------------|----------------------------------|------------|
| ** **                                          | ** ** | **June 30**                 | ** ** |
| ** **                                          | ** ** | **2007**                         | ** ** | **2006** | ** ** |
| OPERATING  REVENUES:                                |       |                             |       |   |   |
| Passenger                                           |       | $                                | 4,390      |   | $ | 3,680 |   |
| Freight and other                                   |       | 2,720                            |       | 2,363 |   |
| Total operating revenues                            |       | 7,110                            |       | 6,043 |   |
| OPERATING  EXPENSES:                                |       |                             |       |   |   |
| Wages and benefits                                  |       | 4,009                            |       | 2,472 |   |
| Aircraft fuel                                       |       | 1,888                            |       | 1,451 |   |
| Aircraft maintenance                                |       | 1,075                            |       | 911 |   |
| Aircraft rents                                      |       | 453                              |       | 453 |   |
| Landing fees                                        |       | 177                              |       | 95 |   |
| Insurance and taxes                                 |       | 328                              |       | 675 |   |
| Depreciation and amortization                       |       | 202                              |       | 178 |   |
| Administrative and other                            |       | 3,438                            |       | 3,602 |   |
| Total operating expenses                            |       | 11,570                           |       | 9,837 |   |
| Operating loss                                      |       | (4,460                           | )          | (3,794 | ) |
| NONOPERATING  INCOME (EXPENSE):                     |       |                             |       |   |   |
| Damage claim income from Mesaba Aviation, Inc.      |       | 9,429                            |       | — |   |
| Interest income and other                           |       | 1,653                            |       | 1,317 |   |
| Interest expense                                    |       | (193                             | )          | (17 | ) |
| Other nonoperating income, net                      |       | 10,889                           |       | 1,300 |   |
|                                                |       |                             |       |   |   |
| Income (loss) before benefit for income taxes       |       | 6,429                            |       | (2,494 | ) |
|                                                |       |                             |       |   |   |
| BENEFIT FOR  INCOME TAXES                           |       | 67                               |       | — |   |
|                                                |       |                             |       |   |   |
| NET INCOME  (LOSS)                                  |       | $                                | 6,496      |   | $ | (2,494 | ) |
|                                                |       |                             |       |   |   |
| NET INCOME  (LOSS) PER SHARE:                       |       |                             |       |   |   |
| Earnings (loss) per common share - basic            |       | $                                | 0.43       |   | $ | (0.12 | ) |
| Earnings (loss) earnings per common share - diluted |       | $                                | 0.43       |   | $ | (0.12 | ) |
|                                                |       |                             |       |   |   |
| WEIGHTED AVERAGE  SHARES OUTSTANDING:               |       |                             |       |   |   |
| Basic                                               |       | 15,016                           |       | 20,592 |   |
| Diluted                                             |       | 15,086                           |       | 20,592 |   |

 

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

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**MAIR HOLDINGS, INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED STATEMENTSOF CASH FLOWS**

**(in thousands)**

**(Unaudited)**
| ** **                                                                            | ** ** | **Three Months Ended** | ** ** |
|---------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                            | ** ** | **June 30**                 | ** ** |
| ** **                                                                            | ** ** | **2007**                         | ** ** | **2006** | ** ** |
| CASH FLOWS FROM  OPERATING ACTIVITIES:                                                |       |                             |       |   |   |
| Net income (loss)                                                                     |       | $                                | 6,496      |   | $ | (2,494 | ) |
| Adjustments to reconcile net income (loss) to net  cash used in operating activities: |       |                             |       |   |   |
| Depreciation and amortization                                                         |       | 202                              |       | 178 |   |
| Amortization of deferred credits                                                      |       | (27                              | )          | (27 | ) |
| Stock-based compensation                                                              |       | 43                               |       | 115 |   |
| Amortization of investment discounts                                                  |       | (218                             | )          | (336 | ) |
| Mesaba Aviation, Inc. tax payable settlement                                          |       | (813                             | )          |  — |   |
| Changes in current operating items:                                                   |       |                             |       |   |   |
| Accounts receivable                                                                   |       | (523                             | )          | (14 | ) |
| Income tax receivable                                                                 |       |  —                     |       | 22 |   |
| Inventories                                                                           |       | (176                             | )          | (295 | ) |
| Prepaid expenses and deposits                                                         |       | 75                               |       | 630 |   |
| Receivable from liquidating trust of Mesaba  Aviation, Inc.                           |       | (9,429                           | )          |  — |   |
| Accounts payable and other                                                            |       | (245                             | )          | (854 | ) |
| Net cash used in operating activities                                                 |       | (4,615                           | )          | (3,075 | ) |
|                                                                                  |       |                             |       |   |   |
| CASH FLOWS FROM  INVESTING ACTIVITIES:                                                |       |                             |       |   |   |
| Purchases of investments                                                              |       | (8,667                           | )          | (10,559 | ) |
| Sales of investments                                                                  |       | 15,865                           |       | 4,807 |   |
| Purchases of property and equipment                                                   |       | (374                             | )          | (80 | ) |
| Sale of property and equipment                                                        |       | 4                                |       |  — |   |
| Increase in restricted cash                                                           |       | (127                             | )          | (13,100 | ) |
| Net cash provided by (used in) investing activities                                   |       | 6,701                            |       | (18,932 | ) |
|                                                                                  |       |                             |       |   |   |
| CASH FLOWS FROM  FINANCING ACTIVITIES                                                 |       |                             |       |   |   |
| Increase in intercompany payable to Mesaba Aviation,  Inc.                            |       |  —                     |       | 197 |   |
| Purchase (repayment) of other noncurrent liabilities                                  |       | 1                                |       | (31 | ) |
| Payment of long term debt and capital leases                                          |       | (36                              | )          |  — |   |
| Proceeds from exercise of stock options                                               |       | 358                              |       |  — |   |
| Net cash provided by financing activities                                             |       | 323                              |       | 166 |   |
|                                                                                  |       |                             |       |   |   |
| NET INCREASE  (DECREASE) IN CASH AND CASH EQUIVALENTS                                 |       | 2,409                            |       | (21,841 | ) |
| CASH AND CASH  EQUIVALENTS:                                                           |       |                             |       |   |   |
| Beginning of period                                                                   |       | 28,593                           |       | 47,135 |   |
| End of period                                                                         |       | $                                | 31,002     |   | $ | 25,294 |   |
| SUPPLEMENTARY  CASH FLOW INFORMATION:                                                 |       |                             |       |   |   |
| Cash paid during the year for:                                                        |       |                             |       |   |   |
| Interest                                                                              |       | $                                | 25         |   | $ | 18 |   |
| Income taxes                                                                          |       | 140                              |       |  — |   |
|                                                                                  |       |                             |       |   |   |
| SUPPLEMENTARY  NON-CASH ACTIVITY:                                                     |       |                             |       |   |   |
| Capital  expenditures in accounts payable                                             |       | $                                | 206        |   | $ | — |   |

 

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

5

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**MAIR HOLDINGS, INC. ANDSUBSIDIARIES**

**NOTES TO CONDENSED CONSOLIDATEDFINANCIAL 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, 2007, and the notes thereto, includedin the Company’s Annual Report on Form 10-K filed with the SEC on June 19,2007.

