UNITED STATES
SECURITIES 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 December 31, 2007

OR

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

For the transition period from            to           

Commission File No:  0-17895

MAIR HOLDINGS, INC.

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

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

Yes x   No o

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

Large Accelerated Filer o Accelerated Filer x Non-Accelerated Filer o

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

Yes o   No x

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

Class	Outstanding as of December 31, 2007
Common Stock, par value $.01 per share	15,083,049

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

Statements in this Quarterly Report on Form 10-Q of MAIR Holdings, Inc. (“MAIR” or the “Company”) under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this report are forward-looking and are based upon information currently available to the Company.  The Company, through its officers, directors or employees, may also from time to time make oral forward-looking statements.  In connection with the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995, the Company notes that a variety of material risks and uncertainties could cause actual results to differ materially from those contained in any forward-looking statement made by or on behalf of the Company.  Many important factors that could cause such a difference are described under the caption “Risk Factors” in Item 1A of Part I of the Company’s Annual Report on Form 10-K, filed with the United States Securities and Exchange Commission (the “SEC”) on June 19, 2007, as updated in Item 1A of Part II of the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2007, filed with the SEC on November 7, 2007 and in Item 1A of Part II of this Quarterly Report on Form 10-Q.

Undue reliance should not be placed on the Company’s forward-looking statements because the matters they describe are subject to known and unknown risks, uncertainties and other unpredictable factors, many of which are beyond the Company’s control.  The Company’s forward-looking statements are based on information currently available and speak only as of the date on which this report was filed with the SEC.  Over time, actual results, performance or achievements will likely differ from the anticipated results, performance or achievements that are expressed or implied by the Company’s forward-looking statements, and such differences might be significant and materially adverse to the Company’s shareholders.

All subsequent written or oral forward-looking statements attributable to the Company or persons acting on the Company’s behalf are expressly qualified by the factors described above.  The Company assumes no obligation, and disclaims any obligation, to update information contained in this Quarterly Report on Form 10-Q, including forward-looking statements, as a result of facts, events or circumstances after the date of this report, except as required by law in the normal course of its public disclosure practices.

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PART I.  FINANCIAL INFORMATION

ITEM 1.  CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MAIR HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share information)

(Unaudited)

	December 31			March 31
	2007			2007
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	19,981		$	28,593
Short-term investments	5,404			26,068
Accounts receivable, net of reserves of $1,289 and $570	3,373			2,882
Inventories, net	1,459			650
Prepaid expenses and deposits	3,248			4,592
Restricted cash	13,354			554
Total current assets	46,819			63,339
PROPERTY AND EQUIPMENT:
Flight equipment	22,538			847
Other property and equipment	2,687			1,724
Less: Accumulated depreciation and amortization	(1,822		)	(891		)
Net property and equipment	23,403			1,680
NONCURRENT ASSETS:
Long-term investments	9,127			11,357
Other intangible assets, net	1,075			2,007
Restricted cash	—			13,110
Other assets, net	190			197
	$	80,614		$	91,690
LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES:
Intercompany payable to Mesaba Aviation, Inc.	$	—		$	813
Accounts payable	4,105			3,063
Stock repurchase payable to Northwest Airlines, Inc.	—			10,905
Accrued liabilities:
Payroll	1,716			1,575
Deferred income	465			737
Imairment charges	12,701			—
Other current liabilities	3,747			6,310
Total current liabilities	22,734			23,403
OTHER NONCURRENT LIABILITIES	1,238			1,081
Total liabilities	23,972			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, 15,083,049 and 15,008,285 shares issued and outstanding
	151			150
Paid-in capital	36,013			35,438
Accumulated other comprehensive income	120			—
Retained earnings	20,358			31,618
Total shareholders’ equity	56,642			67,206
	$	80,614		$	91,690

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MAIR HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except share information)

(Unaudited)

	Three Months Ended						Nine Months Ended
	December 31						December 31
	2007			2006			2007			2006
OPERATING REVENUES:
Passenger	$	6,971		$	3,544		$	18,054		$	11,004
Essential Air Service and other	2,897			2,408			7,977			7,174
Total operating revenues	9,868			5,952			26,031			18,178
OPERATING EXPENSES:
Wages and benefits	4,245			2,842			11,978			8,148
Aircraft fuel	3,208			1,144			7,556			4,111
Aircraft maintenance	1,276			845			3,484			2,765
Aircraft rents	453			453			1,359			1,359
Landing fees	286			75			738			262
Insurance and taxes	316			319			984			1,678
Depreciation and amortization	663			176			1,252			535
Administrative and other	4,089			2,533			11,238			8,969
Impairment and other charges	10,962			—			10,962			—
Total operating expenses	25,498			8,387			49,551			27,827
Operating loss	(15,630		)	(2,435		)	(23,520		)	(9,649		)
NONOPERATING INCOME (EXPENSE):
Damage claim income from Mesaba Aviation, Inc.	—			—			9,429			—
Interest income and other	129			1,330			2,850			3,889
Interest expense	(68		)	(16		)	(440		)	(50		)
Other nonoperating income, net	61			1,314			11,839			3,839
Loss before benefit (provision) for income taxes	(15,569		)	(1,121		)	(11,681		)	(5,810		)
BENEFIT (PROVISION) FOR INCOME TAXES	340			(10		)	421			(351		)
NET LOSS	$	(15,229	)	$	(1,131	)	$	(11,260	)	$	(6,161	)
NET LOSS PER SHARE:
Loss per common share - basic	$	(1.01	)	$	(0.05	)	$	(0.75	)	$	(0.30	)
Loss per common share - diluted	$	(1.01	)	$	(0.05	)	$	(0.75	)	$	(0.30	)
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic	15,083			20,592			15,083			20,592
Diluted	15,083			20,592			15,083			20,592

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

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MAIR HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(Unaudited)

	Nine Months Ended
	December 31
	2007			2006
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(11,260	)	$	(6,161	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization	1,252			535
Amortization of deferred credits	(72		)	(81		)
Stock-based compensation	129			298
Amortization of investment discounts	(423		)	(983		)
Mesaba Aviation, Inc. tax payable settlement	(813		)	—
Deferred income taxes	—			202
Impairment charges	10,962			—
Changes in current operating items:
Accounts receivable	(491		)	335
Income tax receivable	—			941
Inventories	(809		)	(522		)
Prepaid expenses and deposits	1,344			683
Payable to Northwest Airlines, Inc.	(11,314		)	—
Accounts payable and other	(88		)	756
Net cash used in operating activities	(11,583		)	(3,997		)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investments	(15,469		)	(31,138		)
Sales of investments	38,711			40,984
Purchases of property and equipment	(22,195		)	(233		)
Sale of property and equipment	202			—
Decrease (increase) in restricted cash	310			(13,110		)
Net cash provided by (used in) investing activities	1,559			(3,497		)
CASH FLOWS FROM FINANCING ACTIVITIES
Payment of long term debt and capital leases	71			(47		)
Issuance of line of credit	983			—
Proceeds from exercise of stock options	358			3,005
Net cash provided by financing activities	1,412			2,958
NET DECREASE IN CASH AND CASH EQUIVALENTS	(8,612		)	(4,536		)
CASH AND CASH EQUIVALENTS:
Beginning of period	28,593			47,135
End of period	$	19,981		$	42,599
SUPPLEMENTARY CASH FLOW INFORMATION:
Cash paid during the year for:
Interest	$	66		$	44
Income taxes	133			(6,549		)
SUPPLEMENTARY NON-CASH ACTIVITY:
Capital expenditures in accounts payable	$	547		$	—

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

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MAIR HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The condensed consolidated financial statements included herein have been prepared by the Company without audit, pursuant to the rules and regulations of the SEC.  The information furnished in the condensed consolidated financial statements includes normal recurring adjustments, unless otherwise noted, and reflects all adjustments that are, in the opinion of management, necessary for the fair presentation of such condensed consolidated financial statements.  The Company’s business is seasonal and, accordingly, interim results are not indicative of results for a full year.  Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading.  These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements for the year ended March 31, 2007, and the notes thereto, included in the Company’s Annual Report on Form 10-K filed with the SEC on June 19, 2007.

