10-K

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-K

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

For the fiscal year ended December 31, 2002

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 Number 0-25202

Kitty Hawk, Inc.
(Exact name of registrant as specified in its charter)
Delaware	75-2564006
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
1515 West 20th Street
P.O. Box 612787
DFW International Airport, Texas	75261
(Address of principal executive offices)	(Zip Code)
(972) 456-2200
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.000001 per share

          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   o No   x

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

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

Yes   o No   x

          The aggregate market value of voting and non-voting common equity held by non-affiliates of the registrant as of June 28, 2002 (the last business day of the registrant’s most recently completed second fiscal quarter) was approximately $0. In connection with the registrant’s plan of reorganization, all of the registrant’s common equity was cancelled without consideration on September 30, 2002.  (For purposes of determination of the above stated amount, only directors, executive officers and 10% or greater stockholders have been deemed affiliates).

PROCEEDINGS DURING THE PRECEDING FIVE YEARS:

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

Yes   x No   o

          At March 25, 2003, there were 37,744,655 shares of common stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE:

          None.

KITTY HAWK, INC.
2002 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS

		Page
	PART I
Item 1.	Business	1
Item 2.	Properties	15
Item 3.	Legal Proceedings	15
Item 4.	Submission of Matters to a Vote of Security Holders	15
	PART II
Item 5.	Market for Registrant’s Common Equity and Related Stockholder Matters	16
Item 6.	Selected Financial Data	16
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	19
Item 7A.	Quantitative and Qualitative Disclosures about Market Risk	35
Item 8.	Consolidated Financial Statements and Supplementary Data	36
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	36
	PART III
Item 10.	Directors and Executive Officers of the Registrant	37
Item 11.	Executive Compensation	39
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	43
Item 13.	Certain Relationships and Related Transactions	45
Item 14.	Controls and Procedures	48
	PART IV
Item 15.	Exhibits, Consolidated Financial Statement Schedules, and Reports on Form 8-K	49
	Signatures	52
	Certifications	53
	Index to Consolidated Financial Statements and Supplementary Data	F-1

Glossary of Selected Aviation Industry Terms

          The following are definitions of terms commonly used in the aviation industry and this annual report:

          “ACMI”  means providing air transportation service consisting of the aircraft, crew, maintenance and insurance.

          “Aircraft”  means an airframe and attached aircraft engines.

          “Airframe”  means the structure of an aircraft, including the fuselage, wings, stabilizers, flight control surfaces and landing gear, but excluding the aircraft engines.

          “Block hour”  means the time that an aircraft begins moving under its own power at its origination airport to the time it comes to rest at its destination airport.

          “C-check”  means a thorough inspection and overhaul of an airframe and its components, not including aircraft engines, to ensure the airframe is airworthy.  A “light C-check” is generally performed every 3,000 flight hours and a “heavy C-check” is generally performed every 14,000 flight hours.

          “Engine overhaul”  means a heavy shop visit, which includes disassembly, inspection, repair or replacement of worn and life-limited parts, reassembly and testing of an aircraft engine.

          “Flight hour”  means the portion of aircraft operation time commencing at takeoff and ending at landing.

          “Heavy maintenance”  means with respect to an airframe, a light C-check or heavy C-check, or with respect to an aircraft engine, an engine overhaul.

          “Rotable part”  means an aircraft part that can be repaired and reinstalled on an aircraft.

PART I

ITEM 1.  BUSINESS

General

          Through our wholly-owned subsidiary Kitty Hawk Cargo, Inc., we operate a major independent city-to-city expedited scheduled freight network among approximately 50 cities in the U.S. and one city in Canada providing next-morning, two-day and three-day delivery services.  As an independent freight network, we typically do not transport freight from shippers to our cargo facilities or from our cargo facilities to recipients.  As a result, we primarily provide freight services to freight forwarders who either transport the freight to and from our cargo facilities in the origin and destination cities we serve or arrange for others to provide these services.  On occasion, we arrange for the initial pick up of freight from our customers as well as the final delivery to recipients.

          We use aircraft and trucks to transport freight on scheduled routes between the cities in our independent freight network and our hub in Fort Wayne, Indiana.  We transport large freight that generally cannot be physically handled by a person due to its size or weight.  We also carry small package freight and other freight that cannot be transported readily in other freight systems or on passenger aircraft. In 2002, we generated approximately 95.5% of our revenue from expedited scheduled freight services.

          Through our wholly-owned subsidiary Kitty Hawk Aircargo, Inc., we also provide dedicated air freight transportation services in North America using owned or leased Boeing 727-200 freighter aircraft. We primarily provide these services to our expedited scheduled freight business and provide these services to third parties on an on-demand basis as well as through medium- and long-term charter arrangements.

          We were incorporated on October 20, 1994, as a Delaware corporation.  Kitty Hawk Aircargo was incorporated on January 11, 1989, as a Texas corporation, and Kitty Hawk Cargo was incorporated on April 13, 1999, as a Delaware corporation.  Our principal executive offices are located at 1515 West 20th Street, P.O. Box 612787, DFW International Airport, Texas 75261, and our main telephone number is (972) 456-2200.  Currently, Kitty Hawk, Inc. does not have any operations separate and apart from those conducted by its subsidiaries.

          Our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to these reports will be made available free of charge through the Investor Relations section of our Internet website, http://www.khcargo.com, as soon as practicable after such material is electronically filed with, or furnished to, the Securities and Exchange Commission.  The information contained on or linked to our website does not constitute part of this Form 10-K.

Bankruptcy Reorganization

          Proceedings under Chapter 11 of the Bankruptcy Code.  On or about May 1, 2000, we and all nine of our subsidiaries filed voluntary petitions for relief under Chapter 11 of the U.S. Bankruptcy Code in the U.S. Bankruptcy Court for the Northern District of Texas, Fort Worth Division. These proceedings were jointly administered under case No. 400-42141-BJH-11.

          On August 5, 2002, the bankruptcy court entered an order, confirming our final joint plan of reorganization dated August 2, 2002, with certain modifications. 

          Subsequent Modification of the Plan of Reorganization. We filed a motion with the bankruptcy court on December 23, 2002, requesting an order modifying the plan of reorganization to allow us to:

• amend our Second Amended and Restated Certificate of Incorporation to reduce the par value of our common stock from $0.01 per share to $0.000001 per share;

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

• issue warrants under the bankruptcy code that would be exempt from federal, state or local laws requiring registration of the warrants or the common stock to be issued upon exercise of the warrants.

          On January 29, 2003, the bankruptcy court granted our motion and entered an order on January 31, 2003 modifying our plan of reorganization in the manner described above. 

          Summary of Principal Effects of the Plan of Reorganization.  The principal effects of our plan of reorganization are summarized below:

• Corporate Reorganization under Chapter 11 Bankruptcy Proceedings.  We and our two subsidiaries, Kitty Hawk Aircargo and Kitty Hawk Cargo, emerged from bankruptcy on September 30, 2002.  Prior to this date, our seven other subsidiaries that filed for bankruptcy were merged with and consolidated into us pursuant to the plan of reorganization.

• New Board of Directors and Chief Executive Officer.  As of October 1, 2002, James R. Craig, Gerald L. Gitner, Tamir “Thomas” Hacker, Myron Kaplan, John Malloy, Robert Peiser and Tilmon J. Reeves were appointed to our board of directors.  Our Second Amended and Restated Certificate of Incorporation provides that these directors may not be removed as directors prior to September 30, 2003, except for cause.  In November 2002, Messrs. Craig and Reeves resigned from our board of directors, Robert W. Zoller, Jr., was elected Chief Executive Officer and appointed to our board of directors, and Mr. Gitner was appointed Non-Executive Chairman of the Board.

• Amended and Restated Certificate of Incorporation.  On September 30, 2002, we filed our Second Amended and Restated Certificate of Incorporation authorizing the issuance of up to 65,000,000 shares of capital stock, consisting of 3,000,000 shares of new preferred stock, par value $0.01 per share, and 62,000,000 shares of new common stock (CUSIP No. 498326 20 6), par value $0.01 per share.  On February 6, 2003, we filed an amendment to our Second Amended and Restated Certificate of Incorporation to reduce the par value of our common stock to $0.000001 per share.

• Cancellation of Old Common Stock, Senior Notes and General Unsecured Claims.  All of our previously issued common stock (CUSIP No. 498326 10 7) and 9.95% Senior Secured Notes were cancelled as of September 30, 2002.  In addition, as of September 30, 2002, the claims of our former general unsecured trade creditors were cancelled.  Holders of our previously issued common stock received no consideration in connection with the cancellation of their shares of common stock.  Holders of our former 9.95% Senior Secured Notes received cash, common stock and warrants in connection with the cancellation of their notes, and our former general unsecured trade creditors will receive common stock in satisfaction of their claims.

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• Issuance of New Common Stock and Warrants.  In return for debt forgiveness, settlements and other compromises, we issued common stock and warrants to acquire common stock to our former creditors in the following amounts:

Creditor		Shares of Common Stock Issued		Shares of Common Stock Represented by Warrants
Holders of our former 9.95% Senior Secured Notes			28,244,655		12,255,315
Trusts for the benefit of our former general unsecured trade creditors			7,000,000		—
An affiliate of Pegasus Aviation, Inc.			2,500,000		—
	Total		37,744,655		12,255,315

	The warrants have an exercise price of $0.000001 per share, a term of 10 years and are exercisable only by a citizen of the U.S. as defined in 49 U.S.C. § 40102(a)(15).  The 7,000,000 shares of common stock to be issued to our former general unsecured trade creditors were issued initially to two trusts.  These trusts will hold the shares for the benefit of our former general unsecured trade creditors and will distribute the shares once all claims are allowed or dismissed.
•	Cash Distributions to, and Agreements with, Former Creditors.  In September 2002, in addition to the payment of certain administrative claims arising from the bankruptcy proceedings, we delivered $29.1 million to HSBC Bank USA, as successor trustee for the 9.95% Senior Secured Notes.  In addition, we released our former general unsecured trade creditors from any preference claims we might have against them.
•	Aircraft and Engine Use Agreement.  On September 30, 2002, we entered into a 24 month Aircraft and Engine Use Agreement with the Kitty Hawk Collateral Liquidating Trust to make 12 Boeing 727-200 airframes and 33 aircraft engines available for operation by Kitty Hawk Aircargo.  These airframes and aircraft engines had been pledged as collateral to secure our former 9.95% Senior Secured Notes.  The holders of our former 9.95% Senior Secured Notes formed the Kitty Hawk Collateral Liquidating Trust to manage these airframes and aircraft engines.  See “Item 13. Certain Relationships and Related Transactions” for more information about this agreement.
•	Aircraft Leases and Purchases.  On October 1, 2002, Kitty Hawk Aircargo entered into four operating leases for Boeing 727-200 freighter aircraft with affiliates of Pegasus Aviation, Inc., or Pegasus Aviation.  Each of these leases expire in May 2004.  In addition, in June 2002 and December 2002, Kitty Hawk Aircargo purchased two Boeing 727-200 freighter aircraft from affiliates of Pegasus Aviation.  Each of the six aircraft were previously leased and operated by us.  See “Item 13. Certain Relationships and Related Transactions” for more information about these leases and aircraft purchases.
•	U.S. Postal Service Payment.  In August 2002, we received a payment of $30.9 million from the U.S. Postal Service related to the U.S. Postal Services’ August 2001 termination for convenience of our contract to provide air transportation and ground handling for mail delivered to the Western U.S. and in settlement of specified claims between us and the U.S. government.
•	Repayment of Prior Bank Facilities.  In September 2002, pursuant to a settlement reached with our then-existing bank group, we repaid all remaining obligations due under our prior $100 million revolving credit facility and term loan.  Immediately thereafter, the bank group released all liens on the collateral securing the revolving credit facility and term loan, which included certain airframes, aircraft engines, accounts, parts, inventory, contract rights, general intangibles and other collateral.  We have no further obligations to the bank group.

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• Receivables Purchase Facility.  We entered into an agreement with KBK Financial, Inc. for a $5.0 million receivables purchase facility, which may be increased to a $10.0 million facility if KBK Financial obtains a qualified participant.  See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources” for more information about this facility.

• Registration Rights Agreement.  We entered into a registration rights agreement with each of Everest Capital Limited, Resurgence Asset Management, L.L.C. and Stockton LLC, who received significant amounts of our common stock under the plan of reorganization.  Everest Capital Limited and Resurgence Asset Management also received significant amounts of warrants to purchase our common stock under the plan of reorganization.  The registration rights agreement provides them with demand and piggy-back registration rights for our common stock.  The registration rights are currently exercisable.  See “Item 13. Certain Relationships and Related Transactions” for more information about this agreement.

Changes in Our Business Operations Since 2000

          Since January 1, 2000, our business has changed dramatically, primarily as a result of restructuring our operations to emerge from bankruptcy.  In 1999, we generated $731.3 million of revenue, and at December 31, 1999, we had over 2,800 employees and more than 100 aircraft in operation worldwide.  By comparison, in 2002, we generated $121.8 million in revenue, and at December 31, 2002, we had approximately 700 employees and approximately 20 aircraft operating solely in the U.S. and Canada.  The following paragraphs summarize the most significant changes in our business operations from January 1, 2000 to December 31, 2002. 

          Termination of Wide-Body Operations (April 2000).  In April 2000, we suspended the flight operations of Kitty Hawk International, Inc., our former wide-body aircraft air freight carrier, and parked all of its aircraft.  At the same time, we ceased the non-continental U.S. operations of Kitty Hawk Cargo, which were generally serviced by Kitty Hawk International’s aircraft.  We also terminated the employment of 914 employees, including 287 pilots.  In September 2000, we transferred Kitty Hawk International’s DOT certificate of public necessity and convenience and its FAR Part 121 air carrier operating certificate issued by the Federal Aviation Administration, or FAA, for $200,000 to an entity controlled by one of our former directors.  In connection with the sale of Kitty Hawk International’s operating certificate, by operation of law, the purchaser assumed our future obligations under our collective bargaining agreement with the International Brotherhood of Teamsters, who represented the pilots and flight engineers formerly employed by Kitty Hawk International.

          Termination of General Motors Contract (May 2000).  In May 2000, General Motors terminated its contract with us to arrange the delivery of air freight on an expedited basis, referred to as air logistics.  In 1999, General Motors accounted for approximately $128.7 million, or 17.6%, of our total revenue and 74.2% of our air logistics services revenue.  In 2002, we did not generate any significant revenue directly from General Motors.

          U.S. Postal Service Contract (January 2001).  In January 2001, the U.S. Postal Service announced a six year, $7 billion contract with a package delivery company pursuant to which the package delivery company would provide the U.S. Postal Service with air lift for the U.S. Postal Service’s priority and first class mail nationwide.  As a result of this contract and our bankruptcy proceedings, the U.S. Postal Service has dramatically reduced the amount and type of business it conducts with us.  In 2000, the U.S. Postal Service accounted for $158 million, or 43.1%, of our total revenue, substantially all of which was generated from dedicated air freight services and management of peak season operations.  In 2002, the U.S. Postal Service only accounted for $2.1 million, or 1.7%, of our total revenue, of which $1.2 million was generated from mail transported in our expedited scheduled freight network and $0.9 million was generated from dedicated air freight services.

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          Termination for Convenience of W-Net Contract (August 2001).  In August 1999, the U.S. Postal Service awarded us a contract for air transportation and ground handling for the majority of the mail delivered to the Western US, referred to as the W-Net contract.  Pursuant to this contract, we established a hub and spoke network for receiving, sorting and delivering mail and generally operated nine aircraft in the W-Net Network six days a week.  In August 2001, the US Postal Service terminated the W-Net contact for convenience, which required the US Postal Service to pay us for certain of our start-up costs, sunk costs and expected profits associated with the contract.  In August 2002, we received a payment of $30.9 million from the US Postal Service related to the US Postal Services’ August 2001 termination for convenience of the W-Net contract and in settlement of specified claims between us and the US government.

          Sale of Air Logistics Business and Small Aircraft Assets (December 2001).   In late December 2001, we sold the operations of our air logistics business as well as the small aircraft owned and operated by Kitty Hawk Charters, our former FAR Part 135 small aircraft airline.  Our air logistics business involved coordinating door-to-door transportation of freight by arranging for ground pick-up, loading, air transportation, unloading and ground delivery.  We also sold the operations of OK Turbines, Inc., our small aircraft jet engine parts distributor.

          Expiration of ACMI Contract with BAX Global.  Historically, we have provided BAX Global with dedicated air freight transportation services under a long term ACMI contract.  In 2000, we provided BAX Global with 14 Boeing 727s through June 2000 and seven Boeing 727s from June through December 2000.  In 2001, we provided BAX Global with six Boeing 727s.  In 2001, BAX Global accounted for approximately $28.9 million, or 11.7%, of our total revenue.  Of this amount, dedicated air freight transportation services accounted for approximately $26.0 million, or 23.2%, of our revenue from dedicated air freight transportation services, and expedited scheduled freight services accounted for $2.9 million, or 2.2%, of our revenue from expedited scheduled freight services.  In December 2001, our ACMI contract with BAX Global expired.  In 2002, BAX Global accounted for approximately $4.7 million, or 3.9%, of our total revenue.  Of this amount, dedicated air freight transportation services accounted for approximately $1.4 million, or 24.9%, of our revenue from dedicated air freight transportation services, and expedited scheduled freight services accounted for $3.3 million, or 2.8%, of our revenue from expedited scheduled freight services.  In December 2002, we entered into a new one-year ACMI contract to provide BAX Global with three Boeing 727–200 freighter aircraft. This new agreement may be terminated by either party upon 30 days' written notice to the other party.

          Non-Renewal of C-Net (September 2002).  From 1993 to 2001, we were a prime contractor for managing the US Postal Service’s primary Christmas Network hub, or C-Net. C-Net provided for air transportation and ground handling services primarily for priority mail among a network of domestic cities during the December holiday rush.  In 2001, we generated $24.9 million of revenue from managing C-Net. In September 2002, the US Postal Service announced that it did not intend to renew our contract to manage the primary C-Net hub, which the US Postal Service did not operate during the December 2002 holiday season.

Industry Overview

          General.  The US freight transportation industry is extremely large and encompasses a broad range of transportation modes and service levels.  Much of the freight shipped in the US is transported on an expedited or “time-definite” basis.  Expedited freight transit times vary from a few hours or overnight to as long as two, three or four days.  Expedited freight includes freight of varying sizes and weights, from as small as envelopes to heavy weight or oversized freight requiring dedicated aircraft or trucks and weighing in excess of 200,000 pounds. 

          In the expedited freight segment, there is generally an inverse relationship between cost per pound transported and transit time.  As a result, shippers typically pay the highest cost per pound for the quickest transit times.  As transit times increase, the cost per pound transported generally decreases.

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          The expedited freight market is generally served by:

• air freight carriers that provide on-demand services, as opposed to medium and long-term dedicated air freight transportation services;

• package delivery companies that provide express door-to-door service;

• freight carriers that provide scheduled door-to-door freight delivery services using networks similar to our expedited scheduled freight network;

• air freight carriers that contract with freight forwarders and airlines to provide medium and long-term dedicated air freight transportation services;

• trucking companies that utilize all-truck networks generally offering two, three and four day services door-to-door or city-to-city on a common-carrier less-than-truckload basis; and

• trucking companies that utilize trucks on a dedicated single-haul truck-load basis.

          We generally compete in the inter-city, heavy weight expedited freight segment of the U.S. freight transportation industry.  This segment of the industry is highly competitive and very fragmented.  The ability to effectively compete in this segment depends on price, frequency of service, cargo capacity, ability to track freight, extent of geographic coverage and reliability. 

          A number of expedited freight transportation companies, including us, provide a combination of delivery services. Specifically, our expedited scheduled freight business provides regularly scheduled freight delivery services between various cities, and our dedicated air freight transportation business provides charter services to our customers needing dedicated air lift for a specified period of time.

          Industry Trends.  The demand for expedited freight services in the U.S. is primarily influenced by the health of the U.S. economy, which is cyclical in nature.  Domestic durable goods manufacturing and corporate capital expenditures in the U.S. have a significant impact on the amount of freight that is transported on an expedited basis. 

          We believe the activity level of the following domestic industries, listed in decreasing order of influence, have the most significant impact on demand for our expedited scheduled freight services:

• automotive;

• electronics;

• telecom and related infrastructure equipment;

• apparel; and

• other durable goods and equipment.

          The general downturn in the U.S. economy started in late 2000.  During 2001, the demand for our expedited scheduled freight services generally trended downward the entire year.  In 2002, the demand for our expedited scheduled freight services stabilized, but at a level that was approximately 40% below the level in 2000.

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Expedited Scheduled Freight Services

          General.  We operate a scheduled city-to-city expedited freight service that provides time-definite transportation of predominantly heavy weight freight to and from approximately 50 cities in the U.S. and one city in Canada through a hub and spoke network.  Most of the freight in our network is transported from its city of origination to our hub and sorting facility in Fort Wayne, Indiana before being routed to its destination city.

          The sorting facility in Fort Wayne, Indiana is a 239,000 square foot facility constructed to meet the specific requirements of our expedited scheduled freight service and was completed in June 1999.  We began operating the facility in early July 1999.  We believe the sorting facility is capable of handling well over 2.0 million pounds on a given operational night, or about three times as much freight as we handled on an average operational night in 2002.

          Our expedited scheduled freight service currently transports freight by aircraft to and from airports located in 26 cities.  In addition, we contract with third parties to provide ground transportation to 25 other cities at which we receive and deliver freight at scheduled times.  We also contract with third parties to provide ground handling and storage services at most of the cities we serve.  We continually evaluate the cities in our expedited scheduled freight network and add and remove cities as circumstances warrant.

          In general, we transport the following types of freight:

• hazardous materials that cannot be transported on passenger aircraft;

• dimensionally oversized freight that cannot fit in passenger aircraft cargo holds;

• heavy weight freight that cannot be readily handled by a person;

• freight requiring special handling or that must be attended in flight;

• small packages and mail; and

• live animals.

          Our expedited scheduled freight service caters primarily to freight forwarders that typically arrange transportation from the shipper in the city of origin to our cargo facility and from our cargo facility in the city of destination to the recipient.  We offer our customers three levels of delivery services, including overnight or next-day morning, second-day morning and third-day morning delivery to our cargo facility in the city of destination.  Freight received each evening is available at our cargo facility in the city of destination on the morning specified by our customer, Tuesday through Saturday, throughout the year.  In 2002, we generated $116.3 million of revenue, or 95.5% of our total revenue, from expedited scheduled freight services.

          Customers.  We currently have over 400 active freight forwarder customers.  In 2002, our top 25 customers accounted for over two-thirds of our expedited scheduled freight revenue, and our top four customers accounted for over one-third of our expedited scheduled freight revenue.

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          The following table lists each customer that accounted for at least 5% of our expedited scheduled freight revenue in 2002 and the percentage of our expedited scheduled freight revenue derived from those customers in 2002 and 2001.

	2002					2001
Customer	Revenue		Percentage of Expedited Scheduled Freight Revenue			Revenue		Percentage of Expedited Scheduled Freight Revenue
	(dollars in thousands)
Pilot Air Freight, Inc.	$	13,734		11.8	%	$	13,356		9.9	%
AIT Freight Systems, Inc.		11,253		9.7			12,469		9.2
Eagle Global Logistics, Inc. (1)		7,849		6.8			23,929		17.7
Exel North American Logistics, Inc.		5,887		5.1			6,905		5.1

(1) In 2001, we generated approximately $17 million of revenue from temporarily combining our expedited scheduled freight network with that of Eagle Global Logistics during June, July and August, which did not recur in 2002.

          We generally maintain a close operating relationship with our most significant customers.  We offer our customers discount programs based upon volume of freight shipped in our network and timely payment of invoices.  Each of our significant customers participate in this discount program.  We have no material minimum shipping contracts with our customers, including our most significant customers.  As a result, our customers generally book expedited scheduled freight services with us on an as-needed basis.

          Competition.  We generally compete with FedEx, United Parcel Service, other integrated freight transportation companies, regional delivery firms and commercial passenger airlines that provide freight service on their scheduled flights.  Many of our competitors have substantially larger freight networks, serve significantly more cities, have more freight system capacity and more capital and financial resources than us.

          Fuel and Other Costs.  In this business, we absorb increases in fuel costs, landing charges and other variable costs.  We periodically increase our prices or implement temporary surcharges to offset some of our increased costs. 

          During 2002, we purchased jet fuel from various suppliers at then current market prices.  We do not currently have any short or long-term contracts for jet fuel, nor do we currently have any agreements to hedge against changes in the price of jet fuel.  From time to time, we review the price and availability of jet fuel.  If we have the opportunity and ability to enter into supply contracts for jet fuel or arrangements to hedge against changes in jet fuel prices, we may enter into such agreements or arrangements.  During 2002, our jet fuel averaged $0.90 per gallon and we used between 2.1 million and 3.0 million gallons of jet fuel per month, depending on the mix of aircraft employed in our network and the amount of freight shipped.  The following table shows our total jet fuel expense and percentage of total operating expenses of our expedited scheduled freight network represented by jet fuel during 2002, 2001 and 2000.