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

*Basis of Presentation and Corporate Organization*

MAIR is the holdingcompany for Big Sky Transportation Co. (“Big Sky”), a regional air carrierbased in Billings, Montana.  Until April24, 2007, MAIR was also the holding company for Mesaba Aviation, Inc., (“Mesaba”),a regional air carrier based in Minneapolis, Minnesota.  The Company’s condensed consolidatedfinancial statements include the accounts of MAIR and Big Sky, as well asMesaba until Mesaba’s bankruptcy filing on October 13, 2005 (“the Petition Date”).  All intercompany transactions and balanceshave been eliminated in consolidation. As discussed further below, the accounts of Mesaba have beendeconsolidated from the Company’s condensed consolidated financial statementseffective as of the Petition Date.

Mesaba filed a voluntarypetition for relief under Chapter 11 of the United States Bankruptcy Code (the “BankruptcyCode”) in the United States Bankruptcy Court for the District of Minnesota (“BankruptcyCourt”) on the Petition Date, after which Mesaba operated its business as adebtor-in-possession pursuant to the Bankruptcy Code.  Mesaba filed its plan of reorganization onJanuary 22, 2007, which provided for Mesaba to exit bankruptcy as awholly-owned subsidiary of Northwest Airlines, Inc. (“Northwest”).  The plan of reorganization was approved bythe Bankruptcy Court on April 9, 2007. On April 24, 2007 (the “Exit Date”), the plan of reorganization becameeffective and Mesaba exited bankruptcy as a wholly-owned subsidiary ofNorthwest, and, therefore, is no longer owned by MAIR.  Mesaba’s statement of income is reported inNote 12 on a condensed basis for the period from April 1, 2007 through the ExitDate.

Due to Mesaba’sbankruptcy and the uncertainties surrounding the nature, timing, and specificsof the bankruptcy proceedings, MAIR deconsolidated Mesaba’s financial resultseffective as of the Petition Date.  As aresult, Mesaba’s assets and liabilities have been removed from the Company’sconsolidated balance sheets as of the Petition Date and through the ExitDate.  Mesaba’s results of operationshave also been removed from the Company’s condensed consolidated results ofoperations and cash flows since the Petition Date.

MAIR has accounted forMesaba’s financial results under the equity method of accounting since Mesaba’sbankruptcy filing on the Petition Date until its Exit Date.  In accordance with Accounting PrinciplesBoard (“APB”) Opinion No. 18, **The Equity Method of Accounting for Investments inCommon Stock****,MAIR** evaluated whether its investment in Mesaba hadexperienced an other-than-temporary impairment as of March 31, 2006.  MAIR’s evaluation utilized a market and incomeapproach, including a discounted cash flow analysis, and 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. The impairment charge was recorded in “Impairment and other charges” inthe fiscal 2006 consolidated statement of operations.

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For the fiscal year endedMarch 31, 2007, Mesaba reported a net loss of $71.3 million.  MAIR did not record any of these lossesexperienced by Mesaba in MAIR’s consolidated financial statements due to MAIRnot having any further obligations to fund any of Mesaba’s additional losses.

For theperiod from April 1, 2007 through the Exit Date, Mesaba reported net income of$83.5 million (see Note 12).  Upon Mesaba’semergence from bankruptcy and the corresponding transfer of MAIR’s equity inMesaba to Northwest, MAIR lost its ability to significantly influence Mesaba;therefore, the Company did not record any portion of Mesaba’s income under theequity method of accounting.

The provisions ofStatement of Position 90-7, *Financial Reporting byEntities in Reorganization Under the Bankruptcy Code* (“SOP 90-7”),applied to Mesaba’s financial statements while Mesaba operated under theprovisions of Chapter 11 of the Bankruptcy Code.  SOP 90-7 does not change the application ofGAAP in the preparation of financial statements.  However, SOP 90-7 does require that thefinancial statements, for periods including and subsequent to the filing of theChapter 11 petition, distinguish transactions and events that are directlyassociated with the reorganization from the ongoing operations of thebusiness.  See Note 12 for the condensedincome statement of Mesaba presented in accordance with SOP 90-7 on astand-alone basis for the period from April 1, 2007 through the Exit Date andthe three months ended June 30, 2006.

Since the Petition Date,intercompany balances between MAIR and Mesaba have not been eliminated. As ofMarch 31, 2007, MAIR had an intercompany tax payable to Mesaba of $0.8 millionand Mesaba had an equal intercompany tax receivable from MAIR.  As a result of the April 2007 settlement ofMAIR’s proof of claim in Mesaba’s bankruptcy proceedings (see Note 3), MAIR maybe responsible for certain of Mesaba’s tax obligations incurred through theExit Date, the effective date of Mesaba’s plan of reorganization, for thosestates in which MAIR and Mesaba historically filed a unitary tax return. Although the Company does not believe there is any remaining tax exposures,under the settlement between MAIR and Mesaba, Mesaba agreed to relinquish itsright to the $0.8 million intercompany tax balance to allow MAIR to use thesefunds to pay any Mesaba tax obligations that taxing authorities may seek tocollect from MAIR.  The reversal of theliability amount was recorded within other income for the three month periodended June 30, 2007.

**Operations**

*Big Sky*

Big Sky operates as aregional air carrier based in Billings, Montana, providing scheduled passenger,freight, express package and charter services. As of June 30, 2007, Big Sky provided scheduled air service to 26communities in the United States and Canada. Big Sky operates as a Delta Connection carrier for Delta Air Lines, Inc.(“Delta”) in the east, with service to and from Boston, and in the west, BigSky operates daily scheduled flights providing interline and online connectingservices and local market services.  BigSky also has code-sharing agreements with Alaska Airlines, Horizon Air, US Airand Northwest, where its services in the west are marketed jointly with thoseair carriers for connecting flights.

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 thecountry that could not otherwise economically justify that service based ontheir passenger traffic.  The DOT paysEAS subsidies for each departure in a covered market. During the three monthsended June 30, 2007 and 2006, Big Sky recognized revenue from EAS subsidies of$2.1 million and $2.2 million, respectively, reflecting the impact of theaddition of Watertown, Massena and Ogdensburg, New York service, offset by theelimination of subsidy at Sheridan, Wyoming and the termination of service atMoses Lake, Washington.

On March 12, 2007, BigSky and Delta executed a Hosted Prorate Agreement governing the Bostonoperation.  On the same date, Big Skyentered into a purchase agreement with Champlain Enterprises, Inc. d/b/aCommutAir to purchase eight Beechcraft 1900D aircraft, with a right of firstrefusal to purchase an additional four aircraft. Big Sky took delivery of thefirst aircraft on July 7, 2007. Additionally, Big Sky was awarded a two year contract from the DOT toprovide EAS service between Massena, Ogdensburg and Watertown, New York toBoston, Massachusetts.  This servicebegan in April 2007 and is a part of Big Sky’s Delta operations.  The total annual subsidy for this flying isapproximately $2.1 million.  As of July15, 2007, Big Sky provided Delta Connection service to six cities in New York, Maine,Massachusetts and two cities in Canada with a fleet of six Beechcraft 1900Daircraft.  During the remainder of fiscalyear 2008, Big Sky is scheduled to increase this operation by adding fouradditional aircraft and providing service to other similar communities.

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*Recent Developments*

Big Sky was recentlyawarded an EAS contract to provide service between Cincinnati, Ohio and CapeGirardeau, Missouri and between Jackson, Tennessee, and Owensboro,Kentucky.  The EAS contract provides foran annual subsidy of $3.2 million.  BigSky intends to begin this service as a Delta Connection carrier in November2007.