1.Basis of Presentation, Corporate Organization and Business

Basis of Presentation and Corporate Organization

MAIR is the holding company for Big Sky Transportation Co. (“Big Sky”), a regional air carrier based in Billings, Montana.  Until April 24, 2007, MAIR was also the holding company for Mesaba Aviation, Inc., (“Mesaba”), a regional air carrier based in Minneapolis, Minnesota.  The Company’s condensed consolidated financial statements include the accounts of MAIR and Big Sky.  All intercompany transactions and balances have been eliminated in consolidation.

Mesaba filed a voluntary petition for relief under Chapter 11 of the United States Bankruptcy Code (the “Bankruptcy Code”) in the United States Bankruptcy Court for the District of Minnesota (“Bankruptcy Court”) on October 13, 2005 (the “Petition Date”), after which Mesaba operated its business as a debtor-in-possession pursuant to the Bankruptcy Code.  On April 24, 2007 (the “Exit Date”), Mesaba’s bankruptcy plan of reorganization became effective and Mesaba exited bankruptcy as a wholly-owned subsidiary of Northwest Airlines, Inc. (“Northwest”), and, therefore, is no longer owned by MAIR.

Operations

Big Sky

Big Sky operates as a regional air carrier based in Billings, Montana, providing scheduled passenger, freight, express package and charter services.  In April 2007, Big Sky began operating as a Delta connection carrier for Delta Air Lines, Inc. (“Delta”) in the east, with service to and from Boston.  However, a combination of unusually bad weather, disappointing revenue and record-high fuel prices disrupted Big Sky’s operations to the point where they were no longer financially viable.  As a result, Big Sky and Delta mutually agreed to cease the eastern operations effective January 7, 2008.  Big Sky also announced that it is seeking to transition its western operations to another carrier and sell its operating assets.  Big Sky’s western operations involve providing interline and online connecting services and local market services through daily scheduled flights.  Big Sky has a code-sharing agreement with Northwest, where its services in the west are marketed jointly.  As of February 6, 2008, Big Sky provided scheduled air service to ten communities in Montana.

Big Sky participates in the Essential Air Service (“EAS”) program with the Department of Transportation (“DOT”).  The EAS program subsidizes air carriers to provide air service to designated rural communities throughout the country that could not otherwise economically justify that service based on their passenger traffic.  The DOT pays EAS subsidies for each departure in a covered market. During the three months ended December 31, 2007 and 2006, Big Sky recognized revenue from EAS subsidies of $2.8 and $1.9 million, respectively.  During the nine months ended December 31, 2007 and 2006, Big Sky recognized revenue from EAS subsidies of $7.2 and $6.2 million, respectively.

As a part of its Delta connection service, Big Sky entered into an agreement to purchase eight Beechcraft 1900D (“Beechcraft”) aircraft and related spare parts.  At December 31, 2007, seven aircraft and spare parts costing approximately $21.8 million had been delivered to Big Sky.  Although Big Sky intended to obtain independent financing for the aircraft, Big Sky was unable to obtain commercially reasonable independent financing without a guaranty by

6

MAIR.  As a result, MAIR provided the debt financing to allow Big Sky to acquire the seven aircraft.  Because Big Sky ended its Delta connection service on January 7, 2008, Big Sky, with the seller’s consent, elected not to purchase the eighth and final aircraft under the purchase agreement.  Effective January 7, 2008, Big Sky has classified these seven aircraft as held for sale and is now in the process of identifying buyers.  Big Sky believes that there is currently a strong global market for these aircraft.  However, there is no assurance that market conditions will not deteriorate before Big Sky is able to sell the aircraft.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities, as well as the reported amounts of revenues and expenses.  The most significant use of estimates relates to the allowance for doubtful accounts, aircraft property and equipment lives, inventory obsolescence reserves, valuation of other intangible assets and accounting for income taxes.  Ultimate results could differ from those estimates.

2.Intangible Assets

The Company purchased Big Sky in December 2002.  The excess of the Big Sky purchase price over the fair market value of the net assets acquired was allocated to certain identifiable intangible assets, including Big Sky’s pilot labor contract and its air carrier certificate, and to goodwill.  Goodwill and the intangible assets are evaluated for impairment annually, at a minimum, or on an interim basis if events or circumstances indicate a possible inability to realize the carrying amounts.

Intangible assets and related accumulated amortization were as follows, in thousands:

	December 31, 2007						March 31, 2007
	Accumulated						Accumulated
	Gross		Amortization		Net		Gross		Amortization			Net
Indefinite-lived intangible assets:
Air carrier certificate	$	925			$	925	$	925				$	925
Airport slots	150				150		—					—
Amortizable intangible asset:
Pilot labor contract	—		—		—		2,840		(1,758		)	1,082
	$	1,075	$	—	$	1,075	$	3,765	$	(1,758	)	$	2,007

During the third quarter of fiscal 2008, Big Sky purchased three slots at the Westchester County Airport in White Plains, New York with the intent to provide air service to Boston, Massachusetts in January 2008.  Presently the slots are being offered for sale.

Due to continued losses and the recent announcement that Big Sky is seeking to transition its remaining operations to another carrier, the Company determined that an interim impairment test of intangible assets was necessary at December 31, 2007.  Based on the results of the interim test performed at December 31, 2007 the Company determined that Big Sky’s pilot labor contract was impaired and recorded an impairment charge of approximately $0.8 million.  The impairment charge was recorded in “Impairment charges” in the accompanying consolidated statement of operations.  Based on its analysis, the Company believes Big Sky’s air carrier certificate and airport slots continue to have value and are not impaired.

3.MAIR’s Proof of Claim in Mesaba’s Bankruptcy

On February 28, 2006, as a part of Mesaba’s bankruptcy proceedings, MAIR filed a proof of claim against Mesaba, with no recognition of this claim in the Company’s consolidated financial statements due to the significant uncertainty of any amount being ultimately collected.  In April 2007, the Bankruptcy Court approved a compromise for MAIR’s damage claim under which Mesaba allowed MAIR a claim of up to $6.2 million relating to repayment of the guaranty of Mesaba’s hangar lease at the Cincinnati/Northern Kentucky International Airport and management fees.  Additionally, pursuant to a Stock Purchase Agreement between MAIR and Northwest, Northwest assigned its $7.3

7

million allowed claim against Mesaba to MAIR.  Therefore, as of the Exit Date, MAIR’s total unsecured creditors’ claim in Mesaba’s bankruptcy totaled $13.5 million.