Year	Total Cost (in millions)		Average Cost (per gallon)		Jet Fuel Expense as a Percentage of Scheduled Freight Operating Expenses
2002	$	26.8	$	0.8977		23.6	%
2001		35.1		0.9606		20.8
2000		47.2		1.0520		21.7

Dedicated Air Freight Transportation Services

          General.  Currently, Kitty Hawk Aircargo primarily provides dedicated air freight transportation services for our expedited scheduled freight business.  In addition, Kitty Hawk Aircargo provides dedicated air freight transportation services for a limited number of customers.

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          ACMI Contracts. Our contracts with third parties for dedicated air freight transportation services vary, but typically require us to provide the aircraft, crew, maintenance and insurance, referred to as ACMI.  In a typical ACMI contract, our customers are responsible for substantially all aircraft operating expenses, other than ACMI expenses, including fuel, fuel servicing, airport freight handling, landing and parking fees, ground handling expenses and aircraft push-back costs. ACMI contracts vary in duration from short to long-term and typically require us to operate specific aircraft and/or provide minimum air freight capacity.  In general, ACMI contracts are terminable upon 30 days’ prior written notice or if we fail to meet certain minimum performance levels, otherwise breach the contract or become subject to other customary events of default.

          Under our ACMI contracts, we are permitted to use, and occasionally do use, our aircraft for other services between ACMI contract flights.  By offering ACMI and charter services in addition to our expedited freight services, we are able to improve the utilization of our fleet and generate additional revenue.

          In December 2002, we entered into a new one-year ACMI contract to provide BAX Global with three Boeing 727–200 freighter aircraft.  This agreement may be terminated by either party upon 30 days’ written notice to the other party.

Aircraft Fleet

          Owned Aircraft.  At March 15, 2003, we owned 13 Boeing 727-200 freighter aircraft of which eight were available for operation in revenue service.  Of the remaining five aircraft, we temporarily parked three aircraft which require heavy maintenance, but expect to place one or more of these aircraft back into operation when needed, and we permanently parked two aircraft.  We do not currently expect to operate these two aircraft again.

          Of the 13 aircraft we own, two are pledged as collateral for a loan from 1^st Source Bank and two are pledged as collateral for loans from an affiliate of Pegasus Aviation.  The liens on the two aircraft pledged to Pegasus Aviation will be released when our final loan payments are made in April 2003.

          Aircraft Subject to Leases or the Aircraft and Engine Use Agreement.  At March 15, 2003, we held 17 Boeing 727–200 freighter aircraft under operating leases or the Aircraft and Engine Use Agreement, of which 15 aircraft are currently available for operation in revenue service.  Under the terms of our W-Net settlement with the U.S. Postal Service, two of the 17 aircraft are currently unavailable for revenue service despite being economically viable to be operated.  We do not currently anticipate using these two aircraft in revenue service in the future.  Under the terms of the Aircraft and Engine Use Agreement governing these two aircraft, we pay only the storage, ground risk insurance and incidental costs for these aircraft unless we are allowed to, and actually do, operate them in revenue service.

          In December 2000, we amended an existing operating lease for one Boeing 727-200 freighter aircraft with an affiliate of Wren Equipment Finance Limited.  We make monthly lease payments of $115,000 and monthly maintenance reserve payments based upon actual flight hours during the previous month.  The lease provides that we must return the aircraft in a certain specified condition. We have recorded a reserve for the estimated cost to meet the return conditions, less estimated maintenance reserves to be paid to Wren Equipment over the life of the lease. This lease expires in December 2003.

          In October 2002, we entered into four new operating leases for Boeing 727-200 freighter aircraft with affiliates of Pegasus Aviation with monthly lease rates ranging from $65,000 to $85,000.  These new leases replaced leases with affiliates of Pegasus Aviation that we originally entered into during May 1999, September 1999 and November 1999.  Each of these new leases expires in May 2004.  In addition to lease payments, we make monthly maintenance reserve payments in an amount determined by the flight hours or cycles of utilization during the previous month. When the new leases expire, we must return each aircraft to the lessor with the same number of available flight hours or cycles on the airframe, engines, landing gear and auxiliary power units until the next scheduled maintenance event as were available at the time we

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originally took delivery of each of the aircraft. Each of the airframes had just undergone light or heavy maintenance when we originally took delivery of them. Under the new leases, instead of performing heavy maintenance on each of the airframes prior to returning them, we may instead pay the lessor $750,000 per airframe. The $750,000 payment will be reduced by the amount of maintenance reserves paid to the lessor under the original leases and the new leases.

          Future Aircraft Needs.  We currently project that we will need 18 operational aircraft through 2003 to meet our projected needs for our expedited scheduled freight service business and our current ACMI contractual obligations.  While some owned and leased aircraft will require heavy maintenance during 2003, we believe that the combined pool of owned and leased aircraft available to us will provide us with enough aircraft to meet our projected aircraft needs in 2003.

          Three of the aircraft subject to the Aircraft and Engine Use Agreement will require heavy maintenance in 2003 to remain airworthy.  Neither we nor the Kitty Hawk Collateral Liquidating Trust are required to perform this heavy maintenance.  As we do not intend to pay for this heavy maintenance, if the Kitty Hawk Collateral Liquidating Trust decides not to perform the required heavy maintenance on these aircraft, we will not be able to operate them after they come due for heavy maintenance.

          As a consequence, we may need to use financing arrangements, lease contracts or other operational agreements to replace air lift capacity in the future.  Currently, we believe that a sufficient number of Boeing 727-200 freighter aircraft are on the market and currently available if such a need arises.  Without adequate aircraft at an economically viable cost, we may not be able to continue to operate our businesses or generate operating income or profits.

          From time to time, we evaluate the number and type of aircraft in our fleet and may add or remove aircraft or add new types of aircraft as circumstances warrant.

          Aircraft Dispositions.  As part of our plan of reorganization, we disposed of a number of aircraft, aircraft engines and related parts.  Some of these aircraft and most of the engines and uninstalled parts were sold at auction.  The numbers and types of aircraft and the year in which they were sold or effectively transferred through the bankruptcy process are as follows:

Aircraft Type		2002		2001		2000		Total
Boeing 747 Freighter			3		1		3		7
Boeing 747 Passenger			—		—		2		2
Lockheed L-1011 Freighter			5		1		—		6
Lockheed L-1011 Passenger			—		—		2		2
Douglas DC-8 Freighter			5		8		6		19
Boeing 727-200 Freighter			3		5		2		10
Boeing 727-100 Freighter			—		—		2		2
Boeing 727-200 Passenger			—		—		1		1
Douglas DC-9 Freighter			—		4		1		5
Small Charter – Passenger / Freighter			—		33		—		33
	Total aircraft dispositions		16		52		19		87

          In October 2001, as part of our plan of reorganization, we transferred ownership of 12 Boeing 727-200 freighter aircraft to the Kitty Hawk Collateral Liquidating Trust.  Because these aircraft are still generally available for operation by us, they are not reflected in the table above.

          Aircraft Acquisitions.  As a part of our plan of reorganization, we acquired two Boeing 727-200 freighter aircraft from affiliates of Pegasus Aviation.  We acquired one aircraft in June 2002 and the other aircraft in December 2002.  The financing for the purchase of these aircraft was provided by an affiliate of Pegasus Aviation, and the debt will be retired in April 2003.

          In December 2000, we acquired two aircraft from 1^st Source Bank.  We previously operated these aircraft pursuant to an operating lease covering three aircraft.  We returned one aircraft, a Boeing 727-100 freighter aircraft, and purchased the two remaining aircraft in settlement and satisfaction of the operating lease.  The seller provided financing for these purchases.  See“Item 7. Management’s Discussion and

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Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources” for more information about the 1^st Source Bank loan.

Flight Operations and Control

          Our aircraft operations are coordinated by our personnel at our headquarters at the Dallas/Fort Worth International Airport.  Our dispatch and flight operations personnel plan and control our flight operations, including aircraft dispatching, flight tracking and crew scheduling.  In addition, our personnel provide varying amounts of logistical support necessary for operating into airports served by our flights.

          To enhance the reliability of our service, we generally maintain at least one operational spare aircraft at all times.  The spare aircraft can be dispatched on short notice to most locations we serve when a substitute aircraft is needed.  Maintaining one or more operational spare aircraft allows us to better ensure the availability of aircraft for our expedited scheduled freight operations and to provide our ACMI customers with high dispatch reliability.

Maintenance

          We perform line maintenance with our own employees, contract employees and third-party contractors.  Heavy airframe maintenance and aircraft engine overhauls are provided by third-party FAA approved FAR Part 145 repair stations.  We do not have any long-term maintenance contracts for our airframes or aircraft engines.

Training and Safety

          We believe that high quality personnel and intensive training programs are keys to our success and the maintenance of a good safety record. As a result, we hire experienced flight crews and maintenance personnel and ensure that both receive ongoing training through educational workshops, enhanced training curriculums, on the job training and, in the case of pilots, extensive simulator use.  In January 2003, the FAA awarded us a third consecutive Certificate of Excellence – Diamond Award because the majority of our eligible mechanics received aviation maintenance technician awards from the FAA for 2002. The Diamond Award is the highest award given to aviation maintenance technicians by the FAA and recognizes individuals as well as airlines for their efforts in training.

          We have an ongoing safety program that employs an industry standard database to track safety performance. Open facsimile and phone lines are available for employees to report safety problems, which are entered into the database and monitored for any recurrence. Direct communication between flight crews, maintenance and management is available at all times through our dispatch system.

Sales and Marketing

          Our current marketing focus is on users of air freight transportation services.  We use different sales and marketing approaches to meet the unique needs of different users within our target market and to achieve our goal of maintaining long-term relationships with our customers.  We promote our business through trade specific publications and trade shows, but do not engage in mass media advertising.  We believe that retaining existing customers is as equally important as generating new clients and is a direct result of customer satisfaction.  We continue to upgrade our database, information software and tracking systems to maintain high quality service. 

          We use account managers with geographic sales responsibilities to reach all of our current and prospective customers. Each account manager is responsible for educating current and prospective customers about our service capabilities, ensuring quality service and determining how we can best serve the customer. Some account managers are also responsible for large national accounts that would not necessarily be best served by multiple regional account managers.

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Employees

          General. At March 15, 2003, we employed approximately 670 full-time and part-time employees.  Of this total, approximately 60 employees were involved in sales, general and administrative functions, approximately 310 employees were involved in our Fort Wayne, Indiana hub operations and approximately 300 employees were involved in maintenance and flight operations, including approximately 132 flight crew members.  Other than our flight crew members, our employees are not currently represented by labor unions or subject to collective bargaining agreements.  We believe we have good relationships with our employees.

          Kitty Hawk Pilots’ Association.  Our flight crew members are represented by the Kitty Hawk Pilots’ Association, which was certified under the Railway Labor Act in September 2000.  Currently, no collective bargaining agreement is in place, and interest-based bargaining negotiations for a collective bargaining agreement with the Kitty Hawk Pilots’ Association are in the preliminary stages.  We executed a letter agreement with the Kitty Hawk Pilots’ Association whereby dues are collected from the salaries of crew members who are members of the Kitty Hawk Pilots’ Association and remitted to the Kitty Hawk Pilots’ Association.  Additionally, through the interest-based bargaining negotiations, we have reached some interim and tentative agreements with our flight crew members, such as interim furlough and recall agreements, pilots reaching age 60 having the option of continuing as a flight engineer and other issues concerning Kitty Hawk Aircargo’s operations.

          Although we believe we have good relations with our flight crew members, the unionization of our workforce could result in higher employee compensation, reduce our flexibility in dealing with our employees and other restraints that could increase our operating costs or constrain our operating and competitive flexibility and which could have a material adverse effect on our business.

Environmental

          Our operations must comply with numerous environmental laws, ordinances and regulations. Under current federal, state and local environmental laws, ordinances and regulations, a current or previous owner or operator of real property may be liable for the costs of removal or clean up of hazardous or toxic substances on, under or in such property. Such laws often impose liability whether or not the owner or operator knew of, or was responsible for, the presence of such hazardous or toxic substances.

          Our business includes operations that require the use, storage and disposal of certain chemicals in small quantities.  These chemicals are classified as “hazardous materials” under, and their use, storage and disposal are regulated by, various federal, state and local environmental protection laws.  These laws generally require us to eliminate or mitigate the impact of these substances on the environment.  In response to these requirements, we have upgraded facilities and implemented programs to detect and minimize contamination.  Due to the small quantities of chemicals used and the current programs in place, we do not anticipate any material environmental liabilities or significant capital expenditures will be incurred in the future related to these operations to comply or remain in compliance with existing environmental regulations.  As a result, we do not have any reserves for environmental liabilities.

          In addition, the presence of contamination from hazardous or toxic substances, or the failure to properly clean up such contaminated property, may adversely affect the ability of the owner of the property to use such property as collateral for a loan or to sell such property. Environmental laws also may impose restrictions on the manner in which a property may be used or transferred or in which businesses may be operated and may impose remedial or compliance costs.

          We are subject to the regulations of the Environmental Protection Agency and state and local governments regarding air quality and other matters. We lease office space, hangar space, ramp space and unimproved areas at various airport locations throughout the U.S.  Most of these leases require us to indemnify the lessor for any environmental contamination caused by us.

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          Currently, we are not aware of any material environmental contamination for which we are liable for the cost of removal or cleanup that we believe would have a material adverse effect on our business. In part because of the highly industrialized nature of many of the locations at which we currently operate or previously operated, there can be no assurance that we have discovered all environmental contamination for which we may be responsible. 

Government Regulation

          General. We are subject to Title 49 of the United States Code, formerly the Federal Aviation Act of 1958, under which the DOT and the FAA exercise regulatory authority over air carriers. The DOT and the FAA have the authority to modify, amend, suspend or revoke the authority and licenses issued to us for failure to comply with the provisions of law or applicable regulations. In addition, the DOT and the FAA may impose civil or criminal penalties for violations of applicable rules and regulations. In addition, we are subject to regulation by various other federal, state, local and foreign authorities, including the Department of Homeland Security, through the Transportation Security Administration, the Department of Defense and the Environmental Protection Agency.  For example, the Transportation Security Administration has adopted recent regulations requiring our employees with access to aircraft operations areas to pass criminal background checks, and we are required to limit access to aircraft operations areas.

          Safety, Training and Maintenance Regulations. Virtually every aspect of our air carrier operations is subject to extensive regulation by the FAA, including the areas of safety, training and maintenance. To ensure compliance with FAA rules and regulations, the FAA routinely inspects air carrier operations and aircraft and can impose civil monetary penalties in the event of non-compliance.

          Periodically, the FAA focuses on particular aspects of air carrier operations occasioned as a result of a major incident. These types of inspections and regulations often impose additional burdens on air carriers and increase their operating costs. We cannot predict when we will be subject to such inspections or regulations, nor the impact of such inspections or regulations.

          Other regulations promulgated by state and federal Occupational Safety and Health Administrations, dealing with the health and safety of our employees, impact our operations. This extensive regulatory framework, coupled with federal, state and local environmental laws, imposes significant compliance burdens and risks that substantially affect our operational costs.

          Hazardous Materials Regulations. The FAA exercises regulatory jurisdiction over transporting hazardous materials. From time to time, we transport articles that are subject to these regulations. Shippers of hazardous materials share responsibility with the air carrier for compliance with these regulations and are primarily responsible for proper packaging and labeling. If we fail to discover any undisclosed hazardous materials or mislabel or otherwise ship hazardous materials, we may suffer possible aircraft damage or liability as well as substantial monetary penalties.

          Other FAA Regulations. All of our aircraft are subject to FAA directives issued at any time, including directives issued under the FAA’s “Aging Aircraft” program, or directives issued on an ad hoc basis. These directives can cause us to conduct extensive examinations and structural inspections of our aircraft and to make modifications to our aircraft to address or prevent problems of corrosion and structural fatigue.  In addition, the FAA may mandate installation of additional equipment on our aircraft, the cost of which may be substantial.  For example, we will have to install collision avoidance systems on our aircraft by October 2003 and may be required to reinforce cockpit doors sometime in the future.  Apart from these aircraft related regulations, the FAA may adopt regulations involving other aspects of our air carrier operations, such as training, cargo loading, ground facilities and communications.

          Department of Homeland Security; Transportation Security.  As a result of the passage of the Aviation and Transportation Security Act, the Congress created the Transportation Security Administration, or TSA.   By law, the TSA is directed to adopt regulations for the screening of cargo transported on cargo aircraft.  Once these new requirements are adopted, they could have an impact on our ability to efficiently process cargo or otherwise increase our operating costs.

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          The Department of Homeland Security has also taken over many departments and functions that regulate various aspects of our business, such as the U.S. Customs Service, and has formed a Border and Transportation Directorate.  The ability of the Department of Homeland Security to efficiently structure these combined operations and functions may affect us in ways that cannot be predicted at this time.

          Stock Ownership by Non-U.S. Citizens. Under current federal law, our air freight carrier could cease to be eligible to operate as an air freight carrier if more than 25% of our voting stock were owned or controlled by non-U.S. citizens. Moreover, in order to hold an air carrier certificate, our president and two-thirds of our directors and officers must be U.S. citizens.

          All of our directors and officers are U.S. citizens. Our Second Amended and Restated Certificate of Incorporation limits the aggregate voting power of non-U.S. persons to 22.5% of the votes voting on or consenting to any matter, and our Amended and Restated Bylaws do not permit non-U.S. citizens to serve as directors or officers.

Insurance

          We are vulnerable to potential losses that may be incurred in the event of an aircraft accident. Any such accident could involve not only repair or replacement of a damaged aircraft and its consequent temporary or permanent loss from revenue service, but also potential claims involving injury to persons or property.

          We are required by the DOT to carry liability insurance on each of our aircraft and many of our aircraft leases and contracts also require us to carry such insurance. We currently maintain public liability and property damage insurance and aircraft liability insurance for each aircraft in the revenue fleet in amounts consistent with industry standards. All-risk aircraft hull and war risk insurance is maintained for all aircraft in the revenue fleet. This all-risk hull insurance is subject to substantial deductibles, but such deductibles are common in the industry.  We maintain minimum cargo liability insurance if not provided by our customers under contracts.  In the aggregate, we currently believe that we will be able to renew our insurance policies at comparable premium levels and with the same levels of coverage.

          Although we believe that our insurance coverage is adequate, there can be no assurance that the amount of such coverage will not be changed upon renewal or that we will not be forced to bear substantial losses from accidents. We do not maintain business interruption insurance if an aircraft is damaged, but we believe this lack of coverage is standard in the industry. Substantial claims resulting from an accident could have a material adverse effect on our business. We attempt to monitor the amount of liability insurance maintained by the third-party providers of ground handling services and operators of chartered aircraft and trucks used in our expedited scheduled freight network through, among other things, the obtaining of certificates of insurance.

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ITEM 2.  PROPERTIES

          Our facilities generally consist of office space, crew lounge, hangars, sorting facilities, maintenance facilities and warehouse and storage space. All of our operating facilities are constructed on property leased from airport owners. As a result, the improvements to these facilities revert to the owner when the ground lease expires.

          We also have various agreements with municipalities and governmental authorities that own and operate airports throughout the U.S. and Canada.  These agreements generally relate to our use of general airport facilities, but may also include leases or licenses to use ramp areas and hangar and maintenance space. In addition, at March 15, 2003, we owned 13 Boeing 727-200 freighter aircraft, various aircraft engines and various ground handling and sorting equipment.

          The following is a summary of our major operating facilities:

Location	Use of Space		Square Feet		Owned/ Leased
Dallas/Fort Worth International Airport, Texas		Company headquarters and maintenance facility		43,400		Owned (1)
Dallas/Fort Worth International Airport, Texas		Offices and warehouse		48,000		Leased
Fort Wayne, Indiana		Office and sorting facilities		239,000		Leased

(1)     We own the building and improvements and lease the land from the airport.

ITEM 3.  LEGAL PROCEEDINGS

          Bankruptcy Reorganization.  A discussion of our bankruptcy proceedings is set forth in “Item 1.  Business – Bankruptcy Reorganization” and is incorporated herein by reference.

          Eagle Global Logistics.  In July 2002, we filed a demand for binding arbitration against EGL, Inc. d/b/a Eagle Global Logistics with the American Arbitration Association to resolve our claim to collect for freight transportation services rendered to EGL in the amount of approximately $4.0 million plus all interest, attorneys’ fees and costs allowable by law.  In August 2002, EGL filed an answer and counter-claim in the arbitration proceeding denying our claim and asserting a counter-claim for consequential damages in an unspecified amount, but in excess of $1.0 million plus costs and attorney’s fees, for an alleged breach of a contract by us.  The arbitration proceeding, which will resolve both parties’ claims, is currently scheduled to begin in June 2003.

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

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

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

          No matters were submitted to a vote of security holders during 2002.

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PART II

ITEM 5.  MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

          As part of implementing our plan of reorganization, we issued our new common stock during March 2003.  The new common stock has CUSIP number 498326 20 6, and at March 25, 2003, there were approximately 14 record holders of our new common stock.

          In September 30, 2002, as part of our plan of reorganization, our old common stock was cancelled. The old common stock had CUSIP number 498326 10 7.

          Our new common stock is eligible for trading in the over-the-counter market and has been assigned the symbol “KTHK”.  As of March 25, 2003, no established trading market for our common stock has emerged.

          We have never declared or paid any cash dividends on our common stock.  Payment of future dividends, if any, will be at the discretion of our board of directors, after taking into account various factors, including our earnings, capital requirements and surplus, financial position, contractual restrictions and other relevant business considerations, and there can be no assurance that dividends will be declared or paid now or any time in the future.

ITEM 6. SELECTED FINANCIAL DATA

          The following table summarizes selected financial information that has been derived from our audited consolidated financial statements.  You should read the information set forth below in conjunction with “Item 7.  Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and notes thereto included elsewhere in this Annual Report on Form 10-K.

          We emerged from bankruptcy on September 30, 2002 and implemented Fresh Start Accounting.  In accordance with Fresh Start Accounting, all of our assets and liabilities were restated to reflect their respective fair values as of September 30, 2002.  Our consolidated financial statements after September 30, 2002 are not comparable to the periods prior to September 30, 2002.  However, for purposes of this discussion, the successor results for the three months ended December 31, 2002 have been combined with the predecessor results for the nine months ended September 30, 2002. The numbers in the following table are in thousands, except per share data, average yield per chargeable weight — pounds moved and fuel — average cost per gallon.