*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 use of estimates relates to the allowance fordoubtful accounts, aircraft property and equipment lives, inventory obsolescencereserves, valuation of other intangible assets and accounting for incometaxes.  Ultimate results could differfrom those estimates.

**2.****              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.

Intangible assets andrelated accumulated amortization were as follows, in thousands:
| ** **                           | ** ** | **June 30, 2007** | ** ** | **March 31, 2007** | ** ** |
|--------------------------------------|------------|-----------------------------|------------|------------------------------|------------|
| ** **                           | ** ** | ** **                  | ** ** | **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                       |       | (1,860                       | )          | 980 |   | 2,840 |   | (1,758 | ) | 1,082 |   |
|                                 |       | $                           | 3,765      |                         | $          | (1,860 | ) | $ | 1,905 |   | $ | 3,765 |   | $ | (1,758 | ) | $ | 2,007 |   |
|                                      |            |                             |            |                              |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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

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

On February 28, 2006, asa part of Mesaba’s bankruptcy proceedings, MAIR filed a proof of claim againstMesaba for $55.2 million, with no recognition of this claim in the Company’sconsolidated financial statements due to the significant uncertainty of anyamount being ultimately collected.  Thefollowing table summarizes MAIR’s claim against Mesaba in thousands:
| Management fees                                                        |   | $      | 2,875  |   |
|------------------------------------------------------------------------|--------|--------|--------|--------|
| Guaranty of principal  and accrued interest on Cincinnati hangar bonds |   | 13,015 |   |
| Guaranty of  Cincinnati hangar lease                                   |   | 4,501  |   |
| Capital  contribution to Mesaba                                        |   | 31,755 |   |
| Federal and  state income taxes                                        |   | 3,080  |   |
|                                                                   |   | $      | 55,226 |   |

 

In April 2007, theBankruptcy Court approved a compromise for MAIR’s $55.2 million damage claimunder which Mesaba allowed MAIR a claim of up to $6.2 million relating torepayment of the guaranty of Mesaba’s hangar lease at the Cincinnati/NorthernKentucky International Airport and management fees.  Additionally, pursuant to a Stock PurchaseAgreement (the “SPA”) between MAIR and Northwest, Northwest assigned its $7.3million allowed claim against Mesaba to MAIR. Therefore, as of the Exit Date, MAIR’s total unsecured creditors’ claimin Mesaba’s bankruptcy totaled $13.5 million.

During the quarter, theliquidating trustee approved an interim distribution of 70% to all claimholderswith allowed claims. For the three months ended June 30, 2007, MAIR recorded$9.4 million, or 70%, of these amounts as “Damage claim income from MesabaAviation, Inc.” within the condensed consolidated statement of operations.  The Company also recorded a related balancein “Receivable from liquidating trust of Mesaba Aviation, Inc.” within thecondensed consolidated balance sheet. The remaining $4.1 million, or 30%, of MAIR’s unsecured claim isconsidered a contingent gain and will be recorded as the Company receivesadditional disbursements from the liquidating trust after the remaining Mesabadisputed claims are resolved (see Note 10).

**4.****              Investments**

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

As of June 30, 2007 andMarch 31, 2007, cash, cash equivalents, short-term and long-term investmentstotaled $61.4 million and $66.0 million, respectively.

Amortized cost, grossunrealized gains and losses and fair value of short and long-term investmentsclassified as securities available for sale were as follows, in thousands:
|                          | ** ** | **June 30, 2007** | ** ** | **March 31, 2007** | ** ** |
|--------------------------|------------|-----------------------------|------------|------------------------------|------------|
| Amortized cost           |       | $                           | 30,515     |                         | $          | 37,409 |   |
| Gross unrealized  gains  |       | 17                          |       | 50                           |       |
| Gross unrealized  losses |       | (87                         | )          | (34                          | )          |
| Fair value               |       | $                           | 30,445     |                         | $          | 37,425 |   |

 

For the three monthsended June 30, 2007 and 2006, the Company’s gross realized gains and losseswere insignificant.

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**5.****              Income Taxes**

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

The Company has performedsuch an analysis, and a full valuation allowance was provided at the end offiscal 2006. The Company utilized certain deferred tax assets in the quarter tooffset taxable income.  The associatedvaluation allowance against those deferred tax assets was thereforeremoved.  The Company continues to recorda full valuation allowance against its remaining deferred tax assets due to theuncertainty regarding the ultimate realization of those assets.  The Company recorded a $0.1 million taxbenefit for the three months ended June 30, 2007 due to the reversal of taxcontingency reserves previously established and the realization of state incometax refunds received for prior periods. The Company will be required to update its estimates of future taxableincome based upon additional  informationmanagement obtains, and the Company will continue to evaluate the realizabilityof the deferred tax assets on a quarterly basis.

The Company will file aconsolidated federal income tax return which will include Mesaba’s incomethrough the Exit Date.  Taxable incomefor both the Company and Mesaba was offset by the utilization of net operatingloss (“NOL”) carryforwards from prior periods.

The Company’s adoption ofthe provisions of the Financial Accounting Standards Board (“FASB”)Interpretation No. 48, *Accounting for Uncertaintyin Income Taxes,* (“FIN 48”) on April 1, 2007 did not impact theCompany’s consolidated financial statements. As of the adoption, the totalamount of unrecognized tax benefits for uncertain tax positions was $0.5million, which is classified as non-current liabilities.  Of this amount, $0.3 million would affect theCompany’s effective tax rate if recognized. It is not expected that the amount of unrecognized tax benefit willsignificantly change within the next twelve months.

The Company’s continuingpractice is to classify interest and penalties, if any, on uncertain taxpositions as components of the provision for income taxes.  The total amount of interest and penaltyaccrued as of April 1, 2007 was $0.1 million.

The Company and itssubsidiaries file a consolidated federal income tax return and various stateincome tax returns.  As of the date ofadoption of FIN 48, the Company is generally no longer subject to U.S. federaland state income tax examinations by tax authorities for years prior to fiscal2004.

**6.****              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 includes expense associated with the fair value of allawards granted on and after April 1, 2006, and expense for the unvested portionof previously granted awards outstanding on April 1, 2006. Results for priorperiods have not been restated.

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

*Stock Option Plans*

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

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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-free interestrate using the U.S. Treasury yield curve as of the grant date.  The estimated expected term is consistentwith the simplified method identified in SEC Staff Accounting Bulletin (“SAB”)No. 107*, Share-Based Payment*.  Thesimplified method calculates the expected term as the average of the vestingand contractual terms of the award.  Theexpected volatility assumption is set based primarily on historical volatility.  For options granted, the Company amortizes thefair value on a straight-line basis over the vesting period of the options.