In July 2007, the liquidating trust made an interim distribution of 70% to all claimholders with allowed undisputed claims.  MAIR received $9.4 million of its $13.5 million claim, which reflects the 70% interim distribution of its claim.  MAIR recorded these amounts as “Damage claim income from Mesaba Aviation, Inc.” within the condensed consolidated statement of operations.  The remaining $4.1 million, or 30%, of MAIR’s unsecured claim is considered a contingent gain and will be recorded as the Company receives additional disbursements from the liquidating trust after the remaining Mesaba disputed claims are resolved (see Note 12).

4.Investments

Investments consist principally of government, agency, corporate and municipal securities and are classified as available-for-sale.  Fair value of investments is determined based on quoted market prices.  The Company classifies investments with an original maturity of more than 90 days that mature within one year as short-term and greater than one year as long-term.

As of December 31, 2007 and March 31, 2007, cash, cash equivalents, short-term and long-term investments totaled $34.5 million and $66.0 million, respectively.

Amortized cost, gross unrealized gains and losses and fair value of short and long-term investments classified as securities available for sale were as follows, in thousands:

	December 31, 2007			March 31, 2007
Amortized cost	$	14,651		$	37,409
Gross unrealized gains	124			50
Gross unrealized losses	(244		)	(34		)
Fair value	$	14,531		$	37,425

For the three and nine months ended December 31, 2007 and 2006, the Company’s gross realized gains and losses were insignificant.

5.Income Taxes

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

The Company has performed such an analysis, and a full valuation allowance was provided at the end of fiscal 2006. The Company continues to record a full valuation allowance against its remaining deferred tax assets due to the uncertainty regarding the ultimate realization of those assets.  The Company recorded a $0.3 million tax benefit for the three months ended December 31, 2007.  The Company recorded a $0.4 million tax benefit for the nine months ended December 31, 2007 due to the reversal of tax contingency reserves previously established and the realization of state income tax refunds received for prior periods and a refund of interest from an Internal Revenue Service (“IRS”) audit.  The Company will be required to update its estimates of future taxable income based upon additional information management obtains, and the Company will continue to evaluate the realizability of the deferred tax assets on a quarterly basis.

The Company will file a consolidated federal income tax return which will include Mesaba’s income through the Exit Date.  Taxable income for both the Company and Mesaba will be offset by the utilization of net operating loss carryforwards from prior periods.

The Company’s adoption of the provisions of the Financial Accounting Standards Board (“FASB”) Interpretation No. 48, Accounting for Uncertainty in Income Taxes, (“FIN 48”) on April 1, 2007 did not impact the Company’s

8

consolidated financial statements. As of the adoption, the total amount of unrecognized tax benefits for uncertain tax positions was $0.5 million, which is classified as non-current liabilities.  Of this amount, $0.3 million would affect the Company’s effective tax rate if recognized.  It is not expected that the amount of unrecognized tax benefit will significantly change within the next twelve months.

The Company’s continuing practice is to classify interest and penalties, if any, on uncertain tax positions as components of the provision for income taxes.  The total amount of interest and penalty accrued as of April 1, 2007 was $0.1 million.

The Company and its subsidiary file a consolidated federal income tax return and various state income tax returns.  As of the date of adoption of FIN 48, the Company is generally no longer subject to U.S. federal and state income tax examinations by tax authorities for years prior to fiscal 2004.

6.Stock-Based Compensation

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 recognizes beginning on that date includes expense associated with the fair value of all awards granted on and after April 1, 2006, and expense for the unvested portion of previously granted awards outstanding on April 1, 2006. Results for prior periods have not been restated.

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

Stock Option Plans

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

The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions:  risk-free interest rate, stock price volatility and expected life.  The Company establishes the risk-free interest rate using the U.S. Treasury yield curve as of the grant date.  The expected volatility assumption is set based primarily on historical volatility.  For options granted, the Company amortizes the fair value on a straight-line basis over the vesting period of the options.

For the nine months ended December 31, 2007 and 2006, SFAS 123R’s fair value method resulted in additional expense in the amount of $0.1 million and $0.3 million, respectively, related to stock options.  These amounts are included in the “Wages and benefits” caption in the accompanying condensed consolidated statements of operations for the three and nine months ended December 31, 2007 and 2006.  SFAS 123R also requires the benefits of tax deductions in excess of recognized compensation cost to be reported as a financing cash flow, rather than as an operating cash flow as required prior to SFAS 123R.  As the Company currently has no excess tax benefits related to SFAS 123R, its adoption has not affected the Company’s condensed consolidated statement of cash flows. The impact of adopting SFAS 123R on future results will depend on, among other things, levels of stock options granted in the future, actual forfeiture rates and the timing of option exercises.

9

A summary of stock option activity 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	74,764	5.97
Expired / Cancelled	548,354	7.13
Balance at December 31, 2007	835,000	6.78	4.9	$	—	763,750	6.76	4.7	$	—
Vested or expected to vest at December 31, 2007	835,000	6.78	4.9	$	—

The aggregate intrinsic value of options outstanding at December 31, 2007 is calculated as the difference between the exercise price of the underlying option and the market price of the common stock.  The aggregate intrinsic value of options exercised during the three and nine months ended December 31, 2007 was zero.  The total fair value of options vested during the nine months ended December 31, 2007 was $0.2 million.

Unrecognized Compensation

As of December 31, 2007, the Company had $0.2 million of total unrecognized compensation cost related to non-vested stock option compensation arrangements granted under all equity compensation plans.  Total unrecognized compensation will be adjusted for future changes in estimated forfeitures.  The Company expects to recognize the cost over a weighted average period of two years.

7.Loss Per Share

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

The following table reconciles the number of shares utilized in the condensed consolidated loss per share calculations for the periods ended December 31, in thousands, except per share data:

	Three Months Ended						Nine Months Ended
	December 31						December 31
	2007			2006			2007			2006
Net loss	$	(15,229	)	$	(1,131	)	$	(11,260	)	$	(6,161	)
For loss per share - basic:
Weighted average number of issued shares outstanding	15,083			20,592			15,083			20,592
Effect of dilutive securities:
Computed shares outstanding under stock option plans utilizing the treasury stock method
	—			—			—			—
For loss per share - diluted:
Weighted average common and potentially dilutive common shares outstanding
	15,083			20,592			15,083			20,592
Loss per share - basic	$	(1.01	)	$	(0.05	)	$	(0.75	)	$	(0.30	)
Loss per share - diluted	$	(1.01	)	$	(0.05	)	$	(0.75	)	$	(0.30	)
Antidilutive options and warrants	835			1,537			790			1,582

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8.Consolidated Comprehensive Loss

The following table presents the calculation of comprehensive loss for the periods ended December 31, in thousands:

	Three Months Ended						Nine Months Ended
	December 31						December 31
	2007			2006			2007			2006
Net loss	$	(15,229	)	$	(1,131	)	$	(11,260	)	$	(6,161	)
Unrealized gains on investments classified as available for sale	109			11			120			219
Comprehensive loss	$	(15,120	)	$	(1,120	)	$	(11,140	)	$	(5,942	)

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9.Segment Information

The Company follows the provisions of SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information.  SFAS No. 131 establishes annual and interim reporting standards for an enterprise’s business segments and related disclosures about its products, services, geographic areas and major customers.  The method for determining what information to report is based upon the way management organizes the operating segments within the Company for making operating decisions and assessing financial performance.  Although Mesaba has been deconsolidated from the Company’s consolidated financial statements as of the Petition Date, the segment information presented below continues to include Mesaba until the Exit Date, in accordance with SFAS No. 131 and related guidance for equity-method investees.  Mesaba’s results of operations after the Petition Date are included in the “Eliminations” column.