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							Successor			Predecessor
				Year Ended December 31, 2002			Three Months Ended December 31, 2002			Nine Months Ended September 30, 2002			Year Ended December 31,
													2001			2000			1999			1998
Results of Operations
	Revenue:
		Scheduled freight		$	116,279		$	31,482		$	84,797		$	135,052		$	170,255		$	127,868		$	103,599
		Other (1)			5,524			2,994			2,530			112,437			196,578			240,149			171,842
		Services provided to discontinued operations (2)			—			—			—			—			—			23,007			20,484
		Total revenue			121,803			34,476			87,327			247,489			366,833			391,024			295,925
	Cost of revenue:
		Operating expenses			117,401			29,658			87,743			247,390			331,518			233,399			157,111
		Asset impairment (3)			—			—			—			86,316			14,812			—			—
		Services provided from discontinued operations (4)			—			—			—			—			—			112,744			88,744
		Total cost of revenue			117,401			29,658			87,743			333,706			346,330			346,143			245,855
	Gross profit (loss)				4,402			4,818			(416	)		(86,217	)		20,503			44,881			50,070
	General and administrative expenses				8,064			2,140			5,924			11,819			23,181			19,518			12,533
	Operating profit (loss) from continuing operations				(3,662	)		2,678			(6,340	)		(98,036	)		(2,678	)		25,363			37,537
	Other (income) expense:
			Interest expense (5)		2,287			154			2,133			7,051			12,751			9,754			7,484
			Reorganization expenses		39,629			—			39,629			42,676			17,111			—			—
			Other (income) expense (6)		(30,701	)		(139	)		(30,562	)		(14	)		2,310			(11,706	)		(419	)
			Total interest and other (income) expense		11,215			15			11,200			49,713			32,172			(1,952	)		7,065
	Income (loss) from continuing operations before income taxes				(14,877	)		2,663			(17,540	)		(147,749	)		(34,850	)		27,315			30,472
	Income tax expense (benefit)				—			—			—			—			(11,661	)		2,403			12,265
	Income (loss) from continuing operations				(14,877	)		2,663			(17,540	)		(147,749	)		(23,189	)		24,912			18,207
	Loss from discontinued operations (3) (7)				(40,831	)		—			(40,831	)		(20,173	)		(334,131	)		(15,059	)		(1,565	)
	Net income (loss) before extraordinary item				(55,708	)		2,663			(58,371	)		(167,922	)		(357,320	)		9,853			16,642
	Extraordinary item (8)				378,068			—			378,068			—			—			—			—
	Net income (loss)			$	322,360		$	2,663		$	319,697		$	(167,922	)	$	(357,320	)	$	9,853		$	16,642
Earnings (Loss) Per Share Data
	Continuing operations (9)				—		$	0.05		$	(1.02	)	$	(8.62	)	$	(1.35	)	$	1.46		$	1.08
	Discontinued operations (3) (7) (9)				—		$	—		$	(2.39	)	$	(1.18	)	$	(19.51	)	$	(0.88	)	$	(0.09	)
	Extraordinary item (8) (9)				—		$	—		$	22.07		$	—		$	—		$	—		$	—
	Net earnings (loss) per share (9)				—		$	0.05		$	18.66		$	(9.80	)	$	(20.86	)	$	0.58		$	0.99
	Weighted average common stock outstanding (9)				—			50,000			17,133			17,133			17,129			17,021			16,855
Operating Data
	Chargeable weight – pounds moved (10)				149,588			38,992			110,596			175,954			227,176			191,094			170,449
	Average yield per chargeable weight – pounds moved			$	0.7773		$	0.8074		$	0.7667		$	0.7675		$	0.7494		$	0.6691		$	0.6078
	Fuel – average cost per gallon (11)			$	0.8977		$	0.9946		$	0.8653		$	0.9606		$	1.0520		$	0.6770		$	0.5643
	Revenue block hours flown (12)				22,674			6,221			16,453			39,103			62,430			58,818			57,179
Financial Condition
	Cash and cash equivalents			$	10,353		$	10,353		$	4,610		$	13,472		$	14,117		$	14,964		$	15,077
	Total assets				47,259			47,259			47,354			171,606			442,941			922,016			982,585
	Notes payable and long-term obligations (13)				4,978			4,978			5,819			6,580			9,226			459,823			489,751
	Liabilities subject to compromise (13)				—			—			—			465,161			539,448			—			—
	Stockholders’ equity (deficit) (13)			$	19,263		$	19,263		$	16,600		$	(319,697	)	$	(151,775	)	$	205,117		$	194,197

(1)	Other revenue is primarily generated by Kitty Hawk Aircargo for services provided through ACMI contracts, on-demand charters, dedicated air freight services and management of peak season operations for the U.S. Postal Service.  Also included is revenue generated from freight handling services provided to third parties other than the U.S. Postal Service.
(2)	Services provided to discontinued operations represents revenue earned by our continuing operations in service to any of our discontinued operations.  This is necessary to conform 1999 and 1998 results of operations to the current presentation.
(3)	Asset impairment is the non-cash expense associated with writing down the value of our long-lived assets (mainly airframes, aircraft engines and rotable parts) in connection with SFAS No. 144, “Accounting for the Impairment or

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	Disposal of Long-Lived Assets.”  SFAS No. 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets.  This statement requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.  Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset.  If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset.  SFAS No. 144 requires companies to separately report discontinued operations and extends that reporting to a component of an entity that either has been disposed of (by sale, abandonment or in a distribution to owners) or is classified as held for sale.  Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell.
(4)	Services provided from discontinued operations represents cost for services rendered by our discontinued operations to our continuing operations.  This is necessary to conform 1999 and 1998 results of operations to the current presentation.
(5)	Excludes interest expense of $38.9 million in 1998 and $32.7 million in 1999, which was allocated to discontinued operations.
(6)	Other (income) expense is mainly generated through gains or losses on the disposal of property and equipment and interest income. In 2002, we recognized income of $29.4 million related to the settlement of our claims under the W-Net contract.
(7)	Loss from discontinued operations is the net operating results of operations that ceased or were disposed of during our bankruptcy proceedings and include Kitty Hawk International, the non-continental U.S. operations of Kitty Hawk Cargo, Kitty Hawk Charters, OK Turbines and Longhorn Solutions.
(8)	The extraordinary item in 2002 represents the gain from the extinguishment of debt net of the reorganization equity value distributed, or to be distributed, to our former creditors pursuant to our plan of reorganization.
(9)	No earnings per share data is presented for the year ended December 31, 2002 because the three months ended December 31, 2002 and the nine months ended September 30, 2002 are not comparable due to the cancellation of our common stock and the application of Fresh Start Accounting at September 30, 2002. For these reasons, these two periods may not be combined and used for year-over-year earnings per share comparisons. In 2002, weighted average common stock outstanding for the predecessor period reflects the shares of common stock outstanding at September 30, 2002, which were cancelled under our plan of reorganization.  In 2002, weighted average common stock outstanding for the successor period reflects the shares of common stock and warrants to acquire common stock to be issued under our plan of reorganization, which are deemed to be issued and outstanding as of October 1, 2002 for purposes of this calculation. In addition, because the warrants have a nominal exercise price, the shares of common stock underlying the warrants are also deemed to be outstanding for the presentation of the weighted average common stock outstanding for the successor period.
(10)	Chargeable weight – pounds moved is the greater of the actual weight of or the minimum deemed weight based on the dimensions of the items transported in our expedited scheduled freight network.
(11)	Fuel – average cost per gallon is the average cost per gallon of delivering jet fuel into our aircraft, including the cost per gallon of the jet fuel, transportation fees to get jet fuel to the airport, taxes, airport fees and costs associated with fueling the aircraft.
(12)	Revenue block hours flown are the block hours flown by Kitty Hawk Aircargo.
(13)	The variances result from our bankruptcy proceedings during which a significant amount of our outstanding notes payable and long-term obligations were cancelled and converted into shares or the right to receive shares of our new common stock or warrants to acquire shares of our new common stock and from the write-off of the stockholders’ deficit that had accumulated through September 30, 2002 in connection with our Fresh Start Accounting adjustments.

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ITEM 7.           MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

          We operate through our two wholly owned subsidiaries, Kitty Hawk Cargo and Kitty Hawk Aircargo.  In 2002, we generated approximately 95.5% of our revenue from our expedited scheduled freight network, which is operated by Kitty Hawk Cargo.  Kitty Hawk Aircargo, our air freight carrier airline, primarily supports Kitty Hawk Cargo’s expedited scheduled freight network by transporting cargo in its fleet of Boeing 727-200 freighter aircraft.  In addition, Kitty Hawk Aircargo also provides dedicated air freight transportation services for a variety of customers.

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

          We emerged from bankruptcy on September 30, 2002 and implemented Fresh Start Accounting.  In accordance with Fresh Start Accounting, all of our assets and liabilities were restated to reflect their respective fair values as of September 30, 2002.  Our consolidated financial statements after September 30, 2002 are not comparable to the periods prior to September 30, 2002.  However, for purposes of this discussion, the successor results for the three months ended December 31, 2002 have been combined with the predecessor results for the nine months ended September 30, 2002 and then compared to the predecessor results for the fiscal year ended December 31, 2001.  Differences between periods due to Fresh Start Accounting are explained when necessary.

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

•	Postal contracts revenue, which is generated from ACMI contracts with the U.S. Postal Service, ground handling and sorting services related thereto and management of peak season operations;
•	ACMI revenue, which is generated from ACMI contracts with third-parties and ad hoc charter revenue generated by our air freight carrier airline; and
•	Miscellaneous revenue, which is generated from freight handling services provided for third-parties, other than the U.S. Postal Service.
Cost of Revenue.  Included in our cost of revenue are the following major categories:
•	Flight Expense, which consists of costs related to the flight operations of our air freight carrier airline, including:
	•	crew member wages, benefits, training and travel;
	•	operating lease expense for leased aircraft operated by us;
	•	insurance costs related to aircraft operated by us; and
	•	flight operations and airline management costs, wages and benefits.
•	Transportation Expense, which consists of costs related to the physical movement of freight between our cargo facilities and which is not otherwise classified as flight expense, including:
	•	third-party aircraft charter expense;
	•	aircraft ground operating costs, such as landing and parking fees charged by airports and cost of deicing aircraft; and
	•	trucking expenses for cities in our expedited scheduled freight network that are not served by our aircraft.

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

• Maintenance Expense, which consists of costs to maintain aircraft and aircraft engines operated by our air freight carrier airline, including:

• wages and benefits for maintenance and records personnel;

• costs for contract mechanics at cargo facility outstations;

• costs of aircraft parts and supplies; and

• accruals for heavy airframe and aircraft engine maintenance.

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

• wages and benefits for our Fort Wayne, Indiana hub sort and ramp operations personnel;

• contract services to warehouse, load and unload aircraft principally at cargo facility outstations; and

• wages and benefits for our outstation cargo facility personnel.

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

• Asset Impairment, which consists of recognizing lost value of assets in our on-going operations under Statement of Financial Accounting Standards No. 144 – “Accounting For the Impairment or Disposal of Long-Lived Assets” which requires current period recognition of the reduction in the value of an asset that can no longer reasonably be expected to generate adequate net cash flows to recover its value or are no longer of such utility as to be utilized over the originally expected life.

• Operating Overhead, which consists of direct overhead costs related to operating our expedited scheduled freight network and air freight carrier airline, including:

• wages and benefits for operational managers of Kitty Hawk Cargo;

• expedited scheduled freight network sales and marketing expenses;

• wages and benefits for customer service personnel;

• rent and utilities;

• bad debt expense; and

• general operational office expenses.

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

          Discontinued Operations.  Our discontinued operations consist of Kitty Hawk International, the non-continental U.S. operations of Kitty Hawk Cargo, Kitty Hawk Charters, OK Turbines and Longhorn Solutions.  All of these businesses ceased operating or were disposed of during our bankruptcy proceedings.

Critical Accounting Policies

          Preparing financial statements in conformity with accounting principles generally accepted in the United States of America requires us to use estimates and assumptions to determine the value of our assets and certain liabilities and the amount of certain expenses.  We base these estimates and assumptions upon the best information available to us at the time we make the estimates or assumptions.  Our estimates and

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assumptions could change materially as conditions within and beyond our control change.  As a result, our actual results could differ materially from our estimates.  The most significant accounting policies include:

• our valuation of assets pursuant to Fresh Start Accounting;

• reserves related to airframe and aircraft engine maintenance;

• allowance for doubtful accounts;

• reserves related to aircraft lease return conditions;

• accounting for aircraft parts; and

• recognition of revenue.

          The following is a discussion of our critical accounting policies and the related management estimates and assumptions necessary for determining the value of related assets, liabilities or expenses.  A full description of all of our significant accounting policies is included in note 2 to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K.

          Valuations Pursuant to Fresh Start Accounting.  When we exited bankruptcy on September 30, 2002, we adopted the provisions of Statement of Position 90-7 entitled, “Financial Reporting by Entities in Reorganization under the Bankruptcy Code”, or Fresh Start Accounting.  Under Fresh Start Accounting, we recorded adjustments to our assets, liabilities and stockholders’ equity because:

• the fair market value of our assets after September 30, 2002 were less than the total of the post-petition liabilities and allowed claims which were converted into shares of our new common stock; and

• the holders of our previously issued voting stock did not receive 50% or more of our new voting stock under our plan of reorganization.

          Under Fresh Start Accounting, all of our assets and liabilities were adjusted to their estimated fair market value as of September 30, 2002. We determined the fair market values through a combination of appraisals done by third-parties, our management’s best estimate of value based on current knowledge of the industry and sales transactions for similar assets which have occurred over the prior twelve months.

          We also hired financial advisors to determine the estimated reorganization equity value of our company. The financial advisors based their valuation on two customary methods: a discounted cash flows method using our projected operating results and a comparable company analysis method. The results of their valuation determined that the fair market value of our reorganized company was between $12.9 million and $16.6 million.

          The fair market value of our net assets exceeded the high end of the estimated reorganization equity value by $2.9 million. As a result, we further reduced the value of our property and equipment and certain other assets on a proportionate basis by $2.9 million.

          Airframe and Aircraft Engine Maintenance Reserves.  To keep our airframes and aircraft engines in airworthy condition, we must perform scheduled heavy maintenance on them.  Accounting guidelines allow us to spread the cost of this heavy maintenance over the period of time that elapses between heavy maintenance events.  We accrue maintenance reserves for light C-checks on airframes and engine overhauls on aircraft engines, and we capitalize the cost of heavy C-checks on airframes.  In 2002, each light C-check costs approximately $700,000 to $850,000.  Although we did not perform a heavy C-check in 2002 and we do not currently expect to perform a heavy C-check on any airframes in our existing fleet, other than the airframe leased from Wren Equipment Finance. We currently estimate a heavy C-check to cost $1.2 million or more depending on the airframe.

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          For owned airframes and aircraft engines, we only record maintenance reserves for the airframes and aircraft engines on which we intend to perform light C-checks and engine overhauls in the future.  From our owned aircraft fleet, we have identified three airframes and 37 aircraft engines that we believe are economically viable to maintain in the future. For the remaining owned airframes and aircraft engines, we plan to take them out of service permanently when they come due for their next scheduled heavy maintenance.  As a result, we do not record maintenance reserves for them. 

          We also lease five airframes and 15 aircraft engines on which we are obligated to perform heavy maintenance and for which we record maintenance reserves.  For leased airframes and aircraft engines on which we are not obligated to perform heavy maintenance, we do not record maintenance reserves.

          For owned airframes and aircraft engines for which we are recording maintenance reserves, we increase our reserves for each flight hour logged at a rate equal to our estimate of the hourly cost for the next scheduled light C-check or engine overhaul.  For leased airframes and aircraft engines for which we are recording maintenance reserves, we generally make a payment to the lessor for a contractual rate per hour or cycle flown.  In addition, for leased airframes and aircraft engines on which we expect to perform a scheduled heavy maintenance event prior to returning them to the lessor, we also record maintenance reserves for each flight hour logged at a rate equal to our estimate of the hourly cost for the next scheduled light C-check or engine overhaul.  We estimate the hourly rate for maintenance reserves based on historical data and quotes received from our maintenance vendors. We review these rates annually for significant changes.

          If we perform a light C-check or engine overhaul on an airframe or aircraft engine that we previously expected to retire at the next scheduled heavy maintenance event, we would be required to expense the light C-check or engine overhaul in full when it is performed because we were not recording maintenance reserves on the airframe or aircraft engine.

          Allowance for Doubtful Accounts.  We extend credit to our customers based upon an evaluation of the following factors:

• the customer’s financial condition;

• the amount of credit requested; and

• the customer’s actual payment history, including resolution of disputed invoices.

          We also extend a minimal amount of open credit to customers that refuse to make financial disclosure, but that have an extended history of timely payments to us and low levels of disputed invoices.  We do not typically require our customers to post a deposit or supply collateral.

          We keep an allowance for doubtful accounts reserve as an offset to our accounts receivables in the event a customer’s balance cannot be collected. This reserve is based on current market conditions and periodic evaluations of each customer’s credit worthiness and has consistently been within our expectations.

          If we determine that a customer’s balance cannot be collected, we write-off the receivable against the reserve. At the end of each quarter, we review all the significant past due customer balances and determine if the allowance for doubtful accounts is adequate to cover these delinquent accounts in the event they have to be written-off in the future. Once a customer account is written-off, the customer is not allowed to have any open credit with us.

          Lease Return Condition Reserves.  When we lease aircraft that we operate, the leases generally require us to return the aircraft to the lessor with the same number of hours to the next scheduled heavy maintenance event for the airframe and aircraft engines as when we began leasing the aircraft or to make specified cash payments to the lessor in lieu thereof.  We accrue lease return condition reserves based on

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our estimated cash outlay to meet the contractual lease return conditions at the end of the lease term.  We base the lease return condition reserve on our estimate of the following factors:

• the number of hours we expect to operate the aircraft prior to returning it to the lessor;

• the expected amount of maintenance reserves we expect to pay to the lessor during the lease; and

• the cost to meet the return conditions in the lease.

          If our estimate turns out to be different than the actual cost to comply with the return conditions, we will be required to either take a charge or a credit to maintenance expense for the difference.  We review the estimates underlying the lease return condition reserves on a quarterly basis and adjust the reserves for material differences.

          Aircraft Parts Inventory Accounting.  We have a stock of aircraft parts and supplies that we use to perform minor maintenance on our fleet of owned and leased Boeing 727 aircraft. These parts and supplies are recorded at the lower of their average cost or market value. As a part of our Fresh Start Accounting adjustments, we estimated the value of these assets based on recent purchases of similar parts and supplies, quotes from vendors or recent costs incurred to repair similar parts.

          We currently treat all parts as inventory, rather than as property and equipment. We do this because the majority of our fleet is leased or operated under an Aircraft and Engine Use Agreement. These agreements generally require us to maintain the aircraft in an airworthy condition, which requires us to periodically install parts on the airframe or aircraft engines. Because the parts become a permanent fixture to the leased airframe or aircraft engine, installing the part effectively transfers ownership of the part from us to the lessor.  In addition, due to current market conditions, parts that are removed are generally not economically viable to be extensively repaired or overhauled, thus we do not use the rotable parts pooling concept for treatment of parts as fixed assets.

          As parts and supplies are used on an airframe or aircraft engine during routine line maintenance, the average cost associated with the part or supply item is charged to maintenance expense. If the parts or supplies are being used during a light C-check or an engine overhaul, the average cost of the part or supply item is charged to the maintenance reserve for that airframe or aircraft engine. If the parts or supplies are being used during a heavy C-check, the average cost of the part or supply item is capitalized.

          Revenue Recognition.  Revenue from our scheduled freight network is based on our published tariff manual and the chargeable weight of the item being shipped. We generate the majority of our expedited scheduled freight revenue from overnight services.  Revenue is recognized net of discounts upon delivery of the freight to its destination city in our freight network. Any discounts are applied before booking and invoicing.

          Our air freight carrier performs flights under ACMI contracts and ad hoc charters. These services are typically charged by the hour, with a monthly minimum for the ACMI services.  If the monthly minimum revenue is not met, the difference between the minimum monthly revenue and the amount of revenue already recognized that month is recognized at the end of the month.  Revenue associated with these ACMI and ad hoc charter flights is recognized when the flight is completed.

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Results of Operations

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

				Year ended December 31,
				2002			2001			2000
Revenue:
	Scheduled freight				95.5	%		54.6	%		46.4	%
	Other				4.5			45.4			53.6
		Total revenue			100.0			100.0			100.0
Cost of revenue:
	Operating expenses				96.4			100.0			90.4
	Asset impairment				—			34.8			4.0
		Total cost of revenue			96.4			134.8			94.4
Gross profit (loss)					3.6			(34.8	)		5.6
General and administrative expenses					6.6			4.8			6.3
Operating loss from continuing operations					(3.0	)		(39.6	)		(0.7	)
Other (income) expense:
	Interest expense				1.9			2.8			3.5
	Reorganization expense				32.5			17.3			4.7
	Other (income) expense				(25.2	)		—			0.6
			Total interest and other (income) expense		9.2			20.1			8.8
Loss from continuing operations before income taxes					(12.2	)		(59.7	)		(9.5	)
Income tax benefit					—			—			(3.2	)
Loss from continuing operations before discontinued operations and extraordinary item					(12.2	)		(59.7	)		(6.3	)
Loss from discontinued operations					(33.5	)		(8.2	)		(91.1	)
Extraordinary item					310.4			—			—
Net profit (loss)					264.7	%		(67.9	)%		(97.4	)%

Year ended December 31, 2002 compared to the year ended December 31, 2001

     Revenue

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

			2002					2001
			Revenue		Percentage of Total Revenue			Revenue		Percentage of Total Revenue			Percentage Change from 2001 to 2002
			(dollars in thousands)
Scheduled freight			$	116,279		95.5	%	$	135,052		54.6	%		(13.9	)%
Other:
	Postal contracts			920		0.7			85,368		34.5			(98.9	)
	ACMI			3,246		2.7			25,998		10.5			(87.5	)
	Miscellaneous			1,358		1.1			1,071		0.4			26.8
		Total revenue	$	121,803		100.0	%	$	247,489		100.0	%		(50.8	)%

          Scheduled Freight.  In 2002, the reduction in our scheduled freight revenue was primarily due to lower freight levels in our expedited scheduled freight network, which we believe resulted from the general economic downturn in the U.S.  In addition, our 2001 scheduled freight revenue includes approximately $17 million from combining our expedited scheduled freight network operations with those of a customer during June, July and August, which did not recur in 2002.

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          Postal Contracts.  In 2002, the reduction in our postal contract revenue was caused by the loss of the W-Net contract in August 2001 and the U.S. Postal Service’s decision not to renew our C-Net contract in September 2002.

          ACMI.  In 2002, the reduction in our ACMI revenue was primarily due to the expiration of our ACMI contract with BAX Global in December 2001.  The loss of ACMI revenue from BAX Global was offset to a limited degree by other short-term ACMI contract flying in the last half of 2002 for BAX Global, other freight networks and ad hoc charters flown.

          Miscellaneous.  In 2002, miscellaneous revenue increased as a result of leasing ground equipment to third parties during the December holiday season.

     Cost of Revenue

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

		2002					2001
		Cost of Revenue		Percentage of Total Revenue			Cost of Revenue		Percentage of Total Revenue			Percent Change from 2001 to 2002
		(dollars in thousands)
Flight expense		$	28,905		23.7	%	$	44,915		18.1	%		(35.6	)%
Transportation expense			8,841		7.3			44,322		17.9			(80.1	)
Fuel			26,794		22.0			35,055		14.2			(23.6	)
Maintenance expense			14,158		11.6			40,451		16.3			(65.0	)
Freight handling expense			23,166		19.0			40,231		16.3			(42.4	)
Depreciation and amortization			5,438		4.5			26,026		10.5			(79.1	)
Asset impairment			—		0.0			86,316		34.9			(100.0	)
Operating overhead			10,099		8.3			16,390		6.6			(38.4	)
	Total cost of revenue	$	117,401		96.4	%	$	333,706		134.8	%		(64.8	)%

          Flight Expense.  In 2002, flight expense declined in absolute dollars as a result of flying 16,429, or 42.0%, fewer block hours in 2002 as compared to 2001.  We operated fewer block hours primarily due to lower freight levels in our expedited scheduled freight network, the loss of the W-Net contract and the U.S. Postal Service’s decision not to renew our C-Net contract. 

          As a percentage of our total revenue, flight expense increased to 23.7% in 2002 from 18.1% in 2001.  This increase is principally due to the transfer of 12 Boeing 727-200 freighter aircraft to the Kitty Hawk Collateral Liquidating Trust in October 2001.  As a result of the transfer, we were required to make payments to the trust for our use of these aircraft in 2002.  We were not required to make these payments during the first ten months of 2001.

          Transportation Expense.  In 2002, transportation expense declined in absolute dollars due to the U.S. Postal Service’s decision not to renew the C-Net contract.  Because we did not manage the C-Net operations in 2002, we were not required to charter aircraft to fulfill our obligations under the C-Net contract.  In 2001, we chartered a number of aircraft to fulfill our obligations under the C-Net contract.  In addition, 2001 transportation expenses were increased as a result of combining our expedited scheduled freight network operations with those of a customer during June, July and August, which did not recur in 2002. 

          In 2002, virtually all of our transportation expense was incurred by our expedited scheduled freight network.  Because our expedited scheduled freight network is generally less dependent on third-party transportation providers than our other businesses, transportation expense also declined as a percentage of revenue in 2002 as compared to 2001.

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          Fuel.  In 2002, fuel expense declined in absolute dollars due to reductions in the average cost per gallon of jet fuel and due to lower jet fuel consumption in 2002 as compared to 2001.  In 2002, the average cost of jet fuel declined by $0.06 per gallon as compared to 2001, which reduced our year-over-year fuel expense by approximately $1.9 million.  Also, in 2002, we consumed 4.3 million fewer gallons of jet fuel in our expedited scheduled freight network due to lower freight levels, which reduced our year-over-year fuel expense by approximately $4.2 million.  In addition, our 2002 fuel expense was reduced by the loss of one charter contract in August 2001 which required us to supply jet fuel.  The loss of this contract reduced our year-over-year fuel expense by approximately $2.2 million.  

          As a percentage of revenue, fuel expense increased to 22.0% in 2002 from 14.2% in 2001, as most of our revenue in 2002 was generated by our expedited scheduled freight business which includes jet fuel as a cost of revenue.  By contrast, in 2001 and prior years, a significant amount of our revenue was generated by operations that did not include jet fuel as a cost of revenue because jet fuel was reimbursed by the customers. 

          Maintenance Expense.  In 2002, maintenance expense declined in absolute dollars and as a percentage of revenue due to a number of factors.  First, we operated our aircraft 16,429, or 42.0%, fewer block hours in 2002 as compared to 2001, which resulted in lower actual maintenance expense.  Second, the transfer of 12 Boeing 727-200 freighter aircraft to the Kitty Hawk Collateral Liquidating Trust in October 2001 reduced our maintenance expense because we do not have the responsibility for heavy maintenance under the Aircraft and Engine Use Agreement with the trust.  Finally, in the third quarter of 2001, we determined that in light of declining fair market values for our Boeing 727 freighter aircraft and the general availability of replacement freighter aircraft, it made economic sense for us to permanently retire some of our airframes and aircraft engines at their next scheduled heavy maintenance event, rather than performing the scheduled maintenance.  As a result, we were no longer required to record maintenance reserves for these airframes and aircraft engines, which further reduced our maintenance expense in 2002.

          Freight Handling Expense.  In 2002, freight handling expense declined in absolute dollars primarily due to the termination of the W-Net contract, which accounted for approximately $14.7 million of the reduction.  The remaining reduction of approximately $2.3 million was due to carrying 26.4 million fewer chargeable weight pounds in our expedited scheduled freight network in 2002 as compared to 2001.

          As a percentage of revenue, freight handling expense increased to 19.0% in 2002 as compared to 16.3% in 2001 due to changes in our revenue mix among our operations.  In 2002, we generated most of our revenue from our expedited scheduled freight network, which generally has higher freight handling expenses than our other operations.  In 2001, we generated significant revenues from our C-Net contract which had a relatively low freight handling expenses and from our ACMI contract with BAX Global, which had no freight handling expenses.

          Depreciation and Amortization.  In 2002, depreciation and amortization expenses declined in absolute dollars and as a percentage of revenue primarily due to having 12 fewer owned aircraft in 2002 as compared to 2001 and $86.3 million of asset impairment charges at the end of 2001, which significantly reduced the basis of our depreciable assets in 2002.