For each of the threemonths ended June 30, 2007 and 2006, SFAS 123R’s fair value method resulted inadditional expense in the amount of $0.1 million related to stock options.  These amounts are included in the “Wages andbenefits” caption in the accompanying condensed consolidated statements ofoperations for each of the three months ended June 30, 2007 and 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 stock optionactivity since the Company’s most recent fiscal year end is as follows:
| ** **                                   | ** ** | ** **      | ** ** | ** **   | ** ** | **Weighted**    | ** ** | ** **              | ** ** | ** **      | ** ** | ** **   | ** ** | **Weighted**    | ** ** | ** **              | ** ** |
|----------------------------------------------|------------|-----------------|------------|--------------|------------|-----------------|------------|-------------------------|------------|-----------------|------------|--------------|------------|-----------------|------------|-------------------------|------------|
| ** **                                   | ** ** | ** **      | ** ** | **Weighted** | ** ** | **Average**     | ** ** | ** **              | ** ** | ** **      | ** ** | **Weighted** | ** ** | **Average**     | ** ** | ** **              | ** ** |
| ** **                                   | ** ** | ** **      | ** ** | **Average**  | ** ** | **Remaining**   | ** ** | **Aggregate**           | ** ** | ** **      | ** ** | **Average**  | ** ** | **Remaining**   | ** ** | **Aggregate**           | ** ** |
| ** **                                   | ** ** | **Options**     | ** ** | **Exercise** | ** ** | **Contractual** | ** ** | **Intrinsic**           | ** ** | **Options**     | ** ** | **Exercise** | ** ** | **Contractual** | ** ** | **Intrinsic**           | ** ** |
| ** **                                   | ** ** | **Outstanding** | ** ** | **Price**    | ** ** | **Term**        | ** ** | **Value**               | ** ** | **Exercisable** | ** ** | **Price**    | ** ** | **Term**        | ** ** | **Value**               | ** ** |
| ** **                                   | ** ** | ** **      | ** ** | ** **   | ** ** | ** **      | ** ** | **(in thousands)** | ** ** | ** **      | ** ** | ** **   | ** ** | ** **      | ** ** | **(in thousands)** | ** ** |
| Balance at March  31, 2007                   |       | 1,458,118       |       | 6.87         |       |            |       |                    |       |            |       |         |       |            |       |                    |       |
| Granted                                      |       | —          |       | —       |       |            |       |                    |       |            |       |         |       |            |       |                    |       |
| Exercised                                    |       | 59,982          |       | 5.97         |       |            |       |                    |       |            |       |         |       |            |       |                    |       |
| Expired / Cancelled                          |       | —          |       | —       |       |            |       |                    |       |            |       |         |       |            |       |                    |       |
| Balance at June  30, 2007                    |       | 1,398,136       |       | 6.91         |       | 4.2             |       | $                       | 427        |            | 1,248,136  |         | 6.84       |            | 3.8        |                    | $          | 383 |   |
| Vested or expected to  vest at June 30, 2007 |       | 1,178,136       |       | 6.67         |       | 5.1             |       | $                       | 395        |            |       |         |       |            |       |                    |       |   |
|                                              |            |                 |            |              |            |                 |            |                         |            |                 |            |              |            |                 |            |                         |            |  |  |

 

Theaggregate intrinsic value of options outstanding at June 30, 2007 is calculatedas the difference between the exercise price of the underlying option and themarket price of the common stock.  Theaggregate intrinsic value of options exercised during the three months endedJune 30, 2007 was immaterial.   Nooptions vested during the three months ended June 30, 2007.

*Unrecognized Compensation*

As ofJune 30, 2007, the Company had $0.3 million of total unrecognized compensationcost related to non-vested stock option compensation arrangements granted underall equity compensation plans.  Totalunrecognized compensation will be adjusted for future changes in estimatedforfeitures.  The Company expects torecognize the cost over a weighted average period of two years.

**7.****              Earnings (Loss) PerShare**

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

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The following tablereconciles the number of shares utilized in the condensed consolidated earnings(loss) per share calculations for the periods ended June 30, in thousands,except per share data:
|                                                                                           | ** ** | **Three Months Ended** | ** ** |
|-------------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                                | ** ** | **June 30**                 | ** ** |
| ** **                                                                                | ** ** | **2007**                         | ** ** | **2006** | ** ** |
| Net income  (loss)                                                                        |       | $                                | 6,496      |   | $ | (2,494 | ) |
| For earnings per  share - basic:                                                          |       |                             |       |   |   |
| Weighted average number of issued shares outstanding                                      |       | 15,016                           |       | 20,592 |   |
| Effect of  dilutive securities:                                                           |       |                             |       |   |   |
| Computed shares outstanding under stock option plans  utilizing the treasury stock method |       | 70                               |       | — |   |
| For earnings per  share - diluted:                                                        |       |                             |       |   |   |
| Weighted average common and potentially dilutive common  shares outstanding               |       | 15,086                           |       | 20,592 |   |
|                                                                                      |       |                             |       |   |   |
| Earnings (loss)  per share - basic                                                        |       | $                                | 0.43       |   | $ | (0.12 | ) |
| Earnings (loss)  per share - diluted                                                      |       | $                                | 0.43       |   | $ | (0.12 | ) |
|                                                                                      |       |                             |       |   |   |
| Antidilutive options  and warrants                                                        |       | 425                              |       | 5,649 |   |

 

**8.****              ConsolidatedComprehensive Income/(Loss)**

The following tablepresents the calculation of comprehensive income/(loss) for the periods endedJune 30, in thousands:
| ** **                                                         | ** ** | **Three Months Ended** | ** ** |
|--------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                         | ** ** | **June 30**                 | ** ** |
| ** **                                                         | ** ** | **2007**                         | ** ** | **2006** | ** ** |
| Net income  (loss) income                                          |       | $                                | 6,496      |   | $ | (2,494 | ) |
| Unrealized  losses on investments classified as available for sale |       | (70                              | )          | (104 | ) |
| Comprehensive income  (loss)                                       |       | $                                | 6,426      |   | $ | (2,598 | ) |

 

**9.****              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 major customers.  The method for determining what informationto report is based upon the way management organizes the operating segmentswithin the Company for making operating decisions and assessing financialperformance.  Although Mesaba has beendeconsolidated from the Company’s consolidated financial statements as of thePetition Date, the segment information presented below continues to includeMesaba until and Exit Date, in accordance with SFAS No. 131 and relatedguidance for equity-method investees. Mesaba’s results of operations after the Petition Date are included inthe “Eliminations” column.

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Operating segmentinformation for Mesaba, Big Sky and MAIR were as follows, in thousands:
| ** **                                | ** ** | **Mesaba** | ** ** | **Big Sky** | ** ** | **MAIR** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|-------------------------------------------|------------|------------|------------|------------------|------------|----------|------------|------------------|------------|------------------|------------|
| *Three  Months Ended June 30, 2007*       | * *   | * *   | * *   | * *         | * *   | * * | * *   | * *         | * *   | * *         | * *   |
| Operating revenues                        |       | $          | 14,842     |             | $          | 7,110    |       | $                | —     |             | $          | (14,842 | ) | $ | 7,110 |   |
| Operating expenses                        |       | 15,831     |       | 9,394            |       | 2,176    |       | (15,831          | )          | 11,570           |       |
| Depreciation and amortization             |       | 433        |       | 198              |       | 4        |       | (433             | )          | 202              |       |
| Interest expense                          |       | —     |       | 97               |       | 167      |       | (71              | )          | 193              |       |
| Reorganization items, net                 |       | 40,367     |       | —           |       | —   |       | (40,367          | )          | —           |       |
| Income (loss) before income taxes         |       | 83,528     |       | (2,378           | )          | 8,807    |       | (83,528          | )          | 6,429            |       |
| Capital expenditures                      |       | —     |       | 370              |       | 4        |       | —           |       | 374              |       |
| Current assets                            |       | —     |       | 9,911            |       | 59,237   |       | (5,833           | )          | 63,315           |       |
| Total assets                              |       | —     |       | 14,143           |       | 112,900  |       | (29,365          | )          | 97,678           |       |
| Current liabilities                       |       | —     |       | 10,539           |       | 17,644   |       | (5,833           | )          | 22,350           |       |
| Total stockholders’ equity           |       | —     |       | 2,549            |       | 95,016   |       | (23,532          | )          | 74,033           |       |
| *Three  Months Ended June 30, 2006*       | * *   | * *   | * *   | * *         | * *   | * * | * *   | * *         | * *   | * *         | * *   |
| Operating revenues                        |       | $          | 83,440     |             | $          | 6,043    |       | $                | 59         |             | $          | (83,499 | ) | $ | 6,043 |   |
| Operating expenses                        |       | 85,075     |       | 6,663            |       | 3,233    |       | (85,134          | )          | 9,837            |       |
| Depreciation and amortization             |       | 2,554      |       | 173              |       | 5        |       | (2,554           | )          | 178              |       |
| Interest expense                          |       | —     |       | 114              |       | —   |       | (97              | )          | 17               |       |
| Reorganization items, net                 |       | (2,240     | )          | —           |       | —   |       | 2,240            |       | —           |       |
| Income (loss) before income taxes         |       | 593        |       | (732             | )          | (1,762   | )          | (593             | )          | (2,494           | )          |
| Capital expenditures                      |       | 968        |       | 80               |       | —   |       | (968             | )          | 80               |       |
| Current assets                            |       | 74,566     |       | 4,493            |       | 82,668   |       | (79,431          | )          | 82,296           |       |
| Total assets                              |       | 111,077    |       | 8,403            |       | 128,650  |       | (129,375         | )          | 118,755          |       |
| Current liabilities                       |       | 47,034     |       | 9,866            |       | 6,925    |       | (51,900          | )          | 11,925           |       |
| Total stockholders’ equity (deficit) |       | 3,024      |       | (2,177           | )          | 121,725  |       | (16,456          | )          | 106,116          |       |