Operating segment information for Mesaba, Big Sky and MAIR were as follows, in thousands:

	Mesaba			Big Sky			MAIR			Eliminations			Consolidated
Three Months Ended December 31, 2007
Operating revenues	$	—		$	9,868		$	—		$	—		$	9,868
Operating expenses	—			14,302			11,196			—			25,498
Depreciation and amortization	—			656			7			—			663
Interest expense	—			388			40			(360		)	68
Loss before income taxes	—			(5,403		)	(10,166		)	—			(15,569		)
Capital expenditures	—			12,185			4			—			12,189
Current assets	—			8,783			43,738			(5,702		)	46,819
Total assets	—			33,427			100,591			(53,404		)	80,614
Current liabilities	—			17,814			13,624			(8,704		)	22,734
Total shareholders’ equity (deficit)	—			(3,571		)	86,718			(26,505		)	56,642
Three Months Ended December 31, 2006
Operating revenues	$	60,489		$	5,952		$	58		$	(60,547	)	$	5,952
Operating expenses	66,033			6,525			1,920			(66,091		)	8,387
Depreciation and amortization	2,158			170			6			(2,158		)	176
Interest expense	86			117			—			(187		)	16
Reorganization items, net	25,491			—			—			(25,491		)	—
Loss before income taxes	(30,753		)	(692		)	(429		)	30,753			(1,121		)
Capital expenditures	366			33			10			(366		)	43
Current assets	62,257			3,987			87,767			(67,131		)	86,880
Total assets	89,028			7,706			132,355			(109,234		)	119,855
Current liabilities	43,110			8,863			11,916			(47,984		)	15,905
Total shareholders’ equity (deficit)	(36,897		)	(2,152		)	120,439			21,565			102,955
Nine Months Ended December 31, 2007
Operating revenues	$	14,842		$	26,030		$	—		$	(14,841	)	$	26,031
Operating expenses	15,831			34,620			14,931			(15,831		)	49,551
Depreciation and amortization	433			1,236			16			(433		)	1,252
Interest expense	—			604			375			(539		)	440
Income (Loss) before income taxes	83,528			(9,768		)	(13,017		)	(72,424		)	(11,681		)
Capital expenditures	—			22,187			8			—			22,195
Nine Months Ended December 31, 2006
Operating revenues	$	215,107		$	18,178		$	175		$	(215,282	)	$	18,178
Operating expenses	228,317			20,233			7,769			(228,492		)	27,827
Depreciation and amortization	7,141			519			16			(7,141		)	535
Interest expense	86			356			—			(392		)	50
Reorganization items, net	26,816			—			—			(26,816		)	—
Loss before income taxes	(38,970		)	(2,405		)	(3,405		)	38,970			(5,810		)
Capital expenditures	1,596			223			10			(1,596		)	233

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10.Commitments and Contingencies

Saab Leasing Litigation

In 2002, Fairbrook Leasing, Inc., Lambert Leasing, Inc. and Swedish Aircraft Holdings AB (“Saab Leasing”) filed a declaratory judgment action against Mesaba relating to 20 Saab 340A (“340A”) aircraft leased by Mesaba.  In 2003, the District Court declared that the term sheet relating to the leases for the 340A aircraft was a binding preliminary agreement requiring Mesaba to negotiate in good faith toward the execution of long-term agreements for each of the 340A aircraft.  Although Mesaba appealed this ruling, while the appeal was pending, Saab Leasing (relying on the District Court’s declaratory judgment ruling) filed a separate action in the District Court alleging approximately $35 million in damages for past due and future aircraft lease obligations.  While the damages action was pending, the U.S. Court of Appeals for the Eighth Circuit (the “Circuit Court”) affirmed the District Court’s declaratory judgment ruling.  On July 6, 2006, the District Court in the damages action granted Mesaba’s motion for partial summary judgment, ruling that Saab Leasing is not eligible to receive damages for the majority of its claims against Mesaba.

Because the potential damages for the remaining claim against Mesaba were not significant, Mesaba never established any accrual with regard to this litigation within its condensed financial statements.  Mesaba was unable to reach a settlement with Saab Leasing within the context of Mesaba’s bankruptcy proceedings; thus, Mesaba consented to lift the automatic stay and allow Saab Leasing to appeal the District Court’s July 2006 ruling to the Circuit Court.  The Circuit Court heard oral arguments on the appeal on October 18, 2007, but has not yet ruled on the matter.  Mesaba’s liquidating trust is funding litigation expenses related to this appeal and will be required to fund any amounts that may be due to Saab Leasing if the District Court’s ruling is reversed.  Any such payments by Mesaba’s liquidating trust would ultimately reduce the distribution MAIR is entitled to receive from the estate.

Goldman Credit Bankruptcy Claim

Goldman Sachs Credit Partners, L.P. (“Goldman Credit”) is the largest creditor in Mesaba’s bankruptcy proceedings, and it holds approximately $58 million in disputed claims asserted by itself or purchased from other creditors.  All of Goldman Credit’s disputed claims are for aircraft and equipment leases that were rejected by Mesaba.  Goldman Credit has asserted that the stipulated loss provisions of the applicable leases, under which liquidated damages are calculated, should apply to determine the total claim amount due to Goldman Credit.  Mesaba’s liquidating trustee instead believes that the claim allowed to Goldman Credit should reflect actual damages suffered, which is the amount related to Goldman Credit’s claim that is recorded in Mesaba’s liabilities subject to compromise.  Mesaba’s bankruptcy estate has filed for summary judgment with the Bankruptcy Court asserting that the liquidated damages constitute unenforceable penalties.  The Bankruptcy Court heard oral arguments on the motion on September 10, 2007, but has not yet ruled on the motion.  Mesaba’s liquidating trust will be funding the litigation expenses related to the Goldman Credit claim and will be responsible for making a distribution to Goldman Credit following resolution of the claim.  Any such payments from Mesaba’s liquidating trust would ultimately reduce the distribution MAIR is entitled to receive from the estate.

Guaranty

Prior to its bankruptcy, Mesaba leased a facility at the Cincinnati/Northern Kentucky International Airport, but vacated the facility and ceased making the required lease payments on it in November 2005.  In 1999, MAIR unconditionally guaranteed full and prompt payment of the ground lease and the bonds associated with the initial financing of the facility.  In accordance with this guaranty, MAIR has made the required bond and ground lease payments due since November 2005.  In April 2006, in exchange for the bondholders forbearing acceleration of the bonds, MAIR delivered a letter of credit to the bondholders to assure payment of the bonds.  Subsequently, Mesaba assumed and assigned the related ground lease to MAIR.  The Airport Board consented to the assignment of the ground lease.  Since Mesaba vacated the hangar in October 2005, MAIR has been seeking other sublessees to lease the facility.