          Asset Impairment.  In 2002, we did not record any write-downs for asset impairments.  In 2001, we recorded a $86.3 million write-down in the value of our assets.  This write-down was triggered by the decline in the fair market value of the assets of our continuing operations resulting from events outside of our control and the downturn in the U.S. economy. 

          Operating Overhead.  In 2002, operating overhead declined in absolute dollars due to the reduction in the scope of our operations in 2002 as compared to 2001.  As a percentage of revenue, operating overhead increased to 8.3% in 2002 from 6.6% in 2001.  The increase was primarily due to the change in our revenue mix in 2002 as compared to 2001.  In 2002, we generated most of our revenue from our expedited scheduled freight business, which requires more direct sales costs, operational management and facilities costs than that required by the U.S. Postal Service contracts and ACMI contracts which constituted a significant portion of our revenue in 2001.

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     Gross Profit

          In 2002, gross profit increased by $90.6 million as compared to 2001 primarily due to the $86.3 million asset impairment in 2001, which did not recur in 2002.

     General and Administrative Expense

          General and administrative expense declined by $3.8 million, or 31.8%, in 2002 as compared to 2001.  We have aggressively reduced general and administrative expense as our operations have been reduced. 

     Interest Expense and Other (Income) Expense

          Interest expense declined by $4.8 million, or 67.6%, in 2002 as compared to 2001.  This is due to our repaying $65.6 million of secured debt during the last half of 2001 and the first half of 2002.  Reorganization expense decreased $3.0 million, or 7.1%, in 2002 as compared to 2001.  This is due to approximately $3.8 million of higher claims settlement expense due to the confirmation of our plan of reorganization which is offset by a $6.8 million reduction in professional fee expenses related to our bankruptcy proceedings in 2002 as compared to 2001.  Other income increased by $30.7 million in 2002 as compared to 2001 due to $29.4 million of gain recognized from the settlement of our W-Net termination of convenience claim.

     Income Tax Benefit

          We recognized no tax expense on our income in 2002 because of a corresponding reduction in our valuation allowance related to the decrease in our tax attributes as required in our emergence from bankruptcy.  We recognized no tax benefit on our loss in 2001 because we increased our valuation allowance related to our deferred tax assets that resulted from our loss.

     Loss from Continuing Operations 

          As a result of the foregoing, our loss from continuing operations for 2002 was $14.9 million, a decrease of 89.9% as compared to the $147.7 million loss from continuing operations in 2001.

     Loss from Discontinued Operations

          In 2002, our loss from discontinued operations increased by $20.7 million, or 102.4%, as compared to 2001.  In 2002, the losses were attributable to sales of aircraft at less than their carrying value and other charges taken in connection with the Fresh Start Accounting adjustments.  In 2001, the losses were attributable to the December 2001 sale of our air logistics business and a writedown due to further asset impairment related to the grounded aircraft.

     Extraordinary Item

          At September 30, 2002, pursuant to Fresh Start Accounting, upon emergence from bankruptcy, liabilities subject to compromise in the amount of $394.7 million were exchanged for the right to receive new common stock or warrants to acquire new common stock as part of the discharge of debt under our plan of reorganization.  After subtracting the reorganization value of $16.6 million which we distributed as common stock or warrants to acquire common stock, we recognized an extraordinary gain from extinguishment of debt of $378.1 million.

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Year ended December 31, 2001 compared to the year ended December 31, 2000

     Revenue

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

		2001					2000
		Revenue		Percentage of Total Revenue			Revenue		Percentage of Total Revenue			Percentage Change from 2000 to 2001
		(dollars in thousands)
Scheduled freight		$	135,052		54.6	%	$	170,255		46.4	%		(20.7	)%
Postal contracts			85,368		34.5			157,098		42.8			(45.7	)
ACMI			25,998		10.5			39,283		10.7			(33.8	)
Miscellaneous			1,071		0.4			197		0.1			443.7
	Total revenue	$	247,489		100.0	%	$	366,833		100.0	%		(32.5	)%

          Scheduled Freight.  In 2001, scheduled freight revenue declined due to lower freight levels in our expedited scheduled freight network, which we believe resulted from the general economic downturn in the U.S.  In 2001, our scheduled freight revenue includes $17 million from combining our expedited scheduled freight network operations with those of a customer during June, July and August.

          Postal Contracts.  In 2001, postal contract revenue declined primarily due to the termination of the W-Net contract and other dedicated air freight transportation contracts in August 2001 and due to generating more revenue from C-Net in 2000 as compared to 2001 based on the U.S. Postal Service’s requirements.

          ACMI.   In 2001, ACMI revenue declined due to operating fewer aircraft for BAX Global in 2001 as compared to 2000.  In 2000, we operated 14 aircraft for BAX Global until June 2000 and seven aircraft for BAX Global from June 2000 through the end of the year.  In early 2001, BAX Global elected to reduce the number of aircraft operated by us for them to six aircraft, which we operated for the remainder of 2001.

          Miscellaneous.  Miscellaneous revenue increased in 2001 from 2000 due to providing aircraft and freight handling services to third parties at one of our expedited scheduled freight facilities.

     Cost of Revenue

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

		2001					2000
		Cost of Revenue		Percentage of Total Revenue			Cost of Revenue		Percentage of Total Revenue			Percentage Change from 2000 to 2001
		(dollars in thousands)
Flight expense		$	44,915		18.1	%	$	67,025		18.3	%		(33.0	)%
Transportation expense			44,322		17.9			51,982		14.2			(14.7	)
Fuel			35,055		14.2			47,209		12.9			(25.7	)
Maintenance expense			40,451		16.3			53,687		14.6			(24.7	)
Freight handling expense			40,231		16.3			58,417		15.9			(31.1	)
Depreciation and amortization			26,026		10.5			36,384		9.9			(28.5	)
Asset impairment			86,316		34.9			14,812		4.0			482.7
Operating overhead			16,390		6.6			16,814		4.6			(2.5	)
	Total cost of revenue	$	333,706		134.8	%	$	346,330		94.4	%		(3.6	)%

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          Flight Expense.  In 2001, flight expense declined in absolute dollars as a result of flying 23,327, or 37.4%, fewer block hours in 2001 as compared to 2000.  We operated fewer block hours primarily due to operating fewer aircraft for BAX Global, the termination of the W-Net contract and other dedicated air freight transportation contracts with the U.S. Postal Service and reductions in our expedited schedule freight network in the late summer of 2001 resulting from the downturn in the U.S. economy.  Because we continued to generate significant revenues from ACMI contracts and contracts with the U.S. Postal Service in 2001, flight expense as a percentage of revenue essentially remained unchanged.

          Transportation Expense. In 2001, transportation expense declined in absolute dollars due to the termination of the W-Net contract, the reductions in our expedited scheduled freight network in the late summer of 2001 and the reduced scope of C-Net in 2001 dictated by the U.S. Postal Service. 

          As a percentage of revenue, transportation expense increased slightly due to combining our expedited scheduled freight network with a customer during the summer of 2001, which required a greater number of third-party transportation providers.

          Fuel.  In 2001, fuel expense declined in absolute dollars due to our lower average price per gallon for jet fuel in 2001 and due to lower jet fuel consumption in 2001 as compared to 2000.  In 2001, our average cost of jet fuel decreased by $0.09 per gallon, which reduced our year-over-year fuel expense by approximately $3.1 million.  Also, in 2001, we consumed 0.7 million fewer gallons of jet fuel in our expedited scheduled freight network due to lower freight levels, which reduced our year-over-year fuel expense by approximately $0.8 million.  In addition, our 2001 fuel expense was reduced by the loss of one charter contract in August 2001 which required us to supply jet fuel and flying fewer ad hoc charters in 2001 as compared to 2000. 

          As a percentage of revenue, fuel expense increased to 14.2% in 2001 from 12.9% in 2000, as we generated a greater percentage of our total revenue from our expedited scheduled freight business which includes jet fuel as a cost of revenue.  By contrast, in 2000 and prior years, a significant amount of our revenue was generated by operations that did not include jet fuel as a cost of revenue because jet fuel was reimbursed by the customers. 

          Maintenance Expense.  In 2001, maintenance expense declined primarily due to operating 23,327, or 37.4%, fewer block hours.  As a percentage of revenue, maintenance expense increased slightly due to reduced C-Net contract revenue in 2001 and the higher percentage of block hours flown by our air freight carrier airline in the 2001 C-Net operation as compared to 2000.

          Freight Handling Expense.  In 2001, freight handling expense declined primarily due to the termination of the W-Net contract in August 2001 and the reduction in freight handled by our expedited scheduled freight network due to the slowing of the U.S. domestic economy in 2001.  As a percentage of revenue, there was essentially no change in freight handling expense because the C-Net, W-Net and expedited scheduled freight operations that primarily incur this expense were reduced generally at the same rate as total revenue.

          Depreciation and Amortization.  In 2001, depreciation and amortization expense declined due to the significant reduction in the carrying values of our owned airframes and aircraft engines.  This was due to a decline in the fair market value of Boeing 727-200 freighter aircraft and related assets caused in part by the U.S. Postal Service contract with the package delivery company, the W-Net contract termination which triggered an asset impairment and the slowing of the U.S. domestic economy in 2001.  As a percentage of revenue, depreciation and amortization expense increased slightly due to a greater percentage decline in total revenue as compared to the percentage decline in the carrying values of our assets.

          Asset Impairment.  In 2001, we recorded a $86.3 million write-down in the value of our Boeing 727-200 fleet and related assets largely due to events outside of our control, such as the general decline in fair market value of Boeing 727-200 freighter aircraft and related assets.  In 2000, we recorded a $14.8 million write-down in the value of three Douglas DC-9 freighter aircraft that we had operated primarily in ad hoc charter service and that we decided to stop operating in early 2000.  When it became clear in 2000

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that we would not be able to sell or operate these aircraft and recover their then-current book value, we recorded the write-down.  We also recognized a write-down on three Boeing 727-200 airframes that we determined would not be economically viable to maintain once they reached their next scheduled heavy mainframe event.

          Operating Overhead.  In 2001, operating overhead decreased $0.4 million but increased as a percentage of revenue because a number of personnel were required to help with winding-down the W-Net operations and preparing for the 2001 C-Net operations during a period in which we had no related revenue (late August through early December 2001).

     Gross Profit

          In 2001, gross profit declined $106.7 million, or 520.5%, as compared to 2000.  This was primarily the result of the $86.3 million asset impairment in 2001 and our inability to reduce transportation expense, maintenance expense and operating overhead as rapidly as the decline in our revenue in the last half of 2001. 

     General and Administrative Expense

          In 2001, general and administrative expense declined $11.4 million, or 49.0%, as compared to 2000.  General and administrative expense was aggressively reduced as operations were reduced in 2001.

     Interest Expense and Other (Income) Expense

          Interest expense declined by $5.7 million, or 44.7%, in 2001 as compared to 2000.  This is due to our repaying over $42 million of secured debt during 2001.  In 2001, we recognized a net $14,000 of other income from interest income offset by an equal amount of losses from asset disposals.  In 2000, our losses from asset disposals were greater than the interest income earned on our cash balances.

          Reorganization expense increased $25.6 million from 2000 primarily as a result of the return of four Boeing 727-200 aircraft to our lessors and the transfer of 12 Boeing 727-200 aircraft to the Kitty Hawk Collateral Liquidating Trust.  We recognized expenses of $30.9 million versus $8.0 million of similar expenses in 2000.  We also incurred $2.7 million more professional fees related to our bankruptcy proceedings in 2001 as compared to 2000.

     Income Tax Benefit

          We recognized no tax benefit on our loss in 2001, because we increased our valuation allowance related to our deferred tax assets that resulted from our loss.  In 2000, we recognized an $11.6 million tax benefit relating to our loss from continuing operations, which amounted to the reversal of our deferred tax liabilities.

     Loss from Continuing Operations 

          As a result of the foregoing, our loss from continuing operations for 2001 was $147.8 million as compared to the $23.2 million loss from continuing operations in 2000.

     Loss from Discontinued Operations

          In 2001, our loss from discontinued operations declined by $314.0 million, or 94.0%, as compared to 2000.  In 2001, the losses were attributable to the December 2001 sale of our air logistics business and further writedowns to grounded aircraft due to fair market value fluctuations.  In 2000, the losses were attributable to the shutdown of Kitty Hawk International and related operations and recording writedowns of Kitty Hawk International’s aircraft and related assets, most of which was asset impairment.

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Tax Attributes and Valuation Allowance

          Based on our filed U.S. federal income tax returns and estimates of U.S. federal income tax returns yet to be filed, and our estimates of the cancellation of debt resulting from our plan of reorganization, we estimate that we had tax attributes of approximately $35.7 million as of September 30, 2002.  To the extent that we can use these remaining tax attributes, they will provide a tax benefit to us when we have U.S. taxable income in the future.  Depending on the characterization of our extinguishment of debt under the U.S. Internal Revenue Code, there could be an annual limitation on the amount of the tax attributes that are available to us in the future.  In addition, if certain substantial changes in our ownership occur, there could be an annual limitation on the amount of the tax attributes that are available to us, regardless of the characterization of our extinguishment of debt.

          Due to historical operating losses and the potential for future limitations on the utilization of our tax attributes, we have recorded a valuation allowance against our estimated remaining tax attributes because it is unclear how much, if any, tax benefit we will realize prior to expiration of the remaining tax attributes.  Therefore, currently there is no net asset value for the remaining tax attributes reflected in our current consolidated financial statements.

Liquidity and Capital Resources

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

          As a result of the bankruptcy process, we significantly reduced our ratio of debt to equity.  Substantially all of our debt has been extinguished, retired or converted into equity pursuant to our plan of reorganization, which has simplified our financial obligations and commitments.  Although we currently have less liquidity, our debt obligations have also been dramatically reduced. 

          At December 31, 2002, cash and cash equivalents were $10.4 million as compared to $13.5 million in 2001.  Additionally, at December 31, 2002, we had $5.0 million available under our receivables purchase facility.  We had no receivables purchase facility at December 31, 2001.

          At December 31, 2002, we had net working capital of $12.2 million as compared to $49.2 million at December 31, 2001.  At December 31, 2002, our net working capital was supported by long-term debt and equity, as we had no funds advanced from our receivables purchase facility.  The large decrease in our net working capital was primarily due to collection of accounts receivable in early 2002 and ACMI activity that did not recur in 2002.

          We believe that our cash balances plus operating cash flow will be sufficient to meet our cash needs in 2003.  Our capital expenditures in 2003 are projected to be less than $1.0 million.

          In 2004, the leases and the Aircraft and Engine Use Agreement under which we currently operate 14 Boeing 727-200 freighter aircraft are scheduled to expire.  These 14 aircraft represent a majority of our current operating fleet and will represent an increasing percentage of our operating fleet over time as we take non-economically viable aircraft out of service at their next scheduled heavy maintenance event.  There can be no assurance that the lessors or owners of these aircraft will continue to make these aircraft available to us on terms and conditions we find acceptable.  We currently believe there are sufficient available aircraft in the market to meet our needs if we are unable to, or decide not to, extend these leases or the Aircraft and Engine Use Agreement.  However, there may be initial cash equity requirements or transitional maintenance expenditures to obtain other aircraft or retain some or all of the aircraft covered by these leases or the Aircraft and Engine Use Agreement.  Without adequate aircraft at an economically viable cost, we may not be able to continue to operate our businesses or generate operating income or profits.

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          Receivables Purchase Facility.  We entered into an account transfer and purchase agreement with KBK Financial for a $5.0 million receivables purchase facility as part of our plan of reorganization.  The receivables purchase facility may be increased up to a $10.0 million facility if KBK Financial obtains a qualified participant. At December 31, 2002, we had no funds advanced under this facility. 

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

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

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

          The receivables purchase facility does not have a stated expiration date, but can be terminated by either party upon thirty days’ written notice. A penalty of 2.0% of the amount of the receivables purchase facility will be imposed if we terminate the facility prior to October 31, 2003. This penalty is reduced to 1.0% if we terminate the facility between October 31, 2003 and October 31, 2004. There is no penalty if we terminate the facility after October 31, 2004. If KBK Financial does not secure an additional participant with a commitment of at least $2.0 million by April 30, 2003, we will not be subject to these early termination penalty provisions.

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

          The promissory note is guaranteed by us and is secured by two Boeing 727-200 airframes and five aircraft engines.  At December 31, 2002, we owed 1^st Source Bank approximately $4.4 million under this note and the collateral had a carrying value of substantially less than the amount owed.  Under these agreements, we are required to perform light and heavy maintenance on the airframes and aircraft engines and to keep them airworthy. These agreements do not have any minimum collateral value or financial covenants.

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Contractual Obligations

          The following table sets forth our contractual obligations at December 31, 2002, for the periods shown (dollars in thousands):

Contractual Obligations	Total		Within 1 Year		2-3 Years		4-5 Years		Thereafter
Debt	$	4,978	$	2,640	$	2,338	$	—	$	—
Non-aircraft operating leases		42,354		2,519		6,291		6,023		27,521
Aircraft operating leases and use agreements (excluding lease return conditions)		11,895		8,225		3,670		—		—
Purchase commitments		—		—		—		—		—
Total contractual cash obligations	$	59,227	$	13,384	$	12,299	$	6,023	$	27,521

Seasonality of Results and Operating Leverage

          The following table reflects selected unaudited quarterly operating results.  The information has been prepared on the same basis as the consolidated financial statements and include all adjustments, consisting of only normal recurring adjustments, necessary for a fair presentation of the information shown. Our results may vary significantly from quarter to quarter and the operating results for any quarter are not necessarily indicative of the results that may be expected for any future period.

	Predecessor																					Successor
	Quarter Ended
	March 31, 2001			June 30, 2001			September 30, 2001			December 31, 2001			March 31, 2002			June 30, 2002			September 30, 2002			December 31, 2002
	unaudited																					audited
	(in thousands, except per share data)
Total revenue	$	68,279		$	66,406		$	54,452		$	58,352		$	25,087		$	30,595		$	31,645		$	34,476
Gross profit (loss) from continuing operations		(2,047	)		(3,040	)		(64,886	)		(16,244	)		(4,048	)		2,007			1,625			4,818
Operating income (loss)		(5,146	)		(7,060	)		(66,785	)		(19,045	)		(4,570	)		1,604			(3,374	)		2,678
Income (loss) from continuing operations	$	(8,836	)	$	(10,078	)	$	(80,346	)	$	(48,489	)	$	(9,129	)	$	(1,552	)	$	(6,859	)	$	2,663
Basic and diluted net income (loss) from continuing operations per share	$	(0.52	)	$	(0.59	)	$	(4.69	)	$	(2.82	)	$	(0.53	)	$	(0.09	)	$	(0.40	)	$	0.05	(1)

(1)	For the purpose of calculating basic and diluted net income from continuing operations per share for the quarter ended December 31, 2002, the shares of common stock and warrants to acquire common stock to be issued under our plan of reorganization are deemed to be outstanding as of October 1, 2002 . In addition, because the warrants have a nominal exercise price, the shares of common stock underlying the warrants are also deemed to be outstanding.
	Our business is seasonal in nature.  In a typical year, we experience improving revenue with each passing quarter, beginning with the first quarter.  However, this is not apparent for 2001 as shown in the above table.  The U.S. domestic economy entered a downturn in late 2000.  During 2001, the demand for our expedited scheduled freight services generally trended downward the entire year.  We reduced the size of our expedited scheduled freight network and our expenses as rapidly as possible in 2001 when it became apparent that there would not be an improvement in the third and fourth quarters.  In 2002, we experienced normal seasonal trends in our expedited scheduled freight business.
	In 2002, we generated approximately 95.5% of our revenue from our expedited scheduled freight business. This business has significant operating costs that are fixed and cannot be materially reduced in the short-term if the expedited scheduled freight business cannot generate expected levels of revenue.  Once revenue reaches the break-even point in a given period, each additional dollar of revenue contributes

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a relatively high percentage to operating income.  However, if revenue does not reach the break-even point in a given period, the operations will sustain losses, which could be significant depending on the amount of the deficit.

Recent Accounting Pronouncements

          In October 2001, the Financial Accounting Standards Board issued SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” or SFAS 144, which requires a single accounting model to be used for long-lived assets to be sold and broadens the presentation of discontinued operations to include a “component of an entity,” rather than a segment of a business.  A component of an entity constitutes operations and cash flows that can be clearly distinguished, operationally and for financial reporting purposes, from the rest of the entity.  A component of an entity that is classified as held for sale, or has been disposed of, is presented as a discontinued operation if the operations and cash flows of the component will be, or have been, eliminated from the ongoing operations of the entity and the entity will not have any significant continuing involvement in the operations of the component.  SFAS 144 was effective for us beginning January 1, 2002, with earlier applications encouraged.  We adopted SFAS 144 for all periods presented.

          In November 2002, the FASB issued FASB Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others,” or FIN 45.  FIN 45 requires that upon issuance of a guarantee, a guarantor must recognize a liability for the fair value of an obligation assumed under a guarantee.  FIN 45 also requires additional disclosures by a guarantor in its interim and annual financial statements about the obligations associated with guarantees issued.  The recognition provisions of FIN 45 are effective for any guarantees issued or modified after December 31, 2002.  The disclosure requirements are effective for financial statements of interim or annual periods ending after December 15, 2002.  The adoption of FIN 45 is not expected to have a material effect on our financial position, results of operations, or cash flows.

Factors that May Affect Future Results and Market Price of Stock

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

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

          A number of risks and uncertainties could cause our actual results to differ materially from the forward-looking statements contained in this Annual Report on Form 10-K.  Important factors that could cause our actual results to differ materially from the forward-looking statements are set forth in this Annual Report on Form 10-K. These risks, uncertainties and other important factors include, among others:

• loss of key suppliers or significant customers;

• increased competition;

• limited operating flexibility due to our limited capital resources and liquidity and lack of profitability;

• financial costs and operating limitations imposed by the unionization of our workforce;

• changes in economic conditions;

• changes in the cost and availability of jet fuel;

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• changes in the cost and availability of ground handling and storage services;

• changes in the cost and availability of aircraft or replacement parts;

• changes in our business strategy or development plans;

• changes in government regulation and policies; and

• increased foreign political instability and acts of war or terrorism.

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

ITEM 7A.           QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

          At December 31, 2002, we had outstanding debt of $5.0 million, of which $4.4 million is long-term debt with an average maturity of 2.2 years and an interest rate of 8.9%. 

          We do not currently have significant exposure to changing interest rates on our promissory note to 1^st Source Bank or the KBK Financial receivables purchase facility.  Our promissory note to 1^st Source Bank bears a fixed interest rate of 8.9% per annum.  The receivables purchase facility contains a 0.6% fixed discount rate and variable discount rate equal to a base rate determined by KBK Financial, plus 2.0% per annum.  The variable rate may not be less than 6.75%.

          At December 31, 2002, we had approximately $4.4 million outstanding under the 1^st Source Bank promissory note and no outstanding balance under our receivables purchase facility.  To the extent we draw down funds on our receivables purchase facility, we will bear interest rate risk on the amount we draw down.  See “Item 7.  Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources.”

          Our exposure to changing interest rates on invested cash is minimal because we invest our cash in a U.S. Treasury backed money-market fund.  At December 31, 2002, approximately $8.0 million of our cash was invested.

          We have not undertaken any actions to cover interest rate market risk and are not a party to any interest rate market risk management activities.

          A hypothetical 10% decline in market interest rates over the next year would have little impact on our earnings and cash flow because of the fixed rates on a substantial portion of our significant debt.

          Jet fuel is a significant cost of operating aircraft.  We do not have any agreements with jet fuel suppliers assuring the availability or price stability of jet fuel.  We also do not participate in any open market hedging activities related to jet fuel.

          At current levels of operations in our expedited scheduled freight business, each $.01 change in the price per gallon of jet fuel results in a change in our annual fuel cost of $290,000.

          We do not purchase or hold any derivative financial instruments for trading purposes.

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ITEM 8.           FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

          The response to Item 8 is submitted as a separate section of this Annual Report on Form 10-K.  See “Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K.”

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

          None.

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PART III

ITEM 10.           DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

General

          The following table presents information about our executive officers and directors as of March 25, 2003:

Name	Age	Position(s)
Robert W. Zoller, Jr.	56	Chief Executive Officer, President and Director
Jack A. (Drew) Keith	42	Vice President and Chief Financial Officer
Toby Skaar	37	Vice President and General Manager of Kitty Hawk Cargo, Inc.
John Clark Stevens	53	President of Kitty Hawk Aircargo, Inc.
Jessica L. Wilson	34	Chief Accounting Officer
Gerald L. Gitner	57	Non-Executive Chairman of the Board and Director
Tamir (Thomas) Hacker	46	Director
Myron Kaplan	57	Director
John M. Malloy	36	Director
Robert A. Peiser	54	Director

Executive Officers

          Robert W. Zoller, Jr. has served as a member of our board of directors and as our Chief Executive Officer and President since November 2002.  Since April 2002, Mr. Zoller has been a principal and founder of International Management Solutions, LLC, a strategic planning and corporate turn-around consulting practice.  Mr. Zoller served as President and Chief Operating Officer of Hawaiian Airlines, Inc. from December 1999 to April 2002.   Mr. Zoller served as Senior Vice President Maintenance and Engineering for AirTran Airways, Inc. from March 1996 to December 1999, Vice President Operations for American Airlines/AMR Eagle from September 1987 to March 1996, and Director of Flight Operations for Pacific Southwest Airlines, Inc. from July 1979 to September 1987. Mr. Zoller held accounting and financial planning management positions with General Dynamics, Inc. from July 1977 to July 1979 and NCR, Inc. from July 1975 to July 1977. In March 2003, Hawaiian Airlines filed for Chapter 11 protection under the U.S. bankruptcy code. Mr. Zoller’s term of office as a director expires with the annual meeting of stockholders in 2004.