 

**10.****       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 faithtoward the execution of long-term agreements for each of the 340Aaircraft.  Although Mesaba appealed this ruling, while the appeal waspending, Saab Leasing (relying on the District Court’s declaratory judgmentruling) filed a separate action in the District Court alleging approximately$35 million in damages for past due and future aircraft leaseobligations.  While the damages action was pending, the U.S. Court ofAppeals for the Eighth Circuit affirmed the District Court’s declaratoryjudgment ruling.  On July 6, 2006, theDistrict Court in the damages action granted Mesaba’s motion for partialsummary judgment, ruling that Saab Leasing is not eligible to receive damagesfor the majority of its claims against Mesaba.

Because the potentialdamages for the remaining claim against Mesaba are not significant, Mesabanever established any accrual with regard to this litigation within itscondensed financial statements.  Mesabawas unable to reach a settlement with Saab Leasing within the context of Mesaba’sbankruptcy proceedings; thus, Mesaba consented to lift the automatic stay andallow Saab Leasing to appeal the District Court’s July 2006 ruling to theEighth Circuit Court of Appeals.  Mesaba’sliquidating trust will now be required to fund any litigation expenses and anyamounts that may be due to Saab Leasing if the District Court’s ruling isreversed.  Any such payments by Mesaba’sliquidating trust would ultimately reduce the distribution MAIR is entitled toreceive from the estate.

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*Goldman Credit Bankruptcy Claim*

Goldman Sachs CreditPartners, L.P. (“Goldman Credit”) is the largest creditor in Mesaba’sbankruptcy proceedings, and it holds approximately $58 million in disputedclaims asserted by itself or purchased from other creditors.  All of Goldman Credit’s disputed claims arefor aircraft and equipment leases that were rejected by Mesaba.  GoldmanCredit has asserted that the stipulated loss provisions of the applicableleases, under which liquidated damages are calculated, should apply todetermine the total claim amount due to Goldman Credit.  Mesaba’sbankruptcy estate has filed for summary judgment with the Bankruptcy Courtasserting that the liquidated damages constitute unenforceable penalties. Mesaba’s liquidating trustee instead believes that the claim allowed to GoldmanCredit should reflect actual damages suffered, which is the amount related toGoldman Credit’s claim that is recorded in Mesaba’s liabilities subject tocompromise.  Mesaba’s liquidating trust will be funding the litigationexpenses related to the Goldman Credit claim and will be responsible for makinga distribution to Goldman Credit following resolution of the claim.  Anysuch payments from Mesaba’s liquidating trust would ultimately reduce the distributionMAIR is entitled to receive from the estate.

*Guaranty*

Priorto its bankruptcy, Mesaba leased a facility at the Cincinnati/Northern KentuckyInternational Airport, but vacated the facility and ceased making the requiredlease payments on it in November 2005.  In 1999, MAIR unconditionallyguaranteed full and prompt payment of the ground lease and the bonds associatedwith the initial financing of the facility.  In accordance with thisguaranty, MAIR has made the required bond and ground lease payments due sinceNovember 2005.  In April 2006, in exchange for the bondholders forbearingacceleration of the bonds, MAIR delivered a letter of credit to the bondholdersto assure payment of the bonds.  Subsequently, Mesaba rejected the facilitieslease associated with the facility, but assumed and assigned the related groundlease to MAIR.  The Airport Board consented to the assignment of theground lease.  Since Mesaba vacated thehangar in October 2005, MAIR has been seeking other sublessors to lease thefacility.  Any rent MAIR receives from afuture sublessor would offset the lease payments that MAIR is required to make.

MAIR and the bondholdersare negotiating an amendment to the original forbearance that provides for thebondholders’ continued forbearance to allow MAIR a specified number of monthsto identify a new tenant and execute a sublease for the property.  As ofDecember 31, 2005, MAIR recorded a $4.8 million liability with respect to thelease and guaranty, which assumed that the facility would remain vacant for twoyears, during which time MAIR would continue to make the bond and leasepayments, and that thereafter MAIR would be able to sublease the facility at a20% discount.  At June 30, 2007, this accrued liability totaled $3.1 million. If MAIR is unable to find an alternate sublessee for the facility, thebondholders have the right to call the bonds, and MAIR may be required torecord an additional charge and liability of up to $9.8 million.  MAIR continues to reassess this reserve asmaterial developments occur.

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

UMB may draw on theletter of credit upon the occurrence of an event of default under its agreementwith MAIR, including if MAIR fails to make any payment when due to UMB, if MAIRfails to provide evidence that the letter of credit has been renewed annually(or if MAIR fails to renew the letter of credit), if UMB receives notice fromFirst Interstate Bank of the bank’s intent not to renew the letter of credit,if the bonds become subject to mandatory redemption, if MAIR fails to comply withthe terms of its agreement with UMB or if MAIR commits any event of defaultunder its guaranty of Mesaba’s bond obligations.  The cash supporting theletter of credit was classified as “Restricted cash” on the Company’s condensedconsolidated balance sheet at June 30, 2007 and March 31, 2007.

*Other Commitments*

In February 2005, Big Skyobtained a revolving line of credit in the principal amount of $250,000 fromFirst Interstate Bank of Billings.  InMarch 2006, the principal amount available under the line increased to$370,000.  The line of credit charges avariable interest rate based on the prime rate published in the *Wall Street Journal*. At June 30, 2007, the rate was 8.25% on outstanding borrowings of$370,000.  The line of credit iscollateralized by Big Sky’s inventory, accounts receivable and equipment and isscheduled to mature in June 2008.

Big Sky recorded $0.7million of restricted cash at June 30, 2007 for certificates of depositsupporting letters of credit of $0.4 million for workers’ compensationinsurance and $0.2 million for aircraft fuel and airport lease agreements.  In May 2007 Big Sky established a $0.1million certificate of deposit supporting a customs bond required for the June2007 service between Boston, Massachusetts and Quebec City and Fredericton,Canada.