In August 2007, MAIR and the bondholders amended the original forbearance to allow MAIR until November 1, 2008 to identify a new tenant and execute a sublease for the property.  Any rent MAIR receives from a future sublessee would offset the lease payments that MAIR is required to make.  As of December 31, 2005, MAIR recorded a $4.8 million liability with respect to the lease and guaranty, which assumed that the facility would remain vacant for two years, during which time MAIR would continue to make the bond and lease payments, and that thereafter MAIR would be able to sublease the facility at a 20% discount.  As of December 31, 2007, MAIR recorded an additional $10.2 million liability, which assumed that MAIR would pay the bondholders in full on or before November 1, 2008, but that MAIR

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may receive value for its rights under the ground lease.  This impairment charge was based on recent negotiations between MAIR and the bondholders to pay off the remaining bond balance and negotiations between MAIR and the airport regarding the ground lease.

The letter of credit required under the forbearance agreement was issued by First Interstate Bank of Billings and is currently fully collateralized by MAIR’s cash account held at First Interstate Bank.  Under the agreement with the bondholders, MAIR is obligated to maintain the letter of credit until all obligations under the bonds are satisfied.  MAIR’s annual obligations with respect to the bonds and the ground lease for the facility total approximately $1.2 million, and those obligations are scheduled to continue through July 2029 and will increase at scheduled intervals in accordance with the terms of the bond documents.  The bondholder agreement and the letter of credit provide that the amount of the letter of credit will automatically decrease each July in accordance with the redemption schedule for the bonds.

The bondholders may draw on the letter of credit upon the occurrence of an event of default under its agreement with MAIR, including if MAIR fails to make any payment when due, if MAIR fails to provide evidence that the letter of credit has been renewed annually (or if MAIR fails to renew the letter of credit), if the bondholders receive notice from First 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 with the terms of its agreement with the bondholders, if First Interstate Bank’s credit rating is lowered and MAIR fails to deliver an alternate letter of credit, if MAIR fails to consummate a sublease or assignment of the lease with the airport by November 1, 2008, if MAIR fails to provide a report to the bondholders each quarter identifying the steps MAIR has taken to identify a tenant for the facility or if MAIR commits any event of default under its guaranty of Mesaba’s bond obligations.  The cash supporting the letter of credit was classified as “Restricted cash” on the Company’s condensed consolidated balance sheet at December 31, 2007 and March 31, 2007.

Other Commitments

In February 2005, Big Sky obtained a revolving line of credit in the principal amount of $250,000 from First Interstate Bank of Billings.  In March 2006, the principal amount available under the line increased to $370,000.  The line of credit charges a variable interest rate based on the prime rate published in the Wall Street Journal.  At December 31, 2007, the rate was 7.25% on outstanding borrowings of $369,140.  The line of credit is collateralized by Big Sky’s inventory, accounts receivable and equipment and is scheduled to mature in June 2008.

In September 2007, Big Sky obtained a revolving line of credit in the principal amount of $1,000,000 from First Interstate Bank of Billings.  The line of credit charges a fixed rate of 5.5% on outstanding borrowings at December 31, 2007 of $1.0 million.  The line of credit is collateralized by a cash certificate of deposit and is scheduled to mature in September 2008.

Big Sky recorded $0.7 million of restricted cash at December 31, 2007 for certificates of deposit supporting letters of credit of $0.4 million for workers’ compensation insurance and $0.2 million for aircraft fuel and airport lease agreements.  In May 2007 Big Sky established a $0.1 million certificate of deposit supporting a customs bond required for the June 2007 service between Boston, Massachusetts and Quebec City and Fredericton, Canada.

In connection with Big Sky’s leasing of the Beechcraft aircraft, in April 2005, MAIR entered into a letter of credit agreement with Wells Fargo Bank, N.A.  The letter of credit is in the amount of $1.9 million and is for the benefit of Mesa Air Group (“Mesa”), who may draw on the letter of credit if Big Sky fails to perform its obligations under the Beechcraft aircraft leases.  The letter of credit automatically renews each year unless MAIR notifies Mesa that it does not intend to renew it.  If MAIR does not renew the letter of credit, Big Sky’s leases with Mesa will increase by approximately $0.5 million per year.

MAIR Pledge for Big Sky

In August 2006, MAIR entered 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 it holds back from Big Sky when credit card payments are processed.  U.S. Bank processes payments for Big Sky tickets made with various credit cards.  In the past, and consistent with industry practice, U.S. Bank held back a specified portion of those credit card payments until the tickets had been used.  MAIR agreed to pledge its cash in lieu of the required hold back, which subsequently freed up those funds for Big Sky’s use.  Under the pledge agreement, MAIR is free to request a release of its collateral at any time.  Following such a request, U.S. Bank would again begin holding back amounts from Big Sky, and MAIR’s collateral would be returned 90

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days after the held back amounts total the requisite level pursuant to U.S. Bank’s credit card processing policies.  Because MAIR has the right to request a release of its collateral and to terminate the pledge agreement, the amount of cash pledged is not recorded as restricted cash.

11.Accounting for Mesaba’s Financial Results

MAIR has accounted for Mesaba’s financial results under the equity method of accounting from the Petition Date until the Exit Date.  In accordance with Accounting Principles Board (“APB”) Opinion No. 18, The Equity Method of Accounting for Investments in Common Stock, MAIR evaluated whether its investment in Mesaba had experienced an other-than-temporary impairment as of March 31, 2006.  MAIR’s evaluation utilized a market and income approach, including a discounted cash flow analysis, and concluded that its remaining investment in Mesaba had experienced an other-than-temporary impairment.  Accordingly, effective March 31, 2006, MAIR recorded an $8.9 million impairment charge to write off its remaining equity investment in Mesaba.  The impairment charge was recorded in “Impairment and other charges” in the fiscal 2006 consolidated statement of operations.

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

For the period from April 1, 2007 through the Exit Date, Mesaba reported net income of $83.5 million.  Upon Mesaba’s emergence from bankruptcy and the corresponding transfer of MAIR’s equity in Mesaba to Northwest, MAIR lost its ability to significantly influence Mesaba; therefore, the Company did not record any portion of Mesaba’s income under the equity method of accounting.

The provisions of Statement of Position 90-7, Financial Reporting by Entities in Reorganization Under the Bankruptcy Code (“SOP 90-7”), applied to Mesaba’s financial statements while Mesaba operated under the provisions of Chapter 11 of the Bankruptcy Code.  SOP 90-7 does not change the application of GAAP in the preparation of financial statements.  However, SOP 90-7 does require that the financial statements, for periods including and subsequent to the filing of the Chapter 11 petition, distinguish transactions and events that are directly associated with the reorganization from the ongoing operations of the business.

Since the Petition Date, intercompany balances between MAIR and Mesaba have not been eliminated. As of March 31, 2007, MAIR had an intercompany tax payable to Mesaba of $0.8 million and Mesaba had an equal intercompany tax receivable from MAIR.  As a result of the April 2007 settlement of MAIR’s proof of claim in Mesaba’s bankruptcy proceedings (see Note 3), MAIR may be responsible for certain of Mesaba’s tax obligations incurred through the Exit Date for those states in which MAIR and Mesaba historically filed a unitary tax return.  Although MAIR does not believe there is any remaining tax exposures, under the settlement between MAIR and Mesaba, Mesaba agreed to relinquish its right to the $0.8 million intercompany tax balance to allow MAIR to use these funds to pay any Mesaba tax obligations that taxing authorities may seek to collect from MAIR.  The reversal of the liability amount was recorded within other income for the three month period ended June 30, 2007.