          Jack A. (Drew) Keith was named our Vice President and Chief Financial Officer in April 2000 after joining us in September 1999 as Vice President - Finance.  From 1993 to September 1999, Mr. Keith was a commercial banker with Wells Fargo Bank, where he was responsible for the agency of our bank group.  From 1987 to 1993, Mr. Keith was responsible for a portfolio of large corporate workout/problem loans for First Interstate Bank, which was acquired by Wells Fargo Bank in 1996.  Prior to 1987, Mr. Keith was involved in commercial construction project management and real estate development.

          Toby J. Skaar has served as the Vice President and General Manager of Kitty Hawk Cargo since  April 1999.  Mr. Skaar served as Vice President and Chief Operating Officer of Kitty Hawk Cargo from 1990 to April 1999.  Mr. Skaar has been in the freight industry for approximately 20 years. 

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          J. Clark Stevens has served as the President of Kitty Hawk Aircargo since August 1999. Prior to becoming President of Kitty Hawk Aircargo, Mr. Stevens served as Vice President of Technical Services for Kitty Hawk International from September 1998 to August 1999.  Mr. Stevens was President and Chief Operating Officer of Mesa Air Group, Inc. from January 1995 to August 1998 and was a director of Mesa Air Group from 1995 to 1998.  Prior to that time, Mr. Stevens was President of FloridaGulf Airlines (a division of Mesa Air Group) from March 1993 to January 1995.

          Jessica L. Wilson has served as our Chief Accounting Officer since August 2000. Her primary responsibilities include overseeing the daily operations of the accounting department, managing the treasury function and all consolidated financial reporting. From August 1997 to July 2000, Ms. Wilson served as our Corporate Controller, with primary functions of overseeing the Dallas, Texas accounting department and preparation of all consolidated financial reporting. From October 1990 to August 1997, Ms. Wilson was an auditor with Ernst & Young LLP, our primary accounting firm prior to April 2000. Ms. Wilson is a certified public accountant licensed in the state of Texas.

Directors

          Gerald L. Gitner has served as a member of our board of directors since October 2002 and as our Non-Executive Chairman of the Board since November 2002.  Mr. Gitner is the Chairman of D.G. Associates, Inc., a strategic planning and consulting practice.  Prior to joining us, Mr. Gitner served as Chairman of the Board and Chairman of the Executive Committee of the board of directors of Trans World Airlines, Inc. from May 1999 to June 2002, Chairman and Chief Executive Officer of Trans World Airlines (having been the Vice Chairman and Acting Chief Executive Officer since December 1996) from February 1997 to May 1999, and a director of Trans World Airlines from November 1993 to June 2002.   In January 2001, Trans World Airlines filed for Chapter 11 protection under the U.S. bankruptcy code.  He was Chairman of Avalon Group, Ltd. from April 1992 until September 1998 and Co-Chairman of Global Aircraft Leasing Ltd. from 1990 to March 1999.  Prior to that date, Mr. Gitner was President of Texas Air Corp. from 1985 to 1986, Chairman and Chief Executive Officer of Pan American World Services from 1983 to 1985, and Vice Chairman of Pan American World Airways, Inc. from 1983 to 1985. He was a founder of People Express Airlines, Inc. and served as its President from 1980 to 1982. Mr. Gitner serves on the Board of Trustees of both the Rochester Institute of Technology and the American College of Management and Technology.  Mr. Gitner’s term of office as a director expires with the annual meeting of stockholders in 2004.

          Tamir (Thomas) Hacker has served as a member of our board of directors since October 2002. Since May 2001, Mr. Hacker has been a registered representative of B. Riley & Co., a Southern California based brokerage firm. From June 1996 through April 2001, Mr. Hacker was a registered representative of Equibond, Inc., a broker-dealer in Santa Monica, California. Mr. Hacker served on the board of directors of National Bancshares of Texas from September 2000 to January 2002.  Mr. Hacker’s term of office as a director expires with the annual meeting of stockholders in 2004.

          Myron Kaplan has served as a member of our board of directors since October 2002. Mr. Kaplan is a founding partner of Kleinberg, Kaplan, Wolff & Cohen, P.C., a New York City law firm, where he has practiced corporate and securities law for more than 30 years.  Mr. Kaplan served on the board of directors of Trans World Airlines, Inc. from 1993 to June 2002, serving on its Executive Committee and chairing its Compensation Committee from 1996 to 1999 and also serving on its Finance and Audit Committees for portions of his tenure as a director.  In January 2001, Trans World Airlines filed for Chapter 11 protection under the U.S. bankruptcy code. Since March 2002, Mr. Kaplan has served as a member of the board of directors of SAir Group Finance (USA) Inc., which in September 2002 filed for Chapter 11 protection under the U.S. bankruptcy code. Mr. Kaplan also serves on the board of directors of a number of privately-held companies and charitable organizations. Mr. Kaplan’s term of office as a director expires with the annual meeting of stockholders in 2004.

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          John M. Malloy, Jr., has served as a member of our board of directors since October 2002.  Since 1999, Mr. Malloy has been a Managing Director of Everest Capital Limited, an investment management company. From 1996 through 1999, Mr. Malloy was an investment portfolio manager for Everest Capital Limited.  Mr. Malloy’s term of office as a director expires with the annual meeting of stockholders in 2004.

          Robert A. Peiserhas served as a member of our board of directors since October 2002.  Since April 2002, Mr. Peiser has been the President and Chief Executive Officer and a director of Imperial Sugar Company. Prior to joining Imperial Sugar Company, from July 1999 to February 2002, Mr. Peiser served as Chairman and Chief Executive Officer of Vitality Beverages, Inc., a privately-owned beverage company.  From May 1998 to November 1999, Mr. Peiser served as Chairman of CVSI, Inc. and President and Chief Executive Officer of Western Pacific Airlines from December 1996 to February 1998.  Mr. Peiser also served as Executive Vice President and Chief Financial Officer of Trans World Airlines from August 1994 to June 1996.  Mr. Peiser has served as a director of Ascent Assurance, Inc., an insurance holding company, since 1999.  Mr. Peiser’s term of office as a director expires with the annual meeting of stockholders in 2004.

Section 16(a) Beneficial Ownership Reporting Compliance

          Section 16(a) of the Securities Exchange Act of 1934, as amended, requires our directors, executive officers and beneficial owners of more than 10% of our common stock to file with the Securities and Exchange Commission initial reports of ownership and reports of changes in ownership of our common stock and other equity securities.  Based solely upon a review of the copies of such forms we received, we believe that all such reports were submitted on a timely basis during 2002.

ITEM 11.           EXECUTIVE COMPENSATION

          The following table summarizes the compensation we paid during 2002, 2001 and 2000 to our Chief Executive Officer as of December 31, 2002 and our four other most highly compensated executive officers as of December 31, 2002, referred to elsewhere in this Annual Report on Form 10-K as our named executive officers.  The following table also summarizes the compensation we paid during 2002, 2001 and 2000 to Mr. Tilmon J. Reeves, our former Chairman of the Board, President and Chief Executive Officer, and Mr. James R. Craig, our former Vice President and General Counsel.  The summary compensation table excludes compensation in the form of perquisites and other personal benefits earned by these officers as these benefits are less than $50,000 and 10% of the total salary and bonus earned by these officers.

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Summary Compensation Table

		Annual Compensation
Name and Principal Position(s)		Year		Salary		Bonus		All Other Compensation (4)
Robert W. Zoller, Jr. (1)			2002	$	37,500	$	—	$	—
	Chief Executive Officer and President		2001		—		—		—
			2000		—		—		—
Jack A. (Drew) Keith			2002		202,031		—		2,750
	Vice President and Chief Financial Officer		2001		195,000		97,500		2,625
			2000		170,487		5,000		—
Toby Skaar			2002		149,792		—		—
	Vice President and General Manager of Kitty Hawk		2001		160,000		80,000		2,583
	Cargo, Inc.		2000		141,429		40,000		2,297
John Clark Stevens			2002		173,333		—		3,000
	President of  Kitty Hawk Aircargo, Inc.		2001		190,000		95,000		2,625
			2000		179,375		20,000		2,625
Jessica L. Wilson			2002		103,125		—		1,427
	Chief Accounting Officer		2001		100,000		50,000		2,625
			2000		93,333		7,500		2,625
Tilmon J. Reeves (2)			2002		220,833		—		50,167
	Former Chairman of the Board,		2001		400,000		400,000		2,625
	Chief Executive Officer and President		2000		400,000		70,000		2,500
James R. Craig (3)			2002		165,625		—		40,250
	Former Vice President and		2001		200,000		100,000		2,625
	General Counsel		2000		200,000		50,000		2,625

(1)	Mr. Zoller was hired as our Chief Executive Officer and President on November 4, 2002.  His current annual base salary is $300,000.
(2)	Mr. Reeves resigned as Chairman of the Board, Chief Executive Officer and President effective November 4, 2002.
(3)	Mr. Craig resigned as Vice President and General Counsel effective November 4, 2002.
(4)	Represents matching contributions made by us under the terms of our 401(k) plan and $50,000 of severance paid to Mr. Reeves in 2002 and $37,500 of severance paid to Mr. Craig in 2002.

Stock Options

          There were no stock option grants during 2002.  As of September 30, 2002, all outstanding stock options and equity compensation plans were cancelled pursuant to our plan of reorganization.  As of December 31, 2002, we did not have any equity compensation plans.  We are currently considering adopting an equity compensation plan for our employees and non-employee directors.

Employment Agreements

          Mr. Zoller.  Mr. Zoller is employed pursuant to a memorandum of understanding with us.  Mr. Zoller is our Chief Executive Officer and President and the Chief Executive Officer of each of Kitty Hawk Aircargo and Kitty Hawk Cargo.  Under the memorandum of understanding, Mr. Zoller receives an annual base salary of $300,000 and may receive additional performance based compensation, as determined by our board of directors.  Mr. Zoller receives employee fringe benefits that are generally available to all employees and may receive other fringe benefits as determined by our board of directors.  If we terminate the employment of Mr. Zoller prior to November 5, 2005, for any reason other than a material breach of the memorandum of understanding by Mr. Zoller,

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he is entitled to 12 months’ worth of his annual base salary and certain medical insurance benefits for the 12-month period following his termination.  We expect to finalize a specific employment agreement for Mr. Zoller in 2003.

          Mr. Keith.  Mr. Keith is employed pursuant to an employment and severance agreement with us.  Mr. Keith is employed as our Vice President and Chief Financial Officer and as a Vice President of Kitty Hawk Aircargo and Kitty Hawk Cargo.  Under the employment agreement, Mr. Keith currently receives an annual base salary of $225,000 and may receive additional performance based compensation, as determined by our board of directors.  Mr. Keith receives employee fringe benefits that are generally available to all employees and may receive other fringe benefits as determined by our board of directors.

          Mr. Keith is required to safeguard our proprietary information and to surrender to us all written or recorded evidence of our proprietary information as well as our property if he leaves our employment.  Mr. Keith is also prohibited from disclosing, disseminating or utilizing our proprietary information after leaving our employment, unless our Chief Executive Officer authorizes such use in writing.

          Mr. Keith’s employment agreement may be terminated by us or Mr. Keith with or without cause at any time upon 30 days’ prior written notice to the other party.  If we terminate the employment agreement after December 31, 2002, for any reason other than a material breach of the agreement by Mr. Keith, he is entitled to three months’ worth of his annual base salary and certain medical insurance benefits for the three-month period following his termination.  If we terminate the employment agreement for cause or if Mr. Keith terminates the employment agreement for any reason other than a material breach of the agreement by us, he does not receive any additional compensation following his termination.  The employment agreement also provides that if Mr. Keith is terminated for any reason other than a material breach of the agreement by us, he will be prohibited for a period of three years from the date of his termination from attempting to knowingly hire, directly or indirectly, any of our officers or key employees as long as they are still employed by us.

          Mr. Skaar.  Mr. Skaar is employed pursuant to an employment and severance agreement with us.  Mr. Skaar is employed as Vice President and General Manager of Kitty Hawk Cargo.  Under the employment agreement, Mr. Skaar currently receives an annual base salary of $160,000 and may receive additional performance based compensation, as determined by our board of directors.  Mr. Skaar receives employee fringe benefits that are generally available to all employees and may receive other fringe benefits as determined by our board of directors.

          Mr. Skaar is required to safeguard our proprietary information and to surrender to us all written or recorded evidence of our proprietary information as well as our property if he leaves our employment.  Mr. Skaar is also prohibited from disclosing, disseminating or utilizing our proprietary information after leaving our employment, unless our chief executive officer authorizes such use in writing.

          Mr. Skaar’s employment agreement may be terminated by us or Mr. Skaar with or without cause at any time upon 30 days’ prior written notice to the other party.  If we terminate the employment agreement after December 31, 2002, for any reason other than a material breach of the agreement by Mr. Skaar, he is entitled to three months worth of his annual base salary and certain medical insurance benefits for the three-month period following his termination.  If we terminate the employment agreement for cause or if Mr. Skaar terminates the employment agreement for any reason other than a material breach of the agreement by us, he does not receive any additional compensation following his termination.  The employment agreement also provides that if Mr. Skaar is terminated for any reason other than a material breach of the agreement by us, he will be prohibited for a period of three years from the date of his termination from attempting to knowingly hire, directly or indirectly, any of our officers or key employees as long as they are still employed by us.

          Mr. Stevens.  Mr. Stevens is employed pursuant to an employment and severance agreement with us.  Mr. Stevens is employed as President of Kitty Hawk Aircargo.  Under the employment agreement, Mr. Stevens currently receives an annual base salary of $185,000 and may receive additional performance

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based compensation, as determined by our board of directors.  Mr. Stevens receives employee fringe benefits that are generally available to all employees and may receive other fringe benefits as determined by our board of directors.

          Mr. Stevens is required to safeguard our proprietary information and to surrender to us all written or recorded evidence of our proprietary information as well as our property if he leaves our employment.  Mr. Stevens is also prohibited from disclosing, disseminating or utilizing our proprietary information after leaving our employment, unless our chief executive officer authorizes such use in writing.

          Mr. Stevens’ employment agreement may be terminated by us or Mr. Stevens with or without cause at any time upon 30 days’ prior written notice to the other party.  If we terminate the employment agreement after December 31, 2002, for any reason other than a material breach of the agreement by Mr. Stevens, he is entitled to three months’ worth of his annual base salary and certain medical insurance benefits for the three-month period following his termination.  If we terminate the employment agreement for cause or if Mr. Stevens terminates the employment agreement for any reason other than a material breach of the agreement by us, he does not receive any additional compensation following his termination. The employment agreement also provides that if Mr. Stevens is terminated for any reason other than a material breach of the agreement by us, he will be prohibited for a period of three years from the date of his termination from attempting to knowingly hire, directly or indirectly, any of our officers or key employees as long as they are still employed by us.

          Mr. Reeves.  In November 2002, Mr. Reeves resigned as our Chairman of the Board, President and Chief Executive Officer and entered into an approximately one-year salary continuation and consulting agreement to provide consulting services to us at the direction of our Chief Executive Officer.  The agreement provides for compensation of $300,000 and medical insurance coverage during the term of the agreement, and the agreement may be extended for an additional year by either party with consent from the other party.

          Mr. Reeves is required to safeguard our proprietary information and not use, copy or transfer our confidential information, other than is necessary in carrying out his duties under the consulting agreement. Under the consulting agreement, Mr. Reeves is prohibited from:

• directly or indirectly, engaging or investing in, owning, managing, operating, controlling or participating in the ownership, management, operation or control of, or being employed by, or rendering services or advice to, any business that competes with us;

• directly or indirectly in any capacity diverting or taking any of our customers or clients;

• directly or indirectly in any capacity hiring or attempting to hire, contact, solicit any of our employees or inducing, advising or encouraging any of our employees to terminate or modify their relationship with us; or

• providing consulting services to our customers or potential competitors without first obtaining the written consent of our Chief Executive Officer.

          Additionally pursuant to the consulting agreement Mr. Reeves is prohibited for a three-year period from attempting to knowingly hire, directly or indirectly, our officers or key employees as long as they are still employed by us.

          In addition, pursuant to the terms of Mr. Reeves’ former employment agreement with us, Mr. Reeves currently is prohibited from:

• disclosing our proprietary information; and

• engaging, directly or indirectly, in the air logistics, charter brokerage, on-demand, or scheduled carriage business under an FAR Part 121 (now Part 119) or Part 135 certificate until November 4, 2004.

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Compensation of Directors

          Pursuant to our bylaws, the members of our board of directors may be compensated in a manner and at a rate determined from time to time by our board of directors. Directors who are our employees do not receive additional compensation for service as a director.

          During the first nine months of 2002, directors who were not our employees received $18,000 for their service.

          During the last three months of 2002, each director who was not our employee received a retainer of between $3,500 and $6,833, plus a payment of between $500 and $3,000 for each meeting of the board of directors and committee thereof that the director attended.  We paid a total of $75,083 to directors who were not our employees during the last three months of 2002. 

          During 2003, each director who is not our employee is entitled to receive a base quarterly retainer of between $3,500 and $9,500, plus a payment of between $500 and $3,000 for each meeting of the board of directors and committee thereof that the director attends.  Each director who is not our employee is entitled to receive the equivalent of $15,000, after taxes, of our common stock or options to acquire our common stock. We are currently considering adopting an equity compensation plan for directors who are not our employees. 

Compensation Committee Interlocks and Insider Participation in Compensation Decisions

          During the pendency of our bankruptcy proceeding, our full board of directors performed the duties of the compensation committee.  Since October 1, 2002, Messrs. Hacker, Kaplan and Malloy have served as members of our compensation committee of the board of directors.  None of the members of the compensation committee was at any time during fiscal 2002, or at any other time, one of our officers or employees.  No member of the compensation committee serves as a member of the board of directors or compensation committee of any entity that has one or more executive officers serving as a member of our board of directors or compensation committee.

ITEM 12.          SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

          The following table presents information known to us about the beneficial ownership of our common stock as of March 25, 2003, by:

• each person or entity whom we know to own beneficially more than 5% of our common stock;

• each of the named executive officers;

• each of our directors; and

• all of our directors and executive officers as of March 25, 2003 as a group.

          The number and percentage of shares beneficially owned is determined under the rules of the Securities and Exchange Commission and is not necessarily indicative of beneficial ownership for any other purpose.  Under these rules, beneficial ownership includes any shares for which a person has sole or shared voting power or investment power and also any shares of common stock underlying warrants that are exercisable by that person within 60 days of March 25, 2003.  However, shares underlying warrants are not treated as outstanding for the purpose of computing the percentage ownership of any other person or entity.  There were no employee stock options outstanding as of March 25, 2003.

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          Unless otherwise indicated in the footnotes, each person listed in the following table has sole voting and investment power over the shares shown as beneficially owned by that person.  Percentage of beneficial ownership is based on 37,744,655 shares of common stock outstanding as of March 25, 2003.

	Shares Beneficially Owned
	Number		Percentage
Directors and Named Executive Officers:
Robert W. Zoller, Jr.		—		—
Gerald L. Gitner		—		—
Tamir (Thomas) Hacker		—		—
Myron Kaplan		—		—
John M. Malloy (1) (2)		—		—
Robert A. Peiser		—		—
Jack A. (Drew) Keith		—		—
Toby Skaar		—		—
John Clark Stevens		—		—
Jessica L. Wilson		—		—
All directors and executive officers as a group: (10 persons)		—		—
Beneficial Owners of More Than 5%:
Resurgence Asset Management, L.L.C. (2) (3)		11,144,164		28.5
Everest Capital Limited (1) (2) (4)		9,103,349		21.1
Stockton, LLC (5)		6,126,220		16.2
Citadel Limited Partnership (2) (6)		3,288,835		8.3
Kitty Hawk Acquisition Corporation (7)		2,500,000		6.6

(1)	Mr. Malloy is a managing director of Everest Capital Limited. Mr. Malloy disclaims beneficial ownership of shares of our common stock beneficially owned by Everest Capital Limited and its affiliates.
(2)	The information regarding beneficial ownership of our common stock is included in reliance on reports filed by such entities with the SEC, except that the percentage is based upon calculations made by us in reliance upon the number of shares of our common stock reported to be beneficially owned by such entities in such reports.
(3)	Resurgence Asset Management, L.L.C. and its affiliates beneficially own an aggregate of 11,144,164 shares of our common stock in their capacities as investment advisors.  Resurgence Asset Management, L.L.C. is the general partner and/or sole investment advisor of M.D. Sass Corporate Resurgence Partners, L.P., M.D. Sass Corporate Resurgence Partners II, L.P., M.D. Sass Corporate Resurgence Partners III, L.P. and the Resurgence Asset Management, L.L.C. Employee Retirement Plan, and it beneficially owns an aggregate of 7,453,308 shares of our common stock beneficially owned by M.D. Sass Corporate Resurgence Partners, L.P., M.D. Sass Corporate Resurgence Partners II, L.P., M.D. Sass Corporate Resurgence Partners III, L.P. and the Resurgence Asset Management, L.L.C. Employee Retirement Plan.  Resurgence Asset Management, L.L.C. may be deemed to share voting and investment power with each of these entities. Resurgence Asset Management International, L.L.C. is the sole special shareholder and sole investment advisor of M.D. Sass Corporate Resurgence International, Ltd., and it beneficially owns an aggregate of 1,278,489 shares of our common stock, of which (i) 509,320 shares are beneficially owned by M.D. Sass Corporate Resurgence International, Ltd. and (ii) 769,169 shares may be acquired within 60 days of March 25, 2003 upon the exercise of outstanding warrants held by M.D. Sass Corporate Resurgence International, Ltd.  Resurgence Asset Management International, L.L.C. may be deemed to share voting and investment power with M.D. Sass Corporate Resurgence International, Ltd. Re/Enterprise Asset Management L.L.C. is the general partner and sole investment advisor of M.D. Sass Re/Enterprise Portfolio Company, L.P. and M.D. Sass Re/Enterprise II, L.P., and it is the sole investment advisor to two employee pension plans.  Re/Enterprise Asset Management L.L.C. beneficially owns an aggregate of 2,412,367 shares of our common stock, of which (i) an aggregate of 1,798,065 shares are beneficially owned by M.D. Sass Re/Enterprise Portfolio Company, L.P., M.D. Sass Re/Enterprise II, L.P. and the two employee pension plans and (ii) an aggregate of 614,302 shares may be acquired within 60 days of March 25, 2003 upon the exercise of outstanding warrants held by M.D. Sass Re/Enterprise Portfolio Company, L.P. and one of the employee pension plans.  Re/Enterprise Asset Management L.L.C. may be deemed to share voting and investment power with each of these entitities. James B. Rubin serves as Chief Investment Officer of Resurgence Asset Management, L.L.C., Resurgence Asset Management International, L.L.C. and Re/Enterprise Asset Management L.L.C., and, in such capacity, may be deemed to beneficially own the shares of our common stock

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	beneficially owned by Resurgence Asset Management, L.L.C., Resurgence Asset Management International, L.L.C. and Re/Enterprise Asset Management L.L.C.  Each of Mr. Rubin, Resurgence Asset Management, L.L.C., Resurgence Asset Management International, L.L.C. And Re/Enterprise Asset Management L.L.C. disclaims beneficial ownership of all shares of our common stock. The business address of each of Mr. Rubin, Resurgence Asset Management L.L.C., Resurgence Asset Management International, L.L.C. And Re/Enterprise Asset Management L.L.C. is 10 New King Street, White Plains, New York 10604.
(4)	Everest Capital Limited beneficially owns an aggregate of 9,103,349 shares of our common stock, of which (i) 3,626,562 shares are issued and outstanding and (ii) 5,476,787 shares may be acquired within 60 days of March 25, 2003 upon the exercise of outstanding warrants. Everest Capital Limited has shared voting and investment power over such shares of common stock. Everest Capital Limited is the general partner of Everest Capital Master Fund, L.P. Everest Capital Master Fund, L.P. beneficially owns an aggregate of 8,329,086 shares of our common stock, of which (i) 3,318,114 shares are issued and outstanding and (ii) 5,010,972 shares may be acquired within 60 days of March 25, 2003 upon the exercise of outstanding warrants. Everest Capital Master Fund, L.P. has shared voting and investment power over such shares of common stock. The principal business address of Everest Capital Limited and Everest Capital Master Fund, L.P. is The Bank of Butterfield Building, 65 Front Street, 6th Floor, HM 5X, Bermuda.
(5)	The principal business address of Stockton, LLC is 712 Fifth Avenue, 36th Floor, New York, New York 10019.
(6)	Citadel Investment Group, L.L.C. Is the general partner of GLB Partners, L.P.  GLB Partners, LP is the general partner of Citadel Limited Partnership.  Citadel Limited Partnership is the general partner of Citadel Wellington Partners LP, and the portfolio manager of each of Citadel Equity Fund Ltd., Citadel Kensington Global Strategies Fund Ltd., Citadel Credit Trading Ltd. and Citadel Distressed and Credit Opportunity Fund Ltd.  Kenneth Griffin is the President of Citadel Investment Group, L.L.C.  Collectively, Mr. Griffin, Citadel Investment Group, L.L.C., GLB Partners, LP, Citadel Limited Partnership, Citadel Wellington Partners LP, Citadel Equity Fund Ltd., Citadel Kensington Global Strategies Fund Ltd., Citadel Credit Trading Ltd. and Citadel Distressed and Credit Opportunity Fund Ltd. beneficially own an aggregate of 3,288,835 shares of our common stock, of which (i) an aggregate of 1,310,195 shares are issued and outstanding and (ii) an aggregate of 1,978,640 shares may be acquired within 60 days of March 25, 2003 upon the exercise of outstanding warrants held by such entities.  Each of these entities has shared voting and investment power over such shares of common stock. The business address for each of Mr. Griffin, Citadel Investment Group, L.L.C., GLB Partners, LP, Citadel Limited Partnership, Citadel Wellington Partners LP, Citadel Equity Fund Ltd., Citadel Kensington Global Strategies Fund Ltd., Citadel Credit Trading Ltd. and Citadel Distressed and Credit Opportunity Fund Ltd. is 225 W. Washington, 9th Floor, Chicago, Illinois 60606.
(7)	The principal address of Kitty Hawk Acquisition Company is c/o Pegasus Aviation, Inc. at Four Embarcadero Center, Suite 3540, San Francisco, California 94111.