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*MAIR Pledge for Big Sky*

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

**11.****       Mesaba Plan ofReorganization**

On January 22, 2007,Mesaba and Northwest entered into a Stock Purchase and Reorganization Agreement(the “SPRA”), under which Northwest agreed to allow Mesaba a $145 million claimin Northwest’s bankruptcy case.  Inexchange, Mesaba agreed to file a plan of reorganization under which Mesaba’sexisting equity would be cancelled and new equity would be issued to Northwest,making Mesaba a wholly-owned operating subsidiary of Northwest.

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

The entire $125 millionpurchase price from Goldman Sachs was placed in a liquidating trust, and theproceeds from the liquidating trust will ultimately be used to satisfy Mesaba’screditors’ claims.  Prior to the orderapproving Mesaba’s plan of reorganization, MAIR worked with Mesaba’s creditors’committee to resolve the majority of Mesaba’s creditors’ claims.  MAIR estimates that these remaining creditors’claims will total approximately $90 million, which includes MAIR’s $13.5million unsecured creditors’ claim. MAIR recorded $9.4 million of its unsecuredcreditors’ claim as other income during the quarter ended June 30, 2007 aspreviously discussed in Note 3.

Two major claims inMesaba’s bankruptcy remain open:  theSaab litigation and the Goldman Credit claim. The Company does not believe there is significant risk related to theSaab litigation (see Note 10).  Thus theonly significant risk relates to the Goldman Credit claim for engine andaircraft leases.  Goldman Credit’s claimtotals $58 million and demands the stipulated loss value (“SLV”) in the leasesas an appropriate measure of damages for the rejected contracts.  The liquidating trustees’ position is thatthe SLV approach is an unfair penalty and Goldman Credit is only due thepresent value of its lost rent under the leases.  The $90 million estimate of creditors’ claimsincludes the present value of the unpaid rent due to the rejection of theleases.  A summary judgment motion hasbeen filed with the Bankruptcy court and is due to be heard in September 2007.

If the $90 millionestimate of creditors’ claims is correct, Mesaba’s creditors would be paid infull, including interest, and MAIR would then receive approximately $34 millionfor its equity interest in Mesaba from the liquidating trust.  However, in the event the total allowed creditors’claims exceed $125 million, MAIR would not receive any distributions for itsequity ownership of Mesaba.  In suchevent, the liquidating trust assets would be distributed pro-rata to all ofMesaba’s unsecured creditors, including MAIR. MAIR has not recorded the contingent residual equity interest in thetrust due to the uncertainties of the ultimate amount to be received.

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

Below are Mesaba’scondensed financial results from April 1, 2007 through the Exit Date, the datethe plan of reorganization became effective and Mesaba exited bankruptcy as awholly-owned subsidiary of Northwest, ending MAIR’s ownership of Mesaba.

**MESABA AVIATION, INC.**

**(Debtor-in-Possession)**

**Condensed Statements ofOperations**

** (in thousands)**

**(Unaudited)**
| ** **                                                                          | ** ** | **April 1**   | ** ** | **Three Months** | ** ** |
|-------------------------------------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                                                                          | ** ** | **to**             | ** ** | **Ended**             | ** ** |
| ** **                                                                          | ** ** | **April 24,** | ** ** | **June 30,**     | ** ** |
| ** **                                                                          | ** ** | **2007**           | ** ** | **2006**              | ** ** |
| OPERATING REVENUES:                                                                 |       |               |       |                  |       |
| Passenger                                                                           |       | $                  | 12,808     |                  | $          | 75,499 |   |
| Freight and  other                                                                  |       | 2,034              |       | 7,941                 |       |
| Total operating  revenues                                                           |       | 14,842             |       | 83,440                |       |
|                                                                                |       |               |       |                  |       |
| OPERATING EXPENSES:                                                                 |       |               |       |                  |       |
| Wages and  benefits                                                                 |       | 6,983              |       | 33,489                |       |
| Aircraft  maintenance                                                               |       | 2,031              |       | 15,377                |       |
| Aircraft rents                                                                      |       | 2,375              |       | 17,405                |       |
| Administrative  and other                                                           |       | 4,442              |       | 18,804                |       |
| Total operating  expenses                                                           |       | 15,831             |       | 85,075                |       |
| Operating loss                                                                      |       | (989               | )          | (1,635                | )          |
|                                                                                |       |               |       |                  |       |
| NONOPERATING INCOME:                                                                |       |               |       |                  |       |
| Income from  claim in Northwest Airlines, Inc. bankruptcy                           |       | 124,881            |       | —                |       |
| Interest expense  and other income                                                  |       | 3                  |       | (12                   | )          |
| Reorganization  items, net (A)                                                      |       | (40,367            | )          | 2,240                 |       |
| Nonoperating  income, net                                                           |       | 84,517             |       | 2,228                 |       |
| Income before  income taxes and cumulative effect of change in accounting principle |       | 83,528             |       | 593                   |       |
|                                                                                |       |               |       |                  |       |
| PROVISION FOR INCOME  TAXES (C)                                                     |       | (70                | )          | —                |       |
|                                                                                |       |               |       |                  |       |
| INCOME BEFORE CUMULATIVE  CHANGE IN ACCOUNTING PRINCIPLE                            |       | 83,458             |       | 593                   |       |
|                                                                                |       |               |       |                  |       |
| CUMULATIVE EFFECT OF  CHANGE IN ACCOUNTING PRINCIPLE (B)                            |       | —             |       | (507                  | )          |
|                                                                                |       |               |       |                  |       |
| NET INCOME                                                                          |       | $                  | 83,458     |                  | $          | 86 |   |

 

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**(A) Reorganization Items**

Reorganization itemsrecorded from the Petition Date through the Exit Date consisted of transactionsand events that were directly associated with the reorganization ofMesaba.  The reorganization activityincluded aircraft impairment and other rejection charges, legal and professionfees to support the restructuring process, write-off of maintenance accruals,interest income, exit incentives, and additional expenses for recording thetransfer of assets to the liquidating trust.

**(B) Cumulative Change inAccounting Principle**

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

**(C) Provision for Income Taxes**

For the period April 1,2007 through the Exit Date, Mesaba recorded an income tax expense of $0.1million which related to state tax expense. Until the Exit Date, Mesaba will be included in the MAIR consolidatedfederal tax return.  Mesaba utilizedcertain deferred tax assets in the quarter to offset taxable income during thesame period.

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

In September 2006, FASBissued SFAS No. 157, *Fair Value Measurements*(“SFASNo. 157”), to define fair value, establish a framework for measuring fair valuein accordance with GAAP, and expand disclosures about fair valuemeasurements.  SFAS No. 157 will beeffective for the Company beginning April 1, 2008. The Company is in the processof determining what effect, if any, the adoption of SFAS No. 157 will have onits financial statements.

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

**14.****       Subsequent Events**

In July 2007, theliquidating trust made an interim distribution of 70% to all claimholders withallowed claims.  MAIR received $6.8million of its $13.5 million claim, which reflects a 70% interim distributionof its claim with the exception of the Cincinnati hangar claim.  Once MAIR and the bondholders execute aninterim agreement that reflects the bankruptcy court’s assignment of the CVGbond claim to MAIR, the trust will pay 70% of the Cincinnati hangar portion ofMAIR’s claim.  MAIR expects to receivethe payment during the second quarter of fiscal 2008.