12.Mesaba Plan of Reorganization

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 claim in Northwest’s bankruptcy case.  In exchange, Mesaba agreed to file a plan of reorganization under which Mesaba’s existing equity would be cancelled and new equity would be issued to Northwest, making Mesaba a wholly-owned operating subsidiary of Northwest.

The SPRA authorized Mesaba to monetize its $145 million claim against Northwest to provide Mesaba’s bankruptcy estate with cash to satisfy creditors’ claims.  Mesaba’s creditors’ committee conducted an auction on January 29, 2007, after which The Goldman Sachs Group, Inc. (“Goldman Sachs”) and Mesaba entered into a forward contract by which Goldman Sachs purchased the $145 million claim for approximately $125 million.  The closing of the sale to Goldman Sachs was contingent upon Northwest’s bankruptcy court allowing the $145 million claim and upon Mesaba’s plan of reorganization being approved by its own Bankruptcy Court.  Following Northwest’s bankruptcy court’s February 27, 2007 order allowing the $145 million claim and Mesaba’s Bankruptcy Court’s April 9, 2007 approval of Mesaba’s plan

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of reorganization, Goldman Sachs funded the $125 million purchase price on the Exit Date.  Mesaba exited bankruptcy on the Exit Date, and all of the outstanding stock of Mesaba is now owned by Northwest.  On the Exit Date, Mesaba recorded $125 million as “Income from Claim in Northwest Airlines, Inc. bankruptcy.”

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

The Saab litigation and the Goldman Credit claim are the two major claims in Mesaba’s bankruptcy that remain open (see Note 10).  The $90 million estimate of creditors’ claims includes the liquidating trustee’s assessment of the value at which each of these claims should be resolved.  If the $90 million estimate of creditors’ claims is correct, Mesaba’s creditors would be paid in full, including interest, and MAIR would then receive approximately $34 million for 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 its equity ownership of Mesaba.  In such event, the liquidating trust assets would be distributed pro-rata to all of Mesaba’s unsecured creditors, including MAIR.  MAIR has not recorded the contingent residual equity interest in the trust due to the uncertainty of the ultimate amount to be received.

13.New Accounting Pronouncements

In September 2006, FASB issued SFAS No. 157, Fair Value Measurements (“SFAS No. 157”), to define fair value, establish a framework for measuring fair value in accordance with GAAP, and expand disclosures about fair value measurements.  SFAS No. 157 will be effective for the Company beginning April 1, 2008. The Company is in the process of determining what effect, if any, the adoption of SFAS No. 157 will have on its financial statements.

In February 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 financial instruments and certain other items at fair value that are not currently required to be measured at fair value. SFAS 159 is effective for fiscal years beginning April 1, 2008. The Company is in the process of determining what effect, if any, the adoption of SFAS 159 will have on its financial statements.

14.Subsequent Events

As discussed in Note 1, on January 7, 2008 Big Sky ceased its eastern operations as a Delta connection carrier and began seeking to transfer its remaining operations to another air carrier.  In preparation for transition, and in accordance with the federal law requiring notice to eligible employees of a plant shutdown, Big Sky has delivered notices to a number of employees indicating that it will cease its remaining western operations on March 8, 2008.  Big Sky will continue to assess its ability to operate through the date on which another carrier takes over the Montana EAS routes.

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

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

Overview

During the second quarter of fiscal 2008, MAIR determined that any future plans for the Company would be best served by Big Sky first achieving profitability.  It was MAIR’s expectation that during the third quarter, Big Sky would continue executing its expansion plan as a Delta connection carrier and ultimately move towards monthly profitability.  However, a combination of factors, including unusually bad weather, disappointing revenue and record-high fuel prices, resulted in Big Sky sustaining substantial losses in November and December of 2007.  Therefore, on December 19, 2007, Big Sky announced that it had mutually agreed with Delta to cease operations in the east.  This decision further led to a decision to seek to transfer Big Sky’s remaining western operations to another carrier.  In the interim, Big Sky is continuing to operate in the west with four aircraft while another air carrier prepares to take over the Montana EAS routes.  While Big Sky desires to continue its operations as it seeks to transition them to another carrier, it will continue to assess whether such continued operations are feasible in light of Big Sky’s financial situation.

MAIR ended the quarter with approximately $33.6 million in cash and investments on its balance sheet.  MAIR’s Board of Directors is continuing to actively review the appropriate timing and method to distribute cash not required for operations to the Company’s shareholders.  The timing and amount of such a distribution may be affected by the events occurring at Big Sky.

Additionally, to maximize the potential value to MAIR as Mesaba’s former equity holder, MAIR continues to play an active role in Mesaba’s liquidating trust created by its bankruptcy plan of reorganization.  MAIR expects that all distributions from the trust will be made during the first half of fiscal 2009.  MAIR presently intends to distribute to its shareholders the funds it receives from the liquidating trust.

RESULTS OF OPERATIONS

Three Months Ended December 31, 2007 and 2006

The Company reported a consolidated net loss of $15.2 million, or $1.01 per basic and diluted share, for the quarter ended December 31, 2007, compared to a net loss of $1.1 million, or $0.05 per basic and diluted share, for the quarter ended December 31, 2006. The net loss was primarily due to impairment charges of $11.0 million for the Cincinnati hangar, Big Sky’s pilot labor contract and operating losses at MAIR and Big Sky, offset by interest income at MAIR.

Big Sky

Big Sky’s operating statistics for the three months ended December 31 were as follows:

	2007			2006			% Change
Passengers	61,464			26,611			131.0	%
Available seat miles (“ASM”) (000s)	31,689			20,149			57.3	%
Revenue passenger miles (000s)	15,638			7,782			101.0	%
Load factor	49.3		%	38.6		%	10.7	pts
Block hours flown	9,537			5,327			79.0	%
Departures	8,385			5,244			59.9	%
Revenue per ASM	$	0.311		$	0.295		5.4	%
Cost per ASM	$	0.451		$	0.324		39.2	%
Aircraft in service (average)	16			10			60.0	%

Big Sky Operating Revenues

Total operating revenues increased 65.0% to $9.9 million in the third quarter of fiscal 2008 from $6.0 million in the prior year quarter as a result of a 131.0% increase in passengers due to the Delta connection service that began in April 2007, offset by a lower average fare of $113 in fiscal 2008 compared to $133 in fiscal 2007.

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Big Sky Operating Expenses

Total operating expenses in the third quarter of fiscal 2008 increased 119.2% to $14.3 million from $6.5 million in the prior year period, primarily due to increased fuel cost, increased flying period-over-period and other costs associated with the Delta connection service which began in April 2007.