ITEM 13.          CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Aircraft and Engine Use Agreement

          In September 2002, we entered into an Aircraft and Engine Use Agreement with the Kitty Hawk Collateral Liquidating Trust.  As of March 17, 2003, the beneficiaries of the Kitty Hawk Collateral Liquidating Trust beneficially owned approximately 28,244,655 shares of our outstanding common stock and warrants to purchase 12,255,315 shares of our common stock, and John M. Malloy, a member of our board of directors, is a managing director of Everest Capital Limited, which is one of the beneficiaries of the Kitty Hawk Collateral Liquidating Trust.  This agreement expires on September 30, 2004.

          The Aircraft and Engine Use Agreement makes 12 Boeing 727-200 airframes and 33 aircraft engines available to us for operation by Kitty Hawk Aircargo.  The Aircraft and Engine Use Agreement requires us to pay for a minimum use of the airframes equivalent to an aggregate of 450 block hours per month.  The block hour rates for the airframes range from $350 to $400 per hour.  The Aircraft and Engine Use Agreement requires us to pay for a minimum use of the aircraft engines, subject to certain qualifications, equivalent to 1,350 block hours per month.  The block hour rates for the aircraft engines range from $66.67 to $83.33 per hour.  During 2002, the Kitty Hawk Collateral Liquidating Trust received a payment of $29.1 million under the plan of reorganization and $1.9 million under the Aircraft Engine and Use Agreement.  In 2002, we also paid the Kitty Hawk Collateral Liquidating Trust $5.0 million under a previous aircraft use arrangement and $0.7 million for lien releases related to prior period asset sales.

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Aircraft Leases

          In October 2002, we entered into four operating leases for Boeing 727-200 freighter aircraft with affiliates of Pegasus Aviation with monthly lease rates ranging from $65,000 to $85,000.  As of March 17, 2003, an affiliate of Pegasus Aviation beneficially owned approximately 2,500,000 of our outstanding common stock.  These new leases replaced leases with Pegasus Aviation that were originally entered into during May 1999, September 1999 and November 1999.  Under these new leases, in addition to rental payments, we are also required to pay each month maintenance reserves with the amount determined based on flight hours or cycles of utilization during the previous month.  The new leases expire on May 8, 2004.

          Upon the expiration of the new leases, each aircraft must be returned to the lessor with the same number of available flight hours or cycles on the airframe, aircraft engines, landing gear and auxiliary power units until the next scheduled maintenance event as were available at the time we originally took delivery of each of the aircraft.  Each of the aircraft had just undergone a light or heavy C-check when we originally took delivery.  Under the new leases, instead of performing a light or heavy C-check on each of the airframes prior to returning them, we may instead pay the lessor $750,000 per airframe. Each $750,000 payment will be reduced by the amount of maintenance reserves paid to the lessor under the original leases and the new leases.  During 2002, we paid $3.8 million in lease and other payments to Pegasus Aviation or its affiliates.

Aircraft Purchases

          In June 2002, we entered into aircraft purchase agreements with affiliates of Pegasus Aviation to purchase two Boeing 727-200 freighter aircraft, which we had been operating prior to our bankruptcy filing under operating leases. 

          We purchased one aircraft in October 2002 for $382,474 and executed a promissory note for that amount.  This promissory note bears interest at a fixed rate of 8.0% per annum and provides for monthly principal and interest payments of approximately $65,000. This promissory note matures on April 1, 2003 and is secured by a first priority aircraft chattel mortgage and security agreement.  During 2002, we paid $0.2 million in principal and interest on this note.  In 2002, we also paid an affiliate of Pegasus Aviation $326,205 for operation of this aircraft from May 2002 through September 2002, which amounts were credited toward the purchase price of the aircraft in October 2002.  In 2002, we also paid an affiliate of Pegasus Aviation $159,912 under a prior operating lease for this aircraft.

          We purchased the other aircraft in December 2002 for $256,673 and executed a promissory note for that amount.  The promissory note bears interest at a fixed rate of 8.0% per annum and provides for monthly principal and interest payments of approximately $65,000. The promissory note matures on April 1, 2003 and is secured by a first priority aircraft chattel mortgage and security agreement.  During 2002, we did not make any principal or interest payments on this note.  In 2002, we also paid an affiliate of Pegasus Aviation $521,928 for operation of this aircraft from May 2002 through December 2002, which amounts were credited toward the purchase price of the aircraft in December 2002.  In 2002, we also paid an affiliate of Pegasus Aviation $167,148 under a prior operating lease for this aircraft.

Registration Rights Agreement

          We entered into a registration rights agreement dated as of December 15, 2002, with Everest Capital Limited, Resurgence Asset Management L.L.C. and Stockton, LLC.  Under this agreement, we granted each of Everest Capital, Resurgence Asset Management and Stockton, and certain of their subsequent transferees, the right to make one written demand on us on or after February 2, 2003 to file a registration statement under the Securities Act of 1933, or the Securities Act, covering some or all of the shares of common stock they received in connection with our plan of reorganization.  Our obligation to file a registration statement under the registration rights agreement is limited to offerings that will result in aggregate gross proceeds of at least $2.0 million, and we are not required to register these securities for sale as a “shelf-registration” under Rule 415 of the Securities Act.

46

          Everest Capital, Resurgence Asset Management and Stockton, and certain of their subsequent transferees, may also require us to include their shares of common stock in a registration statement under the Securities Act filed to sell securities for ourselves or another holder of our securities.  If we file a registration statement in connection with a business combination or an employee benefit plan, we are not required to include the resale of their shares on the registration statement.

          We will bear virtually all of the expenses associated with registering the shares of common stock subject to the registration rights agreement.  Our obligations under the registration rights agreement will cease when the shares subject to the registration rights agreement have been sold pursuant to a registration statement or Rule 144 of the Securities Act or cease to be outstanding or subject to transfer restrictions. 

Warrants

          In March 2003, we issued 28,244,655 shares of common stock and warrants to acquire 12,255,315 shares of common stock to certain holders of our former 9.95% Senior Secured Notes that are not citizens of the U.S. as defined in 49 U.S.C. § 40102(a)(15).  The warrants have an exercise price of $0.000001 per share, a term of 10 years and are exercisable only by a citizen of the U.S. 

          As part of the distribution to the holders of our former 9.95% Senior Secured Notes, Everest Capital Limited and Resurgence Asset Management L.L.C., or affiliates of Everest Capital and Resurgence Asset Management, received warrants to acquire shares of our common stock.  As March 17, 2003, Everest Capital and Resurgence Asset Management beneficially owned more than 10% or our common stock and may be deemed our affiliates. See “Item. 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.”

Severance Agreements

          Mr. Reeves.  In November 2002, Mr. Reeves resigned as our Chairman of the Board, President and Chief Executive Officer and entered into an approximately one-year salary continuation and consulting contract to provide consulting services to our Chief Executive Officer.  The agreement provides for Mr. Reeves to receive compensation of $300,000 and medical insurance coverage during the term of the agreement, and the agreement may be extended for an additional year by either party with consent from the other party.  During 2002, we paid $50,000 to Mr. Reeves under this agreement.  See “Item 11.  Executive Compensation” for other amounts paid to Mr. Reeves during 2002.

          Mr. Craig.  In November 2002, Mr. Craig resigned as our Vice President and General Counsel and entered into a severance agreement with us.  The agreement provides for Mr. Craig to receive a total of $112,500 paid in semi-monthly installments and medical insurance coverage for the six-month period between November 2002 and April 2003.  During 2002, we paid $37,500 to Mr. Craig under this agreement.   See “Item 11.  Executive Compensation” for other amounts paid to Mr. Craig during 2002.

47

ITEM 14.          CONTROLS AND PROCEDURES

     Evaluation of Disclosure Controls and Procedures.  The term “disclosure controls and procedures” is defined in Rule 13a-14(c) of the Securities Exchange Act of 1934, or the Exchange Act.  This term refers to the controls and procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files under the Exchange Act is recorded, processed, summarized and reported within required time periods.  Our Chief Executive Officer and our Chief Financial Officer have evaluated the effectiveness of our disclosure controls and procedures as of a date within 90 days before the filing of this annual report, and they have concluded that as of that date, our disclosure controls and procedures were effective at ensuring that required information will be disclosed on a timely basis in our reports filed under the Exchange Act.    

 Changes in Internal Controls.  We maintain a system of internal controls that are designed to provide reasonable assurance that our books and records accurately reflect our transactions and that our established policies and procedures are followed.  There were no significant changes to our internal controls or in other factors that could significantly affect our internal controls subsequent to the date of their evaluation by our Chief Executive Officer and our Chief Financial Officer, including any corrective actions with regard to significant deficiencies and material weaknesses.

48

PART IV

ITEM 15.          EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a) 1. Financial Statements

          The following financial statements are filed as a part of this report:

	Page
Report of Independent Certified Public Accountants	F-2
Consolidated Balance Sheets as of December 31, 2002 and 2001	F-3
Consolidated Statements of Operations for the three months ended December 31, 2002, the nine months ended September 30, 2002 and each of the two years in the period ended December 31, 2001	F-4
Consolidated Statements of Stockholders’ Equity (Deficit) for the three months ended December 31, 2002, the nine months ended September 30, 2002 and each of the two years in the period ended December 31, 2001	F-5
Consolidated Statements of Cash Flows for the three months ended December 31, 2002, the nine months ended September 30, 2002 and each of the two years in the period ended December 31, 2001	F-6
Notes to Consolidated Financial Statements	F-7

     2. Financial Statement Schedules

          The following financial statement schedule is filed as part of this report:

	Page
Schedule II.  Allowances and Qualifying Accounts	F-26

          No other financial statement schedules are filed as part of this Annual Report on Form 10-K because the required information is included in the financial statements, including the notes thereto, or circumstances requiring the inclusion of such schedules are not present.

     3. Exhibits

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

49

Exhibit No.		Exhibit
2.1	—	Debtors’ Final Joint Plan of Reorganization, dated August 2, 2002 (Exhibit 2.2 to the Company’s Form 8-K dated August 20, 2002, and is incorporated herein by reference).
2.2	—	Order Confirming Debtors’ Final Joint Plan of Reorganization, dated August 5, 2002 (Exhibit 2.1 to Kitty Hawk, Inc.’s Form 8-K dated August 20, 2002, and is incorporated herein by reference).
2.3*	—	Order Granting Debtors’ Motion to Modify Debtors’ Final Joint Plan of Reorganization, dated September 26, 2002
2.4	—	Order Modifying Debtors’ Final Joint Plan of Reorganization, dated September 26, 2002 (Exhibit 99.1 to Kitty Hawk, Inc.’s Form 8-K dated February 7, 2003, and is incorporated herein by reference).
3.1	—	Second Amended and Restated Certificate of Incorporation of Kitty Hawk, Inc. (Exhibit 99.1 to Kitty Hawk, Inc.’s Form 8-K dated October 1, 2002, and is incorporated herein by reference).
3.2	—	Certificate of Amendment of the Second Amended and Restated Certificate of Incorporation of Kitty Hawk, Inc., dated February 6, 2003 (Exhibit 3.2 to Kitty Hawk, Inc.’s amended Registration Statement on Form 8-A/A dated March 12, 2003, and is incorporated herein by reference).
3.3	—	Amended and Restated Bylaws of Kitty Hawk, Inc., dated August 30, 2002 (Exhibit 3.3 to Kitty Hawk, Inc.’s amended Registration Statement on Form 8-A/A dated March 12, 2003, and is incorporated herein by reference).
4.1	—	Specimen Common Stock Certificate (Exhibit 3.4 to Kitty Hawk, Inc.’s amended Registration Statement on Form 8-A/A dated March 12, 2003, and is incorporated herein by reference).
10.1*	—	Aircraft and Engine Use Agreement, dated September 3, 2002, by and between Kitty Hawk Aircargo, Inc. and the Kitty Hawk Collateral Liquidating Trust.
10.2*	—	Aircraft Operating Agreement, dated December 19, 2002 between Kitty Hawk Cargo, Inc. and Kitty Hawk Aircargo, Inc. and BAX Global Inc.
10.3*	—	Aircraft Security Agreement and Guaranty of Payment, dated November 2,  2002, by and between 1st Source Bank and Kitty Hawk Aircargo, Inc.
10.4*	—	Letter Agreement dated October 31, 2002, between KBK Financial, Inc. and Kitty Hawk, Inc., Kitty Hawk Cargo, Inc. and Kitty Hawk Aircargo, Inc. and Account Transfer and Purchase Agreement, dated August 2002, between KBK Financial, Inc. and Kitty Hawk, Inc., Kitty Hawk Cargo, Inc. and Kitty Hawk Aircargo, Inc.
10.5	—	Ground Lease, dated as of April 13, 1998, by and between the Fort Wayne-Allen County Airport Authority and Kitty Hawk, Inc. (Exhibit 10.30 to Kitty Hawk’s form 10-K dated March 31, 1999, and is incorporated herein by reference.)

50

10.6	—	Building Lease, dated as of April 13, 1998, by and between the Fort Wayne-Allen County Airport Authority and Kitty Hawk, Inc. (Exhibit 10.31 to Kitty Hawk’s Form 10-K dated March 31, 1999, and is incorporated herein by reference.)
10.7*	—	Registration Rights Agreement dated December 15, 2002, by and among Kitty Hawk, Inc., Everest Capital Limited, Resurgence Asset Management, L.L.C. and Stockton LLC.
10.8*†	—	Employment and Severance Agreement dated as of October 3, 2002, by and between Kitty Hawk, Inc. and Jack Andrew “Drew” Keith.
10.9*†	—	Employment and Severance Agreement dated as of October 3, 2002, by and between Kitty Hawk, Inc. and J. Clark Stevens.
10.10*†	—	Employment and Severance Agreement dated as of October 3, 2002, by and between Kitty Hawk, Inc. and Toby J. Skaar.
10.11*†	—	Salary Continuation and Consulting Agreement dated as of November 4, 2002, by and between Kitty Hawk, Inc. and Tilmon J. Reeves.
10.12*†	—	Salary Continuation and Severance Agreement dated as of November 4, 2002, by and between Kitty Hawk, Inc. and James R. Craig.
10.13†	—	Kitty Hawk, Inc. 401(k) Savings Plan (Exhibit 10.43 to Kitty Hawk, Inc.’s previously filed Registration Statement on Form S-1 (Reg. No. 33-85698) dated as of December 1994, and is incorporated herein by reference.)
10.14*†	—	Memorandum of Understanding dated October 29, 2002, between Kitty Hawk, Inc. and Robert W. Zoller, Jr.
12.1*	—	Statement of Computation of Ratios.
21.1*	—	Subsidiaries of the Registrant.
99.1*	—	Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
99.2*	—	Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

*	Each document marked with an asterisk is filed herewith.
†	Each document marked with a dagger constitutes a management contract or compensatory plan or arrangement

(b) Reports on Form 8-K

          On October 1, 2002 we filed a Current Report on Form 8-K to report that our plan of reorganization became effective on September 30, 2002, and the effects of our plan of reorganization.

          On October 18, 2002, we filed a Current Report on Form 8-K to report the record date and entitlement distribution process for our 9.95% Senior Secured Notes and the process for distributing common stock.

          On November 8, 2002, we filed a Current Report on Form 8-K to report the resignations of our Chairman of the Board, Chief Executive Officer and President and our vice President and General Counsel and the selection of a new Chief Executive Officer and President and Chairman of the Board.

          On November 27, 2002, we filed an amendment to our Current Report on Form 8-K originally filed on October 1, 2002, to attach a copy of our audited consolidated balance sheet at September 30, 2002.

51

SIGNATURES

          Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on our behalf by the undersigned, thereunto duly authorized, on the 28^th day of March, 2003.

KITTY HAWK, INC.
By:	/s/ ROBERT W. ZOLLER, JR.
	Robert W. Zoller, Jr.
	Chief Executive Officer and President

          Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on the 28^th day of March, 2003.

Name	Capacities
/s/ ROBERT W. ZOLLER, JR.	Chief Executive Officer, President and Director (principal executive officer)
Robert W. Zoller, Jr.
/s/ GERALD L. GITNER	Non-Executive Chairman of the Board of Directors and Director
Gerald L. Gitner
/s/ DREW KEITH	Chief Financial Officer (principal financial officer)
Drew Keith
/s/ JESSICA L. WILSON	Chief Accounting Officer (principal accounting officer)
Jessica L. Wilson
/s/ TAMIR HACKER	Director
Tamir Hacker
/s/ MYRON KAPLAN	Director
Myron Kaplan
/s/ JOHN M. MALLOY	Director
John M. Malloy
/s/ ROBERT A. PEISER	Director
Robert A. Peiser

52

CERTIFICATION OF CHIEF EXECUTIVE OFFICER

I, Robert W. Zoller, Jr., Chief Executive Officer and President of Kitty Hawk, Inc., certify that:

1.	I have reviewed this annual report on Form 10-K of Kitty Hawk, Inc.;
2.	Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3.	Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
4.	The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
	(a)	designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
	(b)	evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); and
	(c)	presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5.	The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):
	(a)	all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and
	(b)	any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and
6.	The registrant’s other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

March 28, 2003	By:	/s/ ROBERT W. ZOLLER, JR.
		Robert W. Zoller, Jr.
		Chief Executive Officer and President

53

CERTIFICATION OF CHIEF FINANCIAL OFFICER

I, Drew Keith, Chief Financial Officer of Kitty Hawk, Inc., certify that:

1.	I have reviewed this annual report on Form 10-K of Kitty Hawk, Inc.;
2.	Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3.	Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
4.	The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
	(a)	designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
	(b)	evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); and
	(c)	presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5.	The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):
	(a)	all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and
	(b)	any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and
6.	The registrant’s other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

March 28, 2003	By:	/s/ DREW KEITH
		Drew Keith
		Chief Financial Officer

54

KITTY HAWK, INC. AND SUBSIDIARIES

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

	Page
Report of Independent Certified Public Accountants	F-2
Consolidated Balance Sheets as of December 31, 2002 and 2001	F-3
Consolidated Statements of Operations for the three months ended December 31, 2002, the nine months ended September 30, 2002 and each of the two years in the period ended December 31, 2001	F-4
Consolidated Statements of Stockholders’ Equity (Deficit) for the three months ended December 31, 2002, the nine months ended September 30, 2002 and each of the two years in the period ended December 31, 2001	F-5
Consolidated Statements of Cash Flows for the three months ended December 31, 2002, the nine months ended September 30, 2002 and each of the two years in the period ended December 31, 2001	F-6
Notes to Consolidated Financial Statements	F-7
Schedule II.  Allowances and Qualifying Accounts	F-26

F-1

Report of Independent Certified Public Accountants

Board of Directors
Kitty Hawk, Inc. and Subsidiaries

We have audited the accompanying consolidated balance sheets of Kitty Hawk, Inc. and subsidiaries as of December 31, 2002 and 2001, and the related consolidated statements of operations, stockholders’ equity (deficit), and cash flows for the three months ended December 31, 2002, the nine months ended September 30, 2002 and each of the two years in the period ended December 31, 2001. These financial statements are the responsibility of the Company’s management.  Our responsibility is to express an opinion on the financial statements based on our audits. 

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

As discussed in Note 3, effective September 30, 2002, the Company was reorganized under a plan confirmed by the United States Bankruptcy Court and adopted a new basis of accounting whereby all remaining assets and liabilities were adjusted to their estimated fair values.  Accordingly, the consolidated financial statements for periods subsequent to the reorganization are not comparable to the consolidated financial statements presented for prior periods.

In our opinion, the financial statements referred to above present fairly in all material respects the consolidated financial position of Kitty Hawk, Inc. and subsidiaries as of December 31, 2002 and 2001, and the consolidated results of their operations and their cash flows for the three months ended December 31, 2002, the nine months ended September 30, 2002 and each of the two years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States of America.

We have also audited Schedule II for the three months ended December 31, 2002, the nine months ended September 30, 2002 and each of the two years in the period ended December 31, 2001.  In our opinion, this schedule presents fairly, in all material respects, the information required to be set forth therein.

GRANT THORNTON LLP

Dallas, Texas
March 20, 2003

F-2

KITTY HAWK, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)

				Successor		Predecessor
				December 31,
				2002		2001
ASSETS
Current assets:
	Cash and cash equivalents			$	10,353	$	13,472
	Restricted cash and short-term investments				593		2,796
	Trade accounts receivable, net of allowance for doubtful accounts of $0.5 million and $3.2 million, respectively				11,460		38,006
	Assets held for sale				1,862		—
	Inventory and aircraft supplies				6,014		3,313
	Deposits and prepaid expenses				1,698		5,410
	Prepaid fuel				967		3,157
	Other current assets, net				1,280		2,333
		Total current assets			34,227		68,487
Property and equipment, net					12,153		19,364
Other assets, net					879		2,322
Assets of discontinued operations					—		81,433
		Total assets		$	47,259	$	171,606
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
Liabilities not subject to compromise:
	Current liabilities:
		Accounts payable – trade		$	2,339	$	2,278
		Accrued wages			2,628		1,250
		Other accrued expenses			4,705		4,776
		Accrued professional fees			251		621
		Other taxes payable			1,646		724
		Accrued maintenance reserves			7,810		7,745
		Current maturities of long-term debt			2,640		1,916
			Total current liabilities		22,019		19,310
	Long-term debt				2,338		4,664
	Lease return provisions				2,299		—
	Other long-term liabilities				1,340		—
	Liabilities of discontinued operations				—		2,168
			Total liabilities not subject to compromise		27,996		26,142
Liabilities subject to compromise of continuing operations					—		410,095
Liabilities subject to compromise of discontinued operations					—		55,066
Commitments and contingencies					—		—
Stockholders’ equity (deficit):
	Preferred stock, $0.01 and $0.01 par value at December 31, 2002 and 2001, respectively: Authorized shares — 3,000,000 and 1,000,000 at December 31, 2002 and 2001, respectively; none issued				—		—
	Common stock, $0.01 and $0.01 par value at December 31, 2002 and 2001, respectively: Authorized shares —  62,000,000 and 25,000,000 at December 31, 2002 and 2001, respectively; issued and outstanding– none and 17,132,566 at December 31, 2002 and 2001, respectively				—		172
	Additional capital				16,600		134,658
	Retained earnings (deficit)				2,663		(454,527	)
		Total stockholders’ equity (deficit)			19,263		(319,697	)
		Total liabilities and stockholders’ equity (deficit)		$	47,259	$	171,606

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

F-3

KITTY HAWK, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except share and per share data)

				Successor			Predecessor
				Three months ended December 31, 2002			Nine months ended September 30, 2002			Year ended December 31,
											2001			2000
Revenue:
	Scheduled freight			$	31,482		$	84,797		$	135,052		$	170,255
	Postal contracts				920			—			85,368			157,098
	ACMI				1,822			1,424			25,998			39,283
	Miscellaneous				252			1,106			1,071			197
			Total revenue		34,476			87,327			247,489			366,833
Cost of revenue:
	Flight expense				7,542			21,363			44,915			67,025
	Transportation expense				2,361			6,480			44,322			51,982
	Fuel expense				7,424			19,370			35,055			47,209
	Maintenance expense				3,466			10,692			40,451			53,687
	Freight handling expense				5,715			17,451			40,231			58,417
	Depreciation and amortization				938			4,500			26,026			36,384
	Asset impairment				—			—			86,316			14,812
	Operating overhead expense				2,212			7,887			16,390			16,814
			Total cost of revenue		29,658			87,743			333,706			346,330
Gross profit (loss)					4,818			(416	)		(86,217	)		20,503
General and administrative expense					2,140			5,924			11,819			23,181
Operating income (loss) from continuing operations					2,678			(6,340	)		(98,036	)		(2,678	)
Other (income) expense:
	Interest expense				154			2,133			7,051			12,751
	Reorganization expenses				—			39,629			42,676			17,111
	Income from contract settlement				—			(29,443	)		—			—
	Other, net				(139	)		(1,119	)		(14	)		2,310
Income (loss) from continuing operations before income taxes					2,663			(17,540	)		(147,749	)		(34,850	)
Income tax benefit					—			—			—			(11,661	)
Income (loss) from continuing operations					2,663			(17,540	)		(147,749	)		(23,189	)
Discontinued operations:
	Loss from discontinued operations, net of taxes				—			(40,831	)		(20,173	)		(334,131	)
Income (loss) before extraordinary item					2,663			(58,371	)		(167,922	)		(357,320	)
Extraordinary item, net					—			378,068			—			—
Net income (loss)				$	2,663		$	319,697		$	(167,922	)	$	(357,320	)
Basic and diluted net income (loss) per share:
	Continuing operations			$	0.05		$	(1.02	)	$	(8.62	)	$	(1.35	)
	Discontinued operations				—		$	(2.39	)	$	(1.18	)	$	(19.51	)
	Extraordinary item, net				—		$	22.07		$	—		$	—
		Total basic and diluted net income (loss) per share		$	0.05		$	18.66		$	(9.80	)	$	(20.86	)
Weighted average common  shares outstanding					49,999,970			17,132,566			17,132,566			17,128,575