In July 2007, MAIR’sCompensation Committee approved Executive Retention Bonus Agreements with MAIR’sofficers in connection with the Company’s anticipated receipt of disbursementsfrom the liquidating trust established by the Mesaba plan of reorganization asa result of the Company’s former equity interest in Mesaba. The retentionbonuses will be payable if the executive remains in active employment throughthe date the equity disbursement is received; provided, however, that if thereis an event that triggers severance benefits for an executive, the executivedoes not need to be employed at the time the equity disbursement is received.

**ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OFFINANCIAL CONDITION AND RESULTS OF OPERATIONS**

Management’s Discussionand Analysis of Financial Condition and Results of Operations should be read inconjunction with the accompanying consolidated financial statements.

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*Overview*

The first quarter offiscal 2008 marked a significant transition in MAIR’s business.  On the Exit Date, Mesaba emerged frombankruptcy as a wholly-owned subsidiary of Northwest.  The $125 million proceeds from the sale of Mesaba’sallowed claim in Northwest’s bankruptcy were deposited in a liquidating trustto pay Mesaba’s creditors.  MAIRcontinues to play an active role in Mesaba’s liquidating trust created by itsplan of reorganization to maximize the potential value to MAIR as Mesaba’sformer equity holder.  MAIR expects thatall distributions from the trust should be made by the end of fiscal 2008.

During the quarter, BigSky embarked on its expansion plan as a code share partner with Delta, offeringnew service to four markets in the northeast from Boston, utilizing fiveBeechcraft 1900D aircraft.  By the end ofthe fiscal year, Big Sky will double in size with the Boston operation.  MAIR believes that this expansion will assistBig Sky in leveraging its fixed costs of operation over more aircraft to reachsustained profitability by the end of the fiscal year.

While Mesaba’s bankruptcyestate is being resolved, MAIR will also continue to explore additional growthopportunities for Big Sky and will consider acquisitions to diversify withinairline-related industries.  Theseopportunities will be evaluated in the context of maximizing shareholder valueand weighed against other tax efficient mechanisms to return capital toshareholders.

**RESULTSOF OPERATIONS**

**Three Months Ended June 30, 2007and 2006**

The Company reportedconsolidated net income of $6.5 million, or $0.43 per basic and diluted share,for the quarter ended June 30, 2007, compared to a net loss of $2.5 million, or$0.12 per basic and diluted share, for the quarter ended June 30, 2006. The netincome was primarily due to the $9.4 million in damage claims, offset byoperating losses at MAIR and Big Sky.

*Big Sky*

Big Sky’s operatingstatistics for the three months ended June 30 were as follows:
| ** **                      | ** ** | **2007** | ** ** | **2006** | ** ** | **% Change** | ** ** |
|---------------------------------|------------|----------|------------|----------|------------|-------------------|------------|
| Passengers                      |       | 40,990   |       | 29,569   |       | 38.6              | %          |
| Available seat  miles (000s)    |       | 23,014   |       | 21,892   |       | 5.1               | %          |
| Revenue  passenger miles (000s) |       | 11,053   |       | 8,382    |       | 31.9              | %          |
| Load factor                     |       | 48.0     | %          | 38.3     | %          | 9.7               | pts        |
| Block hours  flown              |       | 6,630    |       | 5,580    |       | 18.8              | %          |
| Departures                      |       | 6,455    |       | 5,965    |       | 8.2               | %          |
| Revenue per ASM                 |       | $        | 0.309      |     | $          | 0.272             |       | 13.6 | % |
| Cost per ASM                    |       | $        | 0.410      |     | $          | 0.299             |       | 37.1 | % |
| Aircraft in service  (average)  |       | 10       |       | 10       |       | 0.0               | %          |

 

Big Sky Operating Revenues

Total operating revenuesincreased 17.7% to $7.1 million in the first quarter of fiscal 2008 from $6.0million in the prior year quarter as a result of Boston operations that beganin April 2007.

Big Sky Operating Expenses

Total operating expensesin the first quarter of fiscal 2008 increased 41.0% to $9.4 million from $6.7million in the prior year period, primarily due to increased flyingperiod-over-period and the associated cost of the Boston operation which beganin April 2007.

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The following tablecompares components of the operating cost per ASM for the three months endedJune 30:
| ** **                     | ** ** | **Operating Expenses** | ** ** | **Operating Cost Per ASM** | ** ** |
|--------------------------------|------------|-----------------------------|------------|-------------------------------------------|------------|
| ** **                     | ** ** | **2007**                    | ** ** | **2006**                                  | ** ** | **$ Change** | ** ** | **% Change** | ** ** | **2007** | ** ** | **2006** | ** ** |
| Wages and  benefits            |       | $                           | 3,107      |                                      | $          | 2,137 |   | $ | 970 |   | 45.4 | % | 13.5 | ¢ | 9.6 | ¢ |
| Aircraft fuel                  |       | 1,888                       |       | 1,451                                     |       | 437 |   | 30.1 | % | 8.2 |   | 6.5 |   |
| Aircraft  maintenance          |       | 1,075                       |       | 911                                       |       | 164 |   | 18.0 | % | 4.7 |   | 4.1 |   |
| Aircraft rents                 |       | 453                         |       | 453                                       |       | — |   | 0.0 | % | 2.0 |   | 2.0 |   |
| Landing fees                   |       | 177                         |       | 95                                        |       | 82 |   | 86.3 | % | 0.8 |   | 0.4 |   |
| Insurance and  taxes           |       | 113                         |       | 103                                       |       | 10 |   | 9.7 | % | 0.5 |   | 0.5 |   |
| Depreciation and  amortization |       | 198                         |       | 173                                       |       | 25 |   | 14.5 | % | 0.9 |   | 0.8 |   |
| Administrative  and other      |       | 2,383                       |       | 1,340                                     |       | 1,043 |   | 77.8 | % | 10.4 |   | 6.0 |   |
|                           |       | $                           | 9,394      |                                      | $          | 6,663 |   | $ | 2,731 |   | 41.0 | % | 41.0 | ¢ | 29.9 | ¢ |

 

Wages and benefitsincreased $1.0 million, or 45.4%, as a result of additional staffing andtraining requirements in flight, maintenance and stations for the Bostonoperation.

In the first quarter offiscal 2008, Big Sky experienced a 30.1% increase in fuel expense as a resultof an 18.8% increase in block hours period-over-period and a higher averageprice of jet fuel, from $2.14 per gallon in the first quarter of fiscal 2007 to$2.48 per gallon in the first quarter of fiscal 2008.

Aircraft maintenanceincreased 18.0% as a result of increased flying associated with Big Sky’s Deltaoperations.

Landing fees increased86.3% as a result of the increased level of operations and higher landing feecharges associated with the Big Sky’s eastern operations.

During the first quarterof fiscal 2008, administrative and other expenses increased $1.0 million, or77.8%, from the first quarter of fiscal 2007, primarily due to training costsfor additional staffing and station-related costs at the new Boston locations.

*MAIR*

MAIR Operating Expenses

Total operating expensesin the first quarter of fiscal 2008 decreased to $2.2 million from $3.2 millionin the prior year period, primarily due to decreased legal and professionalfees from Mesaba’s bankruptcy in fiscal 2008 compared to fiscal 2007.

*Consolidated Operating Loss*

Operating loss for thefirst quarter of fiscal 2008 increased to $4.5 million from $3.8 million in theprior year quarter due to the results of MAIR and Big Sky described above.