The following table compares components of the operating expenses and operating cost per ASM for the three months ended December 31:

	Operating Expenses								Operating Cost Per ASM
	2007		2006		$	Change	% Change		2007		2006
Wages and benefits	$	3,846	$	2,304	$	1,542	66.9	%	12.1	¢	11.4	¢
Aircraft fuel	3,208		1,144		2,064		180.4	%	10.1		5.7
Aircraft maintenance	1,276		845		431		51.0	%	4.0		4.2
Aircraft rents	453		453		—		0.0	%	1.4		2.2
Landing fees	286		75		211		281.3	%	0.9		0.4
Insurance and taxes	132		108		24		22.2	%	0.4		0.6
Depreciation and amortization	656		170		486		285.9	%	2.1		0.8
Administrative and other	3,668		1,426		2,242		157.2	%	11.6		7.1
Impairment charges	777		—		777		N/M		2.5		0.0
	$	14,302	$	6,525	$	7,777	119.2	%	45.1	¢	32.4	¢

Wages and benefits increased $1.5 million, or 66.9%, as a result of additional staffing and training requirements in flight, maintenance and stations for the Delta connection service.

In the third quarter of fiscal 2008, Big Sky experienced a 180.4% increase in fuel expense as a result of a 79.0% increase in block hours period-over-period and a higher average price of jet fuel, from $1.88 per gallon in the third quarter of fiscal 2007 to $2.93 per gallon in the third quarter of fiscal 2008.

Aircraft maintenance increased 51.0% as a result of increased flying associated with Big Sky’s Delta connection service.

Landing fees increased 281.3% as a result of the increased level of operations and higher landing fee charges associated with Big Sky’s Delta connection service.

Depreciation and amortization increased 285.9% to $0.7 million in the third quarter of fiscal 2008 from $0.2 million in the third quarter of fiscal 2007, due to aircraft purchased in fiscal 2008.

During the third quarter of fiscal 2008, administrative and other expenses increased $2.2 million, or 157.2%, from the third quarter of fiscal 2007, primarily due to station and passenger related costs associated with the Delta connection service.

During the third quarter of fiscal 2008, Big Sky recorded a $0.8 million impairment charge for its pilot labor contract.

MAIR

MAIR Operating Expenses

Total operating expenses in the third quarter of fiscal 2008 increased to $11.2 million from $1.9 million in the prior year period, primarily due to impairment charges of $10.2 million recorded for the Cincinnati hangar, offset by lower legal and professional fees in fiscal 2008 than those recorded in fiscal 2007 from Mesaba’s bankruptcy.

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Consolidated Operating Loss

Operating loss for the third quarter of fiscal 2008 increased to $15.6 million from the prior year quarter of $2.4 million.  The operating loss was due to the results of MAIR and Big Sky described above.

Consolidated Nonoperating Income

In the third quarter of fiscal 2008, the Company recorded nonoperating income of $0.1 million, as a result of $0.6 million of costs related to Big Sky’s shut down of its eastern operations offset by interest income, compared to nonoperating income of $1.3 million in the prior year quarter.

Consolidated Provision for Income Taxes

The Company recorded a $0.3 million tax benefit on its net loss for the three months ended December 31, 2007 for interest received from an IRS audit.  The Company continues to record a full valuation allowance against its remaining deferred tax assets due to the uncertainty regarding the ultimate realization of those assets.

Nine Months Ended December 31, 2007 and 2006

The Company reported a consolidated net loss of $11.3 million, or $0.75 per basic and diluted share, for the nine months ended December 31, 2007, compared to a net loss of $6.2 million, or $0.30 per basic and diluted share, for the nine months ended December 31, 2006. The net loss was primarily due to operating losses at MAIR and Big Sky, offset by proceeds of $9.4 million for MAIR’s claim in Mesaba’s bankruptcy.

Big Sky

Big Sky’s operating statistics for the nine months ended December 31 were as follows:

	2007			2006			% Change
Passengers	161,259			86,879			85.6	%
Available seat miles (000s)	83,229			64,490			29.1	%
Revenue passenger miles (000s)	41,534			25,245			64.5	%
Load factor	49.9		%	39.1		%	10.8	pts
Block hours flown	24,393			16,516			47.7	%
Departures	22,404			16,926			32.4	%
Revenue per ASM	$	0.313		$	0.282		11.0	%
Cost per ASM	$	0.416		$	0.314		32.2	%
Aircraft in service (average)	13			10			30.0	%

Big Sky Operating Revenues

Total operating revenues increased 42.9% to $26.0 million in fiscal 2008 from $18.2 million in the prior year period as a result of an 85.6% increase in passengers offset by a lower average fare.

Big Sky Operating Expenses

Total operating expenses in fiscal 2008 increased 71.1% to $34.6 million from $20.2 million in the prior year period, primarily due to increased fuel cost, increased flying period-over-period and other costs associated with the Delta connection service which began in April 2007.

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The following table compares components of the operating expenses and operating cost per ASM for the nine months ended December 31:

	Operating Expenses								Operating Cost Per ASM
	2007		2006		$	Change	% Change		2007		2006
Wages and benefits	$	10,170	$	6,721	$	3,449	51.3	%	12.2	¢	10.4	¢
Aircraft fuel	7,556		4,111		3,445		83.8	%	9.1		6.4
Aircraft maintenance	3,484		2,765		719		26.0	%	4.2		4.3
Aircraft rents	1,359		1,359		—		0.0	%	1.6		2.1
Landing fees	738		262		476		181.7	%	0.9		0.4
Insurance and taxes	372		319		53		16.6	%	0.4		0.5
Depreciation and amortization	1,236		519		717		138.2	%	1.5		0.8
Administrative and other	8,928		4,177		4,751		113.7	%	10.8		6.5
Impairment charges	777		—		777		N/M		0.9		0.0
	$	34,620	$	20,233	$	14,387	71.1	%	41.6	¢	31.4	¢

Wages and benefits increased $3.4 million, or 51.3%, as a result of additional staffing and training requirements in flight, maintenance and stations for the Boston operation.

In fiscal 2008, Big Sky experienced a 83.8% increase in fuel expense as a result of a 47.7% increase in block hours year-over-year and a higher average price of jet fuel, from $2.24 per gallon in fiscal 2007 to $2.69 per gallon in fiscal 2008.

Aircraft maintenance increased 26.0% as a result of increased flying associated with Big Sky’s Delta operations.

Landing fees increased 181.7% as a result of the increased level of operations and higher landing fee charges associated with Big Sky’s Delta connection service.

Depreciation and amortization increased 138.2% to $1.2 million in fiscal 2008 from $0.5 million in fiscal 2007, primarily due to aircraft purchased in fiscal 2008, along with systems, equipment and fixtures to support the Delta connection service.

During fiscal 2008, administrative and other expenses increased $4.8 million, or 113.7%, from fiscal 2007, primarily due to training costs for additional staffing, station and passenger related costs at the new Delta connection locations.

During fiscal 2008, Big Sky recorded a $0.8 million impairment charge for its pilot labor contract.

MAIR

MAIR Operating Expenses

Total operating expenses in fiscal 2008 increased to $14.9 million from $7.8 million in the prior year period, primarily due to the $10.2 million impairment charge recorded for the Cincinnati hangar, offset by lower legal and professional fees in fiscal 2008 than those recorded in fiscal 2007 from Mesaba’s bankruptcy.

Consolidated Operating Loss

Operating loss for fiscal 2008 increased to $23.5 million from $9.6 million in the prior year period due to the results of MAIR and Big Sky described above.