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

F-4

KITTY HAWK, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)

(in thousands, except share data)

	Number of Shares			Common Stock			Additional Capital			Retained Earnings (Deficit)			Total
Predecessor Company:
Balance at December 31, 1999		17,059,518		$	171		$	134,231		$	70,715		$	205,117
Shares issued in connection with Employee Stock Purchase Plan		72,472			1			423			—			424
Shares issued to Board of Directors		576			—			4			—			4
Net loss		—			—			—			(357,320	)		(357,320	)
Balance at December 31, 2000		17,132,566			172			134,658			(286,605	)		(151,775	)
Net loss		—			—			—			(167,922	)		(167,922	)
Balance at December 31, 2001		17,132,566			172			134,658			(454,527	)		(319,697	)
Net income		—			—			—			319,697			319,697
Elimination of prior equity		(17,132,566	)		(172	)		(134,658	)		134,830			—
Balance at September 30, 2002		—		$	—		$	—		$	—		$	—
Successor Company:
Establish reorganization value at September 30, 2002		—		$	—		$	16,600		$	—		$	16,600
Net income		—			—			—			2,663			2,663
Balance at December 31, 2002		—		$	—		$	16,600		$	2,663		$	19,263

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

F-5

KITTY HAWK, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

									Successor			Predecessor
									Three months ended December 31, 2002			Nine months ended September 30, 2002			Year ended December 31,
															2001			2000
Operating activities:
	Net income (loss)								$	2,663		$	319,697		$	(167,922	)	$	(357,320	)
	Add: Loss from discontinued operations									—			40,831			20,173			334,131
	Income (loss) from continuing operations									2,663			360,528			(147,749	)		(23,189	)
	Adjustments to reconcile income (loss) from continuing operations to net cash provided by operating activities:
					Depreciation and amortization expense					1,021			6,041			27,500			37,569
					(Gain) loss on disposal of property and equipment					(75	)		147			1,470			6,733
				Gain of extinguishment of debt						—			(378,068	)		—			—
				Reorganization expense						—			39,629			30,847			17,211
			Asset impairment							—			—			86,316			14,812
			Deferred taxes							—			—			—			(30,230	)
			Provision for doubtful accounts							—			419			2,547			5,123
		Changes in operating assets and liabilities:
								Trade accounts receivable		2,697			25,658			38,806			(24,651	)
								Inventory and aircraft supplies		(255	)		(259	)		(120	)		(3,261	)
							Prepaid expenses and other			1,252			3,303			2,973			(7,016	)
							Accounts payable and accrued expenses			(1,115	)		1,512			(23,495	)		34,014
						Accrued maintenance reserves				283			(217	)		5,449			2,305
Net cash provided by operating activities										6,471			58,693			24,544			29,420
Investing activities:
	Proceeds from sale of assets									143			461			5,974			6,577
	Redemption of (establish) restricted cash									290			827			(1,024	)		(1,773	)
	Capital expenditures									(319	)		(1,845	)		(1,668	)		(27,781	)
Net cash provided by (used in) investing activities										114			(557	)		3,282			(22,977	)
Financing activities:
	Proceeds from issuance of debt									55			—			—			—
	Payments on liabilities subject to compromise									—			(67,366	)		(43,088	)		(9,645	)
	Issue common stock									—			—			—			427
	Repayments of long-term debt									(897	)		(2,261	)		(2,646	)		—
Net cash provided by (used in) financing activities										(842	)		(69,627	)		(45,734	)		(9,218	)
Cash provided by (used in) continuing operations										5,743			(11,491	)		(17,908)			(2,775)
Cash provided by (used in) discontinued operations										—			2,629			17,263			1,928
Net increase (decrease) in cash and cash equivalents										5,743			(8,862	)		(645	)		(847	)
Cash and cash equivalents at beginning of period										4,610			13,472			14,117			14,964
Cash and cash equivalents at end of period										10,353			4,610			13,472		$	14,117
Less cash and cash equivalents of discontinued operations										—			—			—			—
Cash and cash equivalents of continued operations									$	10,353		$	4,610		$	13,472		$	14,117
Taxes Paid									$	—		$	10		$	—		$	115
Interest Paid									$	154		$	2,363		$	7,404		$	11,032

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

F-6

KITTY HAWK, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.        Organization and Operations

          The Company provides air freight services utilizing its two operating subsidiaries: (i) an expedited scheduled freight network (Kitty Hawk Cargo) and (ii) an all-cargo Boeing 727-200 air freight carrier (Kitty Hawk Aircargo). The scheduled freight network provides an overnight, heavy weight freight service via a network of approximately 50 North American cities through its hub in Fort Wayne, Indiana utilizing the aircraft of the Company’s air freight carrier, third-party aircraft when needed, and third-party trucking services. In addition to the services provided to the Company’s expedited scheduled freight network, the air freight carrier provides ACMI services (supplying the aircraft, crew, maintenance and insurance for the customer) on short-term contracts. To a lesser degree, the Company’s air freight carrier provides ad hoc charter services which include the cost of fuel.

2.        Summary of Significant Accounting Policies

Principles of Consolidation

          As of and for the three months ended December 31, 2002, the consolidated financial statements include the accounts of Kitty Hawk, Inc. and its wholly-owned subsidiaries, Kitty Hawk Aircargo and Kitty Hawk Cargo.  For periods prior to October 1, 2002, the consolidated financial statements include the accounts of Kitty Hawk, Inc. and its nine wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.

Fresh Start Accounting

          The Company emerged from bankruptcy on September 30, 2002, at which time it adopted the provisions of Statement of Position 90-7 entitled, “Financial Reporting by Entities in Reorganization under the Bankruptcy Code” (“Fresh Start Accounting”).  As a result, all assets and liabilities were restated to reflect their respective fair values.  The consolidated financial statements after emergence are those of a new reporting entity (the “Successor”) and are not comparable to the financial statements of the pre-confirmation company (the “Predecessor”).  (See Note 3)

Use of Estimates

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

Cash and Cash Equivalents

          Cash and cash equivalents include cash on hand and held in banks, money-market funds and other investments with original maturities of three months or less.

F-7

Restricted Cash and Short-Term Investments

          At December 31, 2002, restricted cash and short-term investments were approximately $593,000, consisting primarily of certificates of deposit that collateralize the Company’s corporate credit card program, a letter of credit for its Canadian customs bond and funds held in escrow as collateral for administrative tax claims. At December 31, 2001, restricted cash and short-term investments were approximately $2.8 million and consisted of $2.2 million of funds held from the sale of secured assets and $600,000 of deposits to collateralize the Company’s corporate credit card program.

Allowance for Doubtful Accounts and Concentration of Credit Risk

          Accounts receivable are reduced by an allowance for amounts that may become uncollectible in the future.  Substantially all of the Company’s receivables are due from customers in North America.

          The Company extends credit to its customers based upon its evaluation of the following factors: (i) the customer’s financial condition, (ii) the amount of credit the customer requests and (iii) the customer’s actual payment history (which includes disputed invoice resolution).  The Company also extends a minimal amount of open credit to customers that refuse to make financial disclosure, but have an extended history of timely payment and low levels of disputed invoices.  The Company does not typically require its customers to post a deposit or supply collateral. The Company’s allowance for doubtful accounts is based on current market conditions and periodic evaluations of each customer’s credit worthiness.  Credit losses from continuing operations have consistently been within management’s expectations.

Assets Held for Sale

          Assets held for sale are comprised of Boeing 727 aircraft in freighter configuration, Pratt & Whitney JT8D–7B and –9A aircraft engines, excess rotable aircraft parts and aircraft supplies, an office building complex and excess freight handling equipment. These assets have been recorded at values approximating their current fair market value, less the estimated costs to dispose of the assets. These assets are not currently being used by the Company. The Company is actively marketing these assets.

Inventory and Aircraft Supplies

          Inventory and aircraft supplies consist of rotable aircraft parts, expendable parts and consumable supplies. These assets were valued at their approximate fair market value pursuant to the provisions of Fresh Start Accounting (see Note 3). As inventory is acquired and used in the operations, it is carried at the lower of average cost or market.

Property and Equipment

          The Company’s property and equipment was adjusted to its current fair market value pursuant to the provisions of Fresh Start Accounting (see Note 3) on September 30, 2002. Depreciation is computed using the straight-line method over the estimated useful lives of the assets (taking into consideration for airframes and aircraft engines the next scheduled major maintenance event), with estimated residual values of up to $50,000 for Pratt & Whitney JT8D-15 aircraft engines, and up to $25,000 for Pratt & Whitney JT8D-7B and –9A aircraft engines.

          Estimated useful lives are as follows:

Airframes and engines	1 – 4 years
Machinery and equipment	3 – 7 years
Buildings and leasehold improvements	5 – 15 years

          Expenditures for additions, improvements, aircraft modifications and heavy C-check maintenance costs are capitalized. Routine maintenance and repairs are expensed when incurred. Costs of periodic airframe

F-8

maintenance (light C-checks) and engine heavy shop visits are accrued based on the actual hours flown, except as set forth below. For Company owned aircraft and engines, maintenance reserves are accrued for the assets where management has determined that light C-checks and engine heavy shop visits will be performed given the economic viability of the asset. For airframes and engines that are leased from third parties, maintenance reserves are accrued for the difference between the estimated cost of the maintenance event less the monthly maintenance reserve payments made to the lessor (See Note 10).

Accounting for Impairment of Long-Lived Assets

          The Company evaluates all long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amounts may not be recoverable.  Impairment is recognized when the carrying amounts of such assets cannot be recovered by the undiscounted net cash flows they will generate.

Income Taxes

          The Company utilizes the liability method of accounting for deferred income taxes. Under the liability method, deferred income tax assets and liabilities are calculated based on the difference between the financial statement and tax basis of assets and liabilities as measured by the currently enacted tax rates in effect for the years in which these differences are expected to reverse. Deferred tax expense or benefit is the result of changes in deferred tax assets and liabilities. An allowance against deferred tax assets is recorded in whole or in part when it is more likely than not that such tax benefits will not be realized. (See Note 9).

Balance Sheet Financial Instruments:  Fair Values

          The carrying amounts reported in the consolidated balance sheets for cash and cash equivalents, trade accounts receivable, accounts payable and current portion of long-term debt approximate fair value because of the immediate or short-term maturity of these financial instruments.  The fair value of long term debt approximates carrying value as the interest rates charged on such debt approximates current market rates.

          The settlement of pre-petition liabilities was determined in a court-approved plan of reorganization (see Note 3).  In September 2002, the Company’s plan of reorganization became effective, resulting in the settlement of these liabilities at less than 100% of face value.  No adjustment to these liabilities was made in the December 31, 2001 consolidated financial statements as the plan of reorganization had yet to be approved.

Revenue Recognition

          Scheduled freight revenue, net of discounts offered, is recognized upon completion of delivery.  Postal, ACMI and charter revenue is recognized when the service is completed.

Earnings Per Share

          Predecessor:  Basic earnings per share, for the periods presented in these financial statements prior to October 1, 2002, are based upon the weighted average number of common shares outstanding during each period.  There were no dilutive shares outstanding during the periods presented.  All predecessor shares were cancelled in conjunction with the Company’s emergence from bankruptcy (See Note 3).

          Successor:  Pursuant to the Plan of Reorganization (See Note 3), in March 2003, the Company issued common shares and warrants to purchase common shares to its former creditors.  Because the exercise price of the warrants is nominal, such warrants are treated as outstanding common shares for purposes of calculating earnings per share. These shares are deemed to be outstanding as of October 1, 2002.  The Company has no dilutive securities.

F-9

Stock Options

          In conjunction with the Company’s bankruptcy proceedings, all of the Company’s stock-based compensation plans were cancelled.  No options were granted or exercised under any plan during the bankruptcy period.  Therefore, disclosure of the cancelled plans or any proforma information required by U.S.-GAAP is not presented.

New Accounting Pronouncements

          In October 2001, the Financial Accounting Standards Board issued SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS 144”), which requires a single accounting model to be used for long-lived assets to be sold and broadens the presentation of discontinued operations to include a “component of an entity” (rather than a segment of a business).  A component of an entity constitutes operations and cash flows that can be clearly distinguished, operationally and for financial reporting purposes, from the rest of the entity.  A component of an entity that is classified as held for sale, or has been disposed of, is presented as a discontinued operation if the operations and cash flows of the component will be (or have been) eliminated from the ongoing operations of the entity and the entity will not have any significant continuing involvement in the operations of the component.  SFAS 144 was effective for the Company beginning January 1, 2002, with earlier applications encouraged.  The Company adopted SFAS 144 for all periods presented.

          In November 2002, the FASB issued FASB Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others”  (“FIN 45”).  FIN 45 requires that upon issuance of a guarantee, a guarantor must recognize a liability for the fair value of an obligation assumed under a guarantee.  FIN 45 also requires additional disclosures by a guarantor in its interim and annual financial statements about the obligations associated with guarantees issued.  The recognition provisions of FIN 45 are effective for any guarantees issued or modified after December 31, 2002.  The disclosure requirements are effective for financial statements of interim or annual periods ending after December 15, 2002.  The adoption of FIN 45 is not expected to have a material effect on the Company’s financial position, results of operations, or cash flows.

3.        Bankruptcy Proceedings and Fresh Start Accounting

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

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

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

F-10

          Kitty Hawk, Inc. is a holding company and does not have any independent operations. Cargo operates an expedited scheduled freight network through its hub in Fort Wayne, Indiana. Aircargo is a FAR Part 121 certificated air carrier and operates a fleet of Boeing 727-200 freighter aircraft for Cargo and third-party customers.

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

          On or about the Effective Date, in addition to payment of certain administrative claims arising from the Company’s bankruptcy proceedings, the Company delivered $29.1 million to HSBC Bank USA, as successor Trustee and Collateral Trustee (the “Trustee”), for the benefit of the owners of its Senior Notes.  The Plan of Reorganization provides for the Company’s former general unsecured trade creditors to receive only New Stock in exchange for their claims. In addition, the Plan of Reorganization provides for Aircargo to purchase two aircraft and related engines from affiliates of Pegasus Aviation, Inc. (“Pegasus”) and to continue to lease four aircraft and related engines from affiliates of Pegasus under modified operating leases as a settlement of claims (see Note 8).

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

• amend its Second Amended and Restated Certificate of Incorporation to reduce the par value of its common stock (the “New Stock”) from $0.01 per share to $0.000001 per share;

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

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

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

          As of December 31, 2002, the Company had completed most of the significant cash payments required by the Plan of Reorganization to be made at or near the Effective Date, other than (i) certain priority claim payments due to employees of a former subsidiary of the Company in the amount of approximately $1.8 million, (ii) payments to bankruptcy-related professionals in connection with the final fee applications filed with the Bankruptcy Court in the amount of approximately $304,000, and (iii) payments to other administrative and priority claimants, the amount of whose claims is disputed and has not yet been resolved by the Bankruptcy Court. 

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

F-11

Creditor		Shares of New Stock Issued		Shares of New Stock Represented by Warrants
Holders of the Company’s former Senior Notes			28,244,655		12,255,315
Trusts for the benefit of the Company’s former general unsecured trade creditors			7,000,000		—
An affiliate of Pegasus Aviation, Inc.			2,500,000		—
	Total		37,744,655		12,255,315

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

          As of December 31, 2001, the Company had several outstanding obligations that were related to liabilities which existed at May 1, 2000. These included a $313 million note payable to the Noteholders, $35.9 million outstanding on a revolving line of credit facility with Wells Fargo Bank and $2.9 million outstanding on a term loan with Wells Fargo Bank related to the acquisition of 16 Boeing 727 aircraft. In connection with the Plan of Reorganization, the obligation to the Noteholders will be partially satisfied by the issuance of New Stock and warrants to acquire shares of New Stock.  The amounts due to Wells Fargo Bank were paid in full by September 30, 2002 in accordance with the Plan of Reorganization with proceeds generated from the sale of assets and the operations of the Company’s continuing and discontinued operations.

          Under Fresh Start Accounting, the Company recorded certain adjustments to its assets, liabilities and stockholders’ equity because (i) the fair market value of the Company’s assets after the Effective Date were less than the total of the post-petition liabilities and allowed claims which will be converted to New Stock and (ii) the holders of the Company’s pre-Effective Date voting stock did not receive 50% or more of the voting stock in reorganized Kitty Hawk under the Plan of Reorganization. Under Fresh Start Accounting, all of the assets and liabilities of the Company were adjusted to their estimated fair market value on the Effective Date. Fair market values were determined through a combination of third-party appraisals, internal sources and transactions related to the Company’s assets which have occurred within the last twelve months.

          In connection with the reorganization of the Company, the Company engaged financial advisors to determine the estimated reorganization equity value of reorganized Kitty Hawk. The financial advisors based their valuation on two customary methods: the discounted cash flow method using the Company’s projected operating results and a comparable company analysis method. The results of their valuation determined that the fair market value of reorganized Kitty Hawk ranged between $12.9 million and $16.6 million.

          The fair market value of the Company’s net assets exceeded the estimated reorganization equity value by $2.9 million.  As a result, we further reduced the value of property and equipment and certain other assets on a proportionate basis.  The following table illustrates the result of the Fresh Start Accounting adjustments:

F-12

				Fresh Start Accounting Adjustments (in thousands)
				Pre-Emergence September 30, 2002 (unaudited)			Extinguishment of Debt			Effective Date Payments and Adjustments			Fresh Start Accounting Adjustments			Reorganized Balance Sheet of September 30, 2002
Current assets
	Cash and cash equivalents			$	36,083		$	—		$	(31,473	)(a)	$	—		$	4,610
Restricted cash and short-term investments					1,969			—			—			—			1,969
	Trade accounts  receivable, net				14,403			—			—			—			14,403
	Assets held for sale				5,160			—			—			(3,283	)(c)		1,877
	Inventory and aircraft supplies				2,577			—			—			3,182	(c)		5,759
	Prepaid expenses				3,680			—			—			—			3,680
	Other current assets, net				1,704			—			—			(668	)(c)		1,036
			Total current assets		65,576			—			(31,473	)		(769	)		33,334
Property and equipment, net					13,001			—			—			(81	)(c)		12,920
Other assets, net					3,918			—			—			(2,818	)(c)		1,100
			Total assets	$	82,495		$	—		$	(31,473	)	$	(3,668	)	$	47,354
Current liabilities
	Accounts payable – trade			$	2,100			—		$	—		$	—		$	2,100
	Accrued wages				2,635			—			—			—			2,635
	Other accrued expenses				6,548			—			—			917	(c)		7,465
	Accrued professional fees				1,183			—			—			—			1,183
	Other taxes payable				459			—			—			—			459
	Accrued maintenance reserves				8,305			—			—			(777	)(c)		7,528
	Current maturities of long-term debt				2,937			—			—			—			2,937
		Total current liabilities			24,167			—			—			140			24,307
Long-term debt					2,882			—			—			—			2,882
Liabilities subject to compromise					426,141			(394,668	)(e)		(31,473	)(a)		—			—
Lease return provisions					2,299			—			—			—			2,299
Other long-term liabilities					1,851			—			—			(585	)(c)		1,266
Commitments and contingencies
Stockholders’ equity (deficit):
	Preferred stock				—			—			—			—			—
	Common stock				171			—			—			(171	)(b)		—
	Additional capital				134,657			16,600	)(e)		—			(134,657	)(b)		16,600
	Retained deficit				(509,673	)		378,068	)(e)		—			131,605	(c, d)		—
	Total stockholders’ equity (deficit)				(374,845	)		394,668			—			(3,223	)		16,600
	Total liabilities and stockholders’ equity			$	82,495		$	—		$	(31,473	)	$	(3,668	)	$	47,354

(a)	Payments made on September 30, 2002 in accordance with the Plan of Reorganization.
(b)	All shares of common stock which were outstanding as of September 30, 2002 were cancelled in accordance with the Plan of Reorganization.
(c)	These assets and liabilities were adjusted to their fair market value as of September 30, 2002.
(d)	The retained deficit was eliminated due to the adoption of Fresh Start Accounting.
(e)	Gain of extinguishment of debt is calculated as follows (amounts in thousands):

Liabilities subject to compromise	$	394,668
Less reorganization value		16,600
Gain of extinguishment of debt	$	378,068

4.        Liabilities Subject to Compromise and Reorganization Expense

          As part of fresh start accounting, liabilities subject to compromise for continuing and discontinued operations in the amount of $394.7 million were exchanged for the right to receive new common stock as part of the discharge of debt in the bankruptcy.  These liabilities are identified below: (amounts in thousands)

F-13

		September 30, 2002		December 31, 2001
Trade accounts payable and accrued expenses		$	98,799	$	77,682
Senior notes, including accrued interest			277,251		328,505
Other long-term debt			18,618		58,974
	Total	$	394,668	$	465,161

          In accordance with SOP 90-7, the Predecessor Company recorded all expenses incurred as a result of the Chapter 11 Cases as reorganization items.  The table below summarizes these items:

		Nine Months ended September 30, 2002		Year Ended December 31,
				2001		2000
		(in thousands)
Professional fees		$	5,001	$	11,812	$	9,102
Return of lienholder aircraft, net			—		25,259		—
Return of leased aircraft, net			—		5,605		7,909
Bankruptcy settlement expenses			34,628		—		100
	Total	$	39,629	$	42,676	$	17,111

5.        Discontinued Operations

          During the three years ended December 31, 2002, the Company has undergone a significant number of changes in its operations as it entered and prepared to exit from its Chapter 11 Bankruptcy proceedings. In accordance with SFAS 144, the operations that ceased, or were disposed of, in the last three years have been presented as discontinued operations and include the operations of the Company’s wide-body air freight carrier, the non-continental U.S. operations of its expedited scheduled freight network and its air logistics service provider (including a small aircraft maintenance operation). The results of these operations and the related assets and liabilities of these operations have been segregated in the accompanying consolidated financial statements for all periods presented.

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

          In December 2001, the Company sold the property and equipment, inventory and aircraft supplies and airline operating certificate of its air logistics service provider and its related small aircraft maintenance operation for $8 million cash and a $500,000 note receivable.

          Any assets of the discontinued operations which were not sold or otherwise disposed of became property of the parent company when the entities merged into Kitty Hawk, Inc. prior to the Effective Date and are included in the December 31, 2002 balance sheet as continuing operations. These assets are comprised mainly of accounts receivable, various deposits and an office building complex in Michigan and are not revenue producing. Any residual liabilities associated with these operations were treated in accordance with the Company’s Plan of Reorganization.

          In 2000 and 2001, the Company recognized an asset impairment charge related to the aircraft of the wide-body operations.  These assets were taken out of service on May 1, 2000 and efforts to dispose of these assets generated significantly less cash than their net book value.  The assets were written down to management’s best estimate of the then fair market value.

F-14

          A summary of the Company’s discontinued operations is as follows:

	Predecessor
	Nine months ended September 30, 2002			Year ended December 31,
				2001			2000
	(in thousands)
Revenue	$	949		$	19,535		$	100,907
Operating expenses		686			21,190			147,726
Asset impairment		32,683			9,100			343,631
Interest expense		—			—			10,671
Other expense		8,411			3,919			27,183
Loss on asset disposal		—			5,499			—
Loss before taxes		(40,831	)		(20,173	)		(428,304	)
Income tax benefit		—			—			(94,173	)
Loss from discontinued operations	$	(40,831	)	$	(20,173	)	$	(334,131	)

          A summary of assets and liabilities related to the discontinued operations were as follows:

		December 31, 2001
		(in thousands)
Assets of discontinued operations:
	Restricted cash	$	17,142
	Accounts receivable, net		2,342
	Property and equipment, net		59,132
	Other		2,817
		$	81,433
Liabilities of discontinued operations:
	Liabilities not subject to compromise	$	2,168
	Liabilities subject to compromise		55,066
		$	57,234

6.        Property and Equipment

          Property and equipment owned by the Company consisted of the following:

		December 31,
		2002			2001
		(in thousands)
Airframes and engines		$	8,372		$	54,605
Machinery and equipment			1,608			8,517
Buildings and leasehold improvements			1,906			3,664
Software			251			1,550
Other			1,037			6,133
	Total property and equipment		13,174			74,469
Less: Accumulated depreciation			(1,021	)		(55,105	)
	Net property and equipment	$	12,153		$	19,364

7.        Asset Impairment

          The Company recorded impairment charges for continuing operations of $86.3 million and $14.8 million for the years ended December 31, 2001 and 2000, respectively. Throughout the bankruptcy proceedings, the Company encountered several triggering events which dictated that the Company review its long-lived assets for impairment. In 2000, the Company determined that a write-down was needed on its Douglas DC-9 freighter aircraft which operated mainly in ad hoc charter service. The Company determined that its air freight carrier would cease to operate this fleet type and upon reviewing then current market

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values for this aircraft type, a write-down of the carrying value was needed. Additionally, three Boeing 727-200 freighter aircraft were identified to no longer be economically viable to maintain once they reached the next scheduled maintenance event; therefore, the carrying value of these aircraft was reduced to the estimated market value.