*Consolidated Nonoperating Income*

Nonoperating income, netincreased to $10.9 million in the first quarter of fiscal 2008 from $1.3million in the prior year quarter primarily as a result of MAIR recording $9.4million for its damage claim in Mesaba’s bankruptcy.

*Consolidated Provision for Income Taxes*

The Company recorded $0.1million of tax benefit on its income for the three months ended June 30,2007.  The Company utilized certaindeferred tax assets in the quarter to offset taxable income.  The associated valuation allowance againstthose deferred tax assets was therefore removed.  The Company continues to record a fullvaluation allowance against its remaining deferred tax assets due to theuncertainty regarding the ultimate realization of those assets.  The benefit recorded is due to the reversalof tax contingency reserves previously established and the realization of stateincome tax refunds received for prior periods.

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**Liquidity and Capital Resources**

*Overview*

Unrestricted cash, cashequivalents and investments decreased 7.0% to $61.4 million at June 30, 2007from $66.0 million at March 31, 2007. The decrease was primarily due to funding the start-up costs for Big Sky’sBoston operation.  The Company’s workingcapital increased to $41.0 million at June 30, 2007 compared to working capitalof $39.9 million at March 31, 2007.

As part of the SPA withNorthwest, MAIR’s liquidity will continue to be affected by the purchase of allNorthwest’s stock in MAIR at a purchase price of $6.25 per share.  On March 12, 2007, MAIR paid approximately$24 million of the aggregate purchase price, or $4.25 per share, upon theinitial closing of the transaction.  MAIRwill pay the remaining purchase price, approximately $11.0 million or $2.00 pershare, on the earlier of October 22, 2007 or the date on which MAIR receives atleast $25 million in equity distributions from Mesaba’s bankruptcy estate.

*Operating Activities*

Net cash used inoperating activities for the three months ended June 30, 2007 was $4.6 million,primarily due to establishing a receivable of $9.4 million for MAIR’s claims inMesaba’s bankruptcy which offset net income of $6.5 million.

*Investing Activities*

Net cash provided byinvesting activities for the three months ended June 30, 2007 was $6.7 million,primarily due to net sales of investments of $7.2 million, offset primarily bypurchases of property and equipment of $0.4 million.

*Financing Activities*

Net cash provided byfinancing activities for the three months ended June 30, 2007 was $0.3 millionprimarily due to the $0.4 million in proceeds from the exercise of stockoptions.

*Outlook*

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

**CRITICAL ACCOUNTING POLICIES ANDESTIMATES**

In its 2007 Annual Reporton Form 10-K filed with the SEC on June 19, 2007, the Company identified thecritical accounting policies which affect its more significant estimates andassumptions used in preparing its consolidated financial statements.  The Company has not changed these policiesfrom those previously disclosed in its Annual Report on Form 10-K.

**NEW ACCOUNTING PRONOUNCEMENTS**

See ITEM 1. CondensedConsolidated Financial Statements – Note 13. New Accounting Pronouncements.

## **ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURESABOUT MARKET RISK**

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

*Aircraft Fuel*

Big Sky is subject tofluctuations in fuel prices.  Ahypothetical 10% increase in the June 30, 2007 cost per gallon of fuel,assuming projected fiscal 2008 usage at Big Sky, would result in an increase toaircraft fuel expense of approximately $1.0 million in fiscal 2008.  As of June 30, 2007, Big Sky had no fuelhedges in place for fiscal 2008.

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*Interest Rates*

The Company’s earningsare affected by changes in interest rates due to the impact those changes haveon its interest income from cash equivalents and short and long-term investments.  If interest rates were to increase by 100basis points for a full year, based on the Company’s cash equivalents,short-term and long-term investments balance at June 30, 2007, the Company’sinterest income from cash equivalents, short-term and long-term investmentswould increase by approximately $0.6 million.

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

**ITEM 4.  CONTROLS AND PROCEDURES**

*Evaluation of Disclosure ControlsProcedures*

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

As of June 30, 2007, theCompany conducted an evaluation under the supervision and with theparticipation of the Company’s management, including the Company’s ChiefExecutive Officer and Chief Financial Officer, regarding the effectiveness of thedesign and operation of the Company’s disclosure controls and procedures (asthat term is defined in Rules 13a-15(e) and 15d-15(e) under theSecurities Exchange Act of 1934, as amended).  Based upon that evaluation,the Chief Executive Officer and Chief Financial Officer concluded that theCompany’s disclosure controls and procedures were effective as of the date ofsuch evaluation.

*Changes in Internal Controls*

During the quarter endedJune 30, 2007, 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.

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# **PART II.OTHER INFORMATION**

## **ITEM 1.  LEGAL PROCEEDINGS**

Certain legal proceedingsin which the Company is involved are discussed in Note 13, “Commitments andContingencies,” to the consolidated financial statements included inPart I, Item 8, of the Company’s Annual Report on Form 10-K for thefiscal year ended March 31, 2007, filed with the SEC on June 19,2007.  There have been no furthermaterial developments in the Company’s legal proceedings since the disclosurescontained in such report.  Unlessotherwise indicated, all proceedings discussed in the Company’s earlier reportsfiled with the SEC remain outstanding. Reference also is made to Note 10, “Commitments and Contingencies,” inPart I, Item 1, of this Quarterly Report on Form 10-Q.

**ITEM 1A.  RISK FACTORS**

There have been nomaterial changes in the risk factors previously disclosed in Item 1A, “RiskFactors,” of the Company’s Annual Report on Form 10-K for the fiscal year endedMarch 31, 2007, filed with the SEC on June 19, 2007.

**ITEM 6.  EXHIBITS**

# **EXHIBITINDEX**

|        | **Exhibit  Number** | ** ** | **Document Description**                                                                                          |
|--------|---------------------|------------|-------------------------------------------------------------------------------------------------------------------|
|   |                |       |                                                                                                              |
| *      | 10.13               |       | Severance Compensation Plan Effective July 10, 2007.  Filed Herewith.                                             |
| *      | 10.14               |       | Amendment No. 1 to Management Compensation Agreement  with Paul F. Foley, dated July 11, 2007. Filed herewith.    |
| *      | 10.15               |       | Executive Retention Bonus Agreement between the  Company and Paul F. Foley, dated July 11, 2007. Filed herewith.  |
| *      | 10.16               |       | Executive Retention Bonus Agreement between the  Company and Robert E. Weil, dated July 11, 2007. Filed herewith. |
| *      | 10.17               |       | Executive Retention Bonus Agreement between the Company  and Ruth M. Timm, dated July 11, 2007. Filed herewith.   |
|   | 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.                         |
|   |
|   | *                   |       | Denotes management contract or compensatory plan or  arrangement.                                                 |

 

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**SIGNATURES**

Pursuant to the requirementsof the Securities Exchange Act of 1934, the registrant has duly caused thisreport to be signed on its behalf by the undersigned, thereunto dulyauthorized.
|                        |   | MAIR Holdings, Inc.                                                                                               |               |   |   |   |
|------------------------|--------|-------------------------------------------------------------------------------------------------------------------|--------------------|--------|--------|--------|
|                   |   |                                                                                                              |               |   |   |   |
|                   |   |                                                                                                              |               |   |   |   |
| Dated: August 14, 2007 |   | By:                                                                                                               | /s/ Robert E. Weil |   |   |
|                   |   | Robert E. Weil                                                                                                    |               |   |   |   |
|                   |   | Vice President, Chief Financial Officer and  Treasurer  (principal financial officer and an authorized signatory) |
|                        |        |                                                                                                                   |                    |        |        |        |  |

 

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