Consolidated Nonoperating Income

Nonoperating income, net increased to $11.8 million in fiscal 2008 from $3.8 million in the prior year period, primarily as a result of MAIR recording $9.4 million for its damage claim in Mesaba’s bankruptcy offset by increased interest expense.

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Consolidated Provision for Income Taxes

The Company recorded $0.4 million of tax benefit on its income for the nine months ended December 31, 2007.  The associated valuation allowance against those deferred tax assets was therefore removed.  The Company continues to record a full valuation allowance against its remaining deferred tax assets due to the uncertainty regarding the ultimate realization of those assets.  The benefit recorded is due to the reversal of tax contingency reserves previously established and the realization of state income tax refunds received for prior periods.

Liquidity and Capital Resources

Overview

Unrestricted cash, cash equivalents and investments decreased 47.7% to $34.5 million at December 31, 2007 from $66.0 million at March 31, 2007.  The decrease was primarily due to funding the start-up costs for Big Sky’s Boston operation, including the purchase of seven additional Beechcraft aircraft, as well as the final payment to Northwest of the remaining amount due for the purchase of Northwest’s stock in MAIR.  MAIR paid Northwest approximately $24 million of the aggregate purchase price, or $4.25 per share, upon the initial closing of the transaction in March 2007.  MAIR paid the remaining purchase price, approximately $11.3 million or $2.00 per share, on October 22, 2007.  The Company’s working capital decreased to $24.1 million at December 31, 2007 compared to working capital of $39.9 million at March 31, 2007.

The Company’s liquidity will continue to be affected by the costs associated with transitioning Big Sky’s remaining operations to another carrier and the sale of Big Sky’s owned aircraft and other operating assets.

Operating Activities

Net cash used for operating activities for the nine months ended December 31, 2007 was $11.6 million, primarily due to a net loss of $11.3 million and the payment to Northwest of $11.3 million, offset by $11.0 million of impairment charges, $1.3 million of depreciation and amortization and $1.3 million of prepaid expenses.

Investing Activities

Net cash provided by investing activities for the nine months ended December 31, 2007 was $1.6 million, primarily due to net sales of investments of $23.2 million, offset primarily by net purchases of property and equipment of $22.0 million.

Financing Activities

Net cash provided by financing activities for the nine months ended December 31, 2007 was $1.4 million primarily due to Big Sky’s establishment and draws on the bank line of credit of $1.0 million and $0.4 million in proceeds from the exercise of stock options, offset by $0.1 million of payment of long term debt.

Outlook

The Company has historically relied on cash and cash equivalents, investments and internally generated funds to support its working capital requirements.  Absent adverse factors outside the control of the Company, management believes current liquidity and funds from operations will provide adequate resources for meeting the Company’s future obligations.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

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

NEW ACCOUNTING PRONOUNCEMENTS

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

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ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company’s principal market risks are the availability and price of jet fuel and changes in interest rates, as discussed below.

Aircraft Fuel

Big Sky is subject to fluctuations in fuel prices.  A hypothetical 10% increase in the December 31, 2007 cost per gallon of fuel, assuming projected fiscal 2008 usage at Big Sky, would result in an increase to aircraft fuel expense of approximately $0.1 million in the remainder of fiscal 2008.  As of December 31, 2007, Big Sky had no fuel hedges in place for fiscal 2008.

Interest Rates

The Company’s earnings are affected by changes in interest rates due to the impact those changes have on its interest income from cash equivalents and short and long-term investments.  If interest rates were to increase by 100 basis points for a full year, based on the Company’s cash equivalents, short-term and long-term investments balance at December 31, 2007, the Company’s interest income from cash equivalents, short-term and long-term investments would increase by approximately $0.3 million.

The Company does not purchase or hold any derivative financial instruments for trading or speculative purposes.

ITEM 4.  CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls Procedures

The Company’s management does not expect that its disclosure controls and procedures will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, control may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

As of December 31, 2007, the Company conducted an evaluation under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and acting Chief Financial Officer, regarding the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as that term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended).  Based upon that evaluation, the Chief Executive Officer and acting Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of the date of such evaluation.

Changes in Internal Controls

During the quarter ended December 31, 2007, there were no changes in internal controls over financial reporting that had a material effect on internal control over financial reporting or were reasonably likely to have a material effect on internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

Certain legal proceedings in which the Company is involved are discussed in Note 13, “Commitments and Contingencies,” to the consolidated financial statements included in Part I, Item 3, of the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2007, filed with the SEC on June 19, 2007.  On January 17, 2008, MAIR’s litigation against the Air Line Pilots Association (“ALPA”) was dismissed.  Because management determined that MAIR would not be pursuing any activities potentially prohibited by MAIR’s letter agreement with ALPA, the parties agreed to jointly request a dismissal.  Aside from the ALPA litigation being dismissed, there have been no further

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material developments in the Company’s legal proceedings since the disclosures contained in the Form 10-K.  Unless otherwise indicated, all proceedings discussed in the Company’s earlier reports filed with the SEC remain outstanding.  Reference also is made to Note 10, “Commitments and Contingencies,” in Part I, Item 1, of this Quarterly Report on Form 10-Q.

ITEM 1A.  RISK FACTORS

Except as provided below, there have been no material changes in the risk factors previously disclosed in Item 1A of the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2007, filed with the SEC on June 19, 2007, and in Item 1A of the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2007, filed with the SEC on November 7, 2007.

Big Sky could incur unanticipated costs associated with transitioning its operations to another carrier, and certain of Big Sky’s creditors may seek to recover from MAIR.

In the process of transferring its western operations to another carrier, Big Sky will ultimately be required to close its offices and make arrangements to satisfy its accounts payable.  It is possible that this process will result in additional costs being incurred by Big Sky.  Additionally, although Big Sky is seeking to transfer its operations to another carrier, there can be no assurance that in doing so, Big Sky will be relieved of its existing liabilities, including aircraft, airport and office leases.  Although MAIR has not guaranteed any of Big Sky’s obligations, if Big Sky is unable to pay for its existing liabilities and the costs associated with closing its operations, some of Big Sky’s creditors may seek to recover from MAIR.  Any such actions could reduce the amount of cash that MAIR has available to distribute to its shareholders.

Big Sky could have difficulty continuing its operations through an orderly transition if it experiences substantial employee loss.

Currently, Big Sky intends to continue operating its EAS routes while its seeks to transfer its operations to another carrier.  However, many of Big Sky’s employees may make arrangements for other employment before Big Sky intends to cease operations.  In such event, Big Sky could experience a shortage of employees such that Big Sky is forced to accelerate the date on which it ceases operations.

If Big Sky is unable to sell the seven Beechcraft aircraft it owns for a price equal to what Big Sky paid for the aircraft, Big Sky may be unable to repay MAIR for the purchase of the aircraft.

To support its eastern operations, Big Sky borrowed funds from MAIR to purchase seven Beechcraft aircraft, and MAIR has a security interest in the aircraft.  Current market conditions indicate that there is a strong global market for the aircraft.  However, if Big Sky suffers a loss when selling the aircraft, Big Sky will not be able to repay MAIR the full amount of the loan.

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ITEM 6.  EXHIBITS

EXHIBIT INDEX

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

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SIGNATURES

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

	MAIR Holdings, Inc.
Dated: February 6, 2007	By:	/s/ Paul F. Foley
	President, Chief Executive Officer and acting Chief Financial Officer

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