          In January 2001, the Company received notification that the U.S. Postal Service would be canceling its existing contract with the Company as it entered into a long-term contract with a package delivery company to provide a similar service (See Note 11). The Company flew Boeing 727-200 freighter aircraft for its U.S. Postal Service contracts and the contract cancellation, coupled with the general downturn in the U.S. economy, caused the Company to review this fleet type and its supporting inventory for impairment. This review dictated that a write-down of the aircraft and inventory was needed based on then current market values.

8.        Long-Term Debt, Aircraft Purchase Agreements and Other Financing Arrangements

          Long-term debt, aircraft purchase agreements and other financing arrangements consisted of the following:

		December 31,
		2002		2001
		(in thousands)
1st Source Bank aircraft acquisition loan		$	4,431	$	6,580
Aircraft purchase agreements			513		—
Other			34		—
	Total debt		4,978		6,580
Less current portion			2,640		1,916
	Total long-term debt	$	2,338	$	4,664

          Pursuant to agreements reached with 1^st Source Bank (“1^st Source”) in November 2000 in settlement of lease obligations arising prior to the Company’s bankruptcy filing, Aircargo owed 1^st Source $4.4 million as of December 31, 2002, pursuant to a promissory note and a security agreement (collectively, the “1^st Source Note”). The 1^st Source Note is guaranteed by Kitty Hawk, Inc. and is secured by two Boeing 727-200 freighter aircraft, including five Pratt & Whitney JT8D-7B engines (collectively, the “1^st Source Collateral”). As of December 31, 2002, the 1^st Source Collateral had a carrying value of $309,000. The 1^st Source Note bears interest at a fixed rate of 8.9% per annum, provides for monthly principal and interest payments of $202,000, will fully amortize the debt obligation over its life, and matures in February 2005.

          The 1^st Source Note requires that Aircargo maintain the 1^st Source Collateral and keep it airworthy. There are no minimum collateral value or financial covenant requirements in the 1^st Source Note.

          In connection with the terms of the Plan of Reorganization, on June 30, 2002, Aircargo entered into Aircraft Purchase Agreements with affiliates of Pegasus to purchase two Boeing 727-200 aircraft in freighter configuration, which Aircargo was leasing under capital lease arrangements at the time. The purchase obligations were contingent upon the Company successfully exiting bankruptcy. Pursuant to the Aircraft Purchase Agreements, Aircargo would purchase each aircraft for an amount equal to $750,000, minus the monthly lease payments made since May 1, 2002 on each aircraft under the capital leases. Aircargo purchased one Boeing 727 on October 1, 2002, and executed a promissory note with a principal sum of $382,474 bearing interest at a fixed rate of 8.0% per annum and providing for monthly principal and interest payments of approximately $65,000. The promissory note matures on April 1, 2003. The promissory note is secured by a First Priority Aircraft Chattel Mortgage and Security Agreement covering the aircraft. Aircargo consummated the purchase of the second Boeing 727 on December 17, 2002, and executed a promissory note with a principal sum of $256,673 bearing interest at a fixed rate of 8.0% per annum and providing for monthly principal and interest payments of approximately $65,000, which is equal to the monthly lease payment. The promissory note matures on April 1, 2003 and is secured by a

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First Priority Aircraft Chattel Mortgage and Security Agreement covering the aircraft. As of December 31, 2002, the carrying value of these aircraft was approximately $1.8 million.

          In support of the Company’s Plan of Reorganization, on July 3, 2002, the Company signed a commitment letter with KBK Financial, Inc. (“KBK”).  The commitment letter provided for a $5.0 million receivables purchase facility (the “Facility”), with the ability to be increased to a $10.0 million facility if KBK is successful in obtaining a qualified participant. KBK’s obligation is limited to a maximum of $5.0 million. The commitment originally expired September 1, 2002; however, prior to September 30, 2002, the commitment was extended through October 31, 2002. The Facility is currently limited to $5.0 million as KBK has not yet obtained a participant. On October 31, 2002, the agreements pursuant to the commitment letter with KBK became effective.

          The Facility advances funds to the Company at a rate of 85% of the invoice amount upon KBK’s purchase of the Company’s current invoices offered for sale to KBK. Any invoices of the Company are available for sale to KBK under the Facility. Invoices may be offered on a daily basis, and the number of invoices offered is not limited. KBK can accept or reject offered invoices and is not obligated to purchase any invoices. KBK exercises control over the Company’s incoming lockbox receipts in order to ensure that the cash received on its purchased invoices is collected. KBK also has liens on the Company’s inventory, equipment (excluding airframes and engines), accounts, accounts and contract rights, contracts, drafts, acceptances, documents, instruments, chattel paper, deposit accounts and general intangibles, to secure any unpaid obligations of the Company.

          The Facility’s pricing incorporates both fixed discount and variable rate pricing components. The fixed discount is 0.6% of the invoice amount and is payable at the time of funding. The variable rate is KBK’s base rate, plus 2.00% per annum and is payable based on the number of days from the sale of the invoice to KBK through and including the third business day after the invoice is collected. At no time will the variable rate be less than 6.75%.

          The Facility can be terminated by either party with thirty days’ prior written notice. There is a penalty of 2.0% of the Facility if the Facility is terminated by the Company prior to October 31, 2003. The penalty is reduced to 1.0% if the Company terminates the Facility prior to October 31, 2004. There is no penalty if the Facility is terminated by the Company after October 31, 2004. The penalty is eliminated if KBK is unable to secure a participant with an additional commitment of at least $2.0 million by April 30, 2003.

          The Facility has no financial covenants tied to the Company’s operating performance.  As of December 31, 2002, the Company had no amounts outstanding under this facility.

          Maturities of long-term debt were as follows:

Year		December 31, 2002
		(in thousands)
2003		$	2,640
2004			2,288
2005			50
	Total	$	4,978

9.        Income Taxes

          The Company is currently under IRS audit for the 1996, 1997 and 1998 tax years. Adjustments have been proposed to the 1997 and 1998 tax years relating to the capitalization of airframe repairs and the carryback of the Company’s 1998 net operating loss (“NOL”) to the 1997 tax year. A revenue agent report of adjustments has been issued and a protest of these adjustments has been submitted by the Company with the matter currently before IRS Regional Appeals. The Company believes that the issues will be resolved in a manner consistent with the tax positions it took on its tax returns. Additionally, if an adjustment is

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required, the Company believes that recent legislation increasing the NOL carryback to five years, would offset any adjustment that the IRS may ultimately require. As a result, the Company does not expect any material impact from this IRS audit.

          The provision for income taxes for continuing operations consists of the following:

				Successor			Predecessor
				Three months ended December 31, 2002			Nine months ended September 30, 2002			Year ended December 31,
										2001			2000
				(in thousands)						(in thousands)
Current income tax provision (benefit)				$	—		$	—		$	—		$	—
Deferred income tax:
		Federal			851			(11,351	)		(47,913	)		(2,661	)
	State				161			5,089			(5,550	)		(9,000	)
			Total deferred income tax		1,012			(6,262	)		(53,463	)		(11,661	)
Change in valuation allowance					(1,012	)		6,262			53,463			—
			Total income tax benefit	$	—		$	—		$	—		$	(11,661	)

          The differences between the provision for income taxes for continuing operations and the amount computed by applying the statutory federal income tax rate to income (loss) before income taxes are as follows:

		Successor		Predecessor
		Three months ended December 31, 2002		Nine months ended September 30, 2002			Year ended December 31,
							2001			2000
		(in thousands)					(in thousands)
Federal income tax (benefit) at statutory rate		$	905	$	(5,964	)	$	(50,234	)	$	(11,849	)
State income taxes, net of federal benefit			63		(417	)		(3,516	)		(829	)
Non-deductible expenses, principally meals			44		119			287			1,017
Change in valuation allowance for U.S. federal and state taxes			(1,012)		6,262			53,463			—
	Total	$	—	$	—		$	—		$	(11,661	)

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          Deferred tax assets were as follows:

			December 31,
			2002			2001
			(in thousands)
Deferred tax assets:
	Maintenance reserves		$	2,633		$	2,633
	Accounts receivable			1,896			5,081
	Property and equipment			7,546			8,886
	Net operating loss carryforward			—			108,022
	Other			261			1,429
		Gross deferred tax asset		12,336			126,051
Deferred tax liabilities:
	Accrued expenses			838			216
	Other			287			—
	Gross deferred tax liabilities			1,125			216
Valuation allowance				(11,211	)		(125,835	)
		Net deferred tax asset	$	—		$	—

          The Company has recorded a valuation allowance to the extent it is more likely than not that a tax benefit will not be realized prior to expiration of the carryforward periods. As a result of the Company incurring significant operating losses, there can be no assurance of profitability.

10.        Aircraft Commitments

          In connection with the terms of the Company’s Plan of Reorganization, on October 1, 2002, Aircargo entered into four operating leases (the “New Leases”) for Boeing 727-200 aircraft in freighter configuration with affiliates of Pegasus with monthly rental rates ranging from $65,000 to $85,000. The New Leases replaced leases with Pegasus that were originally entered into during May 1999, September 1999 and November 1999 (the “Original Leases”). Under the New Leases, in addition to rental payments, Aircargo is also required to pay each month maintenance reserves on the airframes, engines, landing gear and auxiliary power units, with the amount determined based on flight hours or cycles of utilization during the immediately preceding month. Each of the New Leases expires in May 2004. 

          Upon the expiration of the New Leases, each aircraft must be returned to the lessor with the same number of available flight hours or cycles on the airframe, engines, landing gear and auxiliary power units until the next scheduled maintenance event as were available at the time Aircargo originally took delivery of each of the aircraft. When Aircargo originally took delivery, each of the aircraft had just undergone a light or heavy “C” check maintenance event. Under the New Leases, in lieu of performing a light or heavy “C” check on each of the aircraft prior to returning them to the lessor, Aircargo may instead pay the lessor $750,000 per airframe. The $750,000 will be reduced by the amount of airframe reserves paid to the lessor under the Original Leases and the New Leases.

          Pursuant to a December 2000 agreement reached with Wren Equipment Finance Limited (hereafter “Wren”), Aircargo operates a Boeing 727-200 aircraft in freighter configuration and three engines (the “Wren Aircraft”) under an operating lease from an affiliate of Wren (the “Wren Lease”). This lease expires in December 2003.

          The Wren Lease provides for monthly lease payments of $115,000, as well as monthly cash payments for future maintenance events for the airframe and each engine based upon actual flight hours during the previous month. The Company has determined that the amount of the monthly lease payment under the Wren Lease is now above market rates. The Company has accrued a liability in connection with Fresh Start Accounting of $720,500 which represents the estimate of excess future lease payments over market.

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          The Wren Lease provides for certain conditions related to the return of the airframe and engines. The Company has recorded a reserve of the estimated costs to meet the return conditions of the Wren Lease less the amounts paid to the lessor over the life of the lease.

          On September 30, 2002, in connection with the terms of the Company’s Plan of Reorganization, Aircargo entered into an Aircraft and Engine Use Agreement (the “Trust Agreement”) with the Kitty Hawk Collateral Liquidating Trust (the “Trust”). The Trust Agreement expires September 30, 2004. The Trust owns certain aircraft and engines that were previously owned by the Company and were pledged to secure repayment of the Senior Notes. Pursuant to an agreed court order, the Trustee for the Senior Notes repossessed the pledged aircraft and related engines in October 2001, although the aircraft and engines have remained on Aircargo’s FAR Part 121 operating certificate. Despite the repossession, Aircargo has continued to operate the aircraft and engines under a bankruptcy court approved aircraft use arrangement and there has been no interruption to the Company’s operations. Aircargo now operates the aircraft and engines under the Trust Agreement.

          The Trust Agreement makes twelve Boeing 727-200 aircraft in freighter configuration and thirty-three engines (collectively the “Trust Aircraft”) available to Aircargo for operation on Aircargo’s FAR Part 121 operating certificate. The Trust Agreement provides for Aircargo to pay for a minimum use of the Trust Aircraft equivalent to an aggregate of 450 block hours per month. The Company does not foresee an instance in which the Company would pay minimum block hour usage above what is actually utilized because the monthly minimum use requirements and payment obligation may be reduced if certain of the Trust Aircraft are unavailable for use. Currently, ten of the twelve Trust Aircraft are available for use by Aircargo and are airworthy. Two of the Trust Aircraft are not available for use by Aircargo as a result of the settlement agreement Aircargo reached with the United States Postal Service (the “U.S. Postal Service”) (SeeNote 11). The unavailability of these two aircraft does not affect the minimum use requirements or payment obligation.

          The Trust Agreement requires that Aircargo provide line and routine maintenance and maintain adequate insurance on the Trust Aircraft. In the event new regulations are introduced that require new equipment be installed, modifications be made, or additional maintenance be performed on the Trust Aircraft, Aircargo’s obligation to perform the required maintenance is limited to a maximum of $50,000 per airframe or engine. The Trust is responsible for the cost of any heavy airframe maintenance and engine heavy shop visit, but may choose not to complete such maintenance or overhaul work, thereby taking the airframe or engine out of service. Therefore, over time, fewer Trust Aircraft may be available for use by Aircargo.

          The minimum future rental costs for the Company’s airframes and engines were as follows:

Year		December 31, 2002
		(in thousands)
2003		$	8,225
2004			3,670
	Total	$	11,895

11.        Non-Aircraft Commitments and Contingencies

          In June 1999, the Company moved the hub for its scheduled freight operations from Terre Haute, Indiana to Fort Wayne, Indiana and entered into a twenty-five year operating lease for a 239,000 square foot facility with a monthly lease rate of $168,775. As part of the Company’s bankruptcy proceedings, the lease agreement was modified to allow the deferral of (i) the full monthly lease rate for 6 months beginning January 1, 2002 and (ii) 50% of the monthly lease rate for one year beginning July 1, 2002. The deferred rent would then be repaid over a 48 month period beginning July 5, 2003 and bear interest at 5% per annum from July 5, 2003. As of December 31, 2002, the Company has recorded $1.3 million for future repayment of the deferred rent. Also in June 1999, the Company entered into a twenty-five year ground lease with the Fort Wayne-Allen County Airport Authority to lease ramp space with a monthly lease rate of

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$14,700, which is subject to annual adjustments based on adjustments in the U.S. Consumer Price Index. There were no rent concessions associated with this lease.

          The Company also leases office buildings, airport aprons, cargo storage and related facilities under noncancelable operating leases which expire on various dates through December 2007. In addition, the Company periodically leases other facilities and equipment under month-to-month lease agreements.

          The minimum rental costs for the Company’s facilities and equipment (excluding airframes and engines) were as follows:

Year		December 31, 2002
		(in thousands)
2003		$	2,519
2004			3,128
2005			3,163
2006			3,199
2007			2,824
Thereafter			27,521
	Total	$	42,354

          Directives and Service Bulletins (“Directives”) issued by the Federal Aviation Administration, or FAA, including those issued under the FAA’s “Aging Aircraft” program, are issued on an ad hoc basis and may cause the Company’s owned or leased aircraft and engines to be subject to extensive examinations and/or structural inspections and modifications to address problems of corrosion and structural fatigue, among other things. Directives applicable to the Company’s fleet can be issued at any time and the cost of complying with such Directives cannot currently be estimated, but could be substantial.

          In August 1999, Aircargo entered into Contract Number W-Net-99-01 (hereafter “the W-Net Contract”) with the U.S. Postal Service , which had a term of six years. The W-Net Contract required the Company to provide ACMI, ground-handling, mail sorting and related services in a hub and spoke system for the western continental United States through a hub at a de-commissioned U.S. Air Force base in Sacramento, California. The Company began operations under the W-Net Contract on August 28, 1999. The type and amount of operations required by the W-Net Contract caused the Company to enter into a number of aircraft leases and obtain equipment in order to provide the W-Net Contract services and continue to meet the Company’s other operational and contractual requirements.  A number of Company owned aircraft and engines were designated in the contract as available to provide the required W-Net Contract services.  The W-Net Contract was amended a number of times over its life.

          In January 2001, the U.S. Postal Service  announced that it had reached an agreement with a package delivery company as a “sole source provider” to provide the U.S. Postal Service with airlift for its Express and Priority Mail products, as well as general mail carrying capabilities. The U.S. Postal Service  subsequently elected to terminate the W-Net Contract for convenience effective August 27, 2001. The W-Net Contract contained a “Termination for Convenience” clause that provided for a method of establishing the obligations of the U.S. Postal Service to the Company in the event the U.S. Postal Service unilaterally elected to terminate the contract without cause prior to the W-Net Contract’s scheduled expiration date. The Company prepared detailed estimates based upon the Termination for Convenience clause and submitted those to the U.S. Postal Service subsequent to the termination of operations under the W-Net Contract. The Company and the U.S. Postal Service entered into a negotiated settlement (the “T for C Settlement”) on January 29, 2002 that, among other things, (i) settled all claims of the Company against the U.S. Postal Service and all obligations of the U.S. Postal Service  to the Company arising from the Termination for Convenience of the W-Net Contract and (ii) provided for the U.S. Postal Service to pay the Company an aggregate of $30.9 million, which has been received by the Company resulting in other income of $29.4 million.

F-21

          The T for C Settlement contains conditions that affect the Company’s future operations relative to some assets the Company owns or could operate under the Trust Agreement.  A significant component of the T for C Settlement was the aircraft and engine book values that would have been amortized over the remaining four years of the W-Net Contract had the U.S. Postal Service not elected to unilaterally terminate the W-Net Contract.  As a result, the Company may continue to own and sell certain aircraft and engines that were designated in the W-Net Contract (the “W-Net Aircraft”), but may not use the W-Net Aircraft in revenue service.  Further, if the Company sells a W-Net Aircraft for more than the projected book value established in the T for C Settlement, the excess proceeds are payable to the U.S. Postal Service. Given the current market conditions, the Company does not expect to sell W-Net Aircraft for more than the projected book value.  The W-Net Aircraft that are owned by the Company are classified as assets held for sale in the accompanying consolidated financial statements.

          On April 19, 2002, M. Tom Christopher, the founder and former Chairman of the Board and Chief Executive Officer of the Company filed a complaint against James R. Craig, the Company’s then Vice President and General Counsel, alleging that while Mr. Craig was Vice President and General Counsel, (i) Mr. Craig and members of the Board of Directors of the Company conspired to terminate Mr. Christopher, and (ii) Mr. Craig was his personal attorney and breached fiduciary duties owed to Mr. Christopher. (M. Tom Christopher v. James R. Craig, Adversary Proceeding No. 02-4164 in In re:  Kitty Hawk, Inc. et al. Debtors, in the United States Bankruptcy Court for the Northern District of Texas, Fort Worth Division, case No.400-42141-BJH-11.) Mr. Craig denies these allegations and intends to vigorously contest this matter.  Under the Company’s then existing Certificate of Incorporation, the Company may be required to indemnify Mr. Craig, including reimbursing his defense costs and paying any final, non-appealable judgment rendered against him. Mr. Craig has agreed, however, to waive the Company’s indemnification obligation with respect to the payment of any final judgment rendered against him in this matter.  Mr. Christopher has not specified the amount of monetary damages he is seeking. The Company’s directors and officers insurance policy may not reimburse the Company for the costs of Mr. Craig’s defense. Management does not believe the costs of Mr. Craig’s defense to be material to the financial condition of the Company.

          In July 2002, the Company filed a demand for binding arbitration against EGL, Inc. d/b/a Eagle Global Logistics (“EGL”) with the American Arbitration Association to resolve a claim for freight transportation services rendered to EGL in the amount of approximately $4.0 million plus all interest, attorneys’ fees and costs allowable by law.  In August 2002, EGL filed an answer and counter-claim in the arbitration proceeding denying the Company’s claim and asserting a counterclaim for consequential damages in an unspecified amount, but in excess of $1.0 million plus costs and attorneys’ fees, for an alleged breach of a contract by the Company.  The arbitration proceeding, which will resolve both parties’ claims, is currently scheduled to begin in June 2003.

          In the normal course of business, the Company is a party to various litigation matters. In the opinion of management, none of these matters will have a material adverse effect on the Company’s financial condition or results of operations.

12.        Related Party Transactions 

          The Company has long-term agreements with Pegasus and the Trust to lease or use aircraft and engines (see Note 10) and two notes payable with Pegasus for the acquisition of two aircraft.  (See Note 8). Under the Plan of Reorganization, Pegasus is entitled to receive approximately 5.0% of New Stock on a fully-diluted basis and the beneficiaries of the Trust are entitled to receive approximately 81.0% of New Stock on a fully-diluted basis in the form of shares of New Stock or warrants to acquire New Stock. As of December 31, 2002, the Company owed the Trust approximately $0.5 million for aircraft usage in December 2002 and owed Pegasus approximately $0.5 million related to debt from the purchase of two aircraft. A member of the Company’s Board of Directors is also the managing director of a beneficiary of the Trust.

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          For the three months ended December 31, 2002, the Company paid approximately $3.4 million related to various agreements with Pegasus and the Trust for use of aircraft and engines and for required payments of maintenance reserves.

13.        Employee Compensation Plans and Arrangements

          The Company has a retirement savings plan under Section 401(k) of the Internal Revenue Code which covers all employees meeting minimum service requirements. Under the plan, voluntary contributions are made by employees and the Company provides matching contributions of 25% of the employees’ contribution up to 20% of the employees’ salary. Contributions are funded as they are collected.

14.        Collective Bargaining Agreements

          The Company’s flight crew members are represented by the Kitty Hawk Pilots’ Association (the “KPA”), which was certified under the Railway Labor Act in September 2000. Currently, there is no collective bargaining agreement in place, and interest-based bargaining negotiations for a collective bargaining agreement with the KPA are in their preliminary stages.  The Company executed a letter agreement whereby dues would be collected from the salaries of crew members who are affiliated with the KPA and remitted to the KPA.  Although the Company believes it has good relations with its flight crew members, the unionization of its workforce could result in higher employee compensation, reduce the Company’s flexibility in dealing with its employees, and other restraints that could increase the Company’s operating costs or constrain its operating and competitive flexibility.

15.        Significant Customers

          The Company provided scheduled freight services to five customers who accounted for 40.0%, 35.1%, 31.9% and 38.0% of its scheduled freight revenue for the three months ended December 31, 2002, the nine months ended September 30, 2002, and the years ended December 31, 2001 and 2000, respectively. The Company had receivables from these customers that comprised approximately 26.0% and 16.3% of the Company’s outstanding accounts receivable balance as of December 31, 2002 and 2001, respectively. Historically, this level of concentration of risk is typical for the on-going operations of the Company.  Of these customers, one is secured by a letter of credit covering up to $1.2 million of valid open account invoices.  The Company will not permit total outstanding receivables for this customer to exceed $1.2 million, and as of December 31, 2002, this customer owed the Company $485,000. The letter of credit expires in March 2004.

          Aircargo provided ACMI services to one customer who accounted for 43.0%, 41.3%, 99.9% and 96.0% of its ACMI revenue for the three months ended December 31, 2002, the nine months ended September 30, 2002, and the years ended December 31, 2001 and 2000, respectively. The Company had receivables from this customer that comprised approximately 1.3% and 5.4% of the Company’s outstanding accounts receivable balance as of December 31, 2002 and 2001, respectively.

16.        Business Segment Data

          The Company’s continuing operations are comprised of two main businesses – an expedited scheduled freight network and an air freight carrier airline, which primarily supports the expedited scheduled freight network by transporting cargo in its fleet of Boeing 727-200 aircraft. Each of these is a business segment, with its respective financial performance detailed below. Each business segment is currently evaluated on financial performance at the operating income line.

F-23

          The Company operates a major independent city-to-city expedited scheduled freight network in the United States and Canada providing next-morning, two-day and three-day delivery service.  As an independent freight network, the Company does not typically provide ground transportation from shippers to the cargo facilities or from the cargo facilities to recipients.  As a result, the Company primarily provides freight services to freight forwarders who arrange pick up from shippers and final delivery to recipients.

          In addition to supporting the expedited scheduled freight network, the air freight carrier also provides dedicated air freight carrier services for a variety of third parties. These services are provided under contractual arrangements where the Company provides the aircraft, crew, maintenance and insurance (ACMI). Additionally, ad hoc charters are performed.

          The other category consists of corporate activities.

          Business assets are owned by or allocated to each of the business segments. Assets included in Other include cash, allowance for doubtful accounts and the corporate headquarters building.

		Scheduled Freight Network			Air Freight Carrier			Other			Discontinued Operations			Eliminations			Consolidated Balance
		(in thousands)
Successor:
	Three months ended December 31, 2002:
	Revenue from external customers	$	31,482		$	2,994		$	—		$	—		$	—		$	34,476
	Revenue from intersegment operations		—			10,487			—			—			(10,487	)		—
	Depreciation and amortization		86			852			—			—			—			938
	Operating income (loss)		1,811			1,102			(235	)		—			—			2,678
	Interest expense		9			16			129			—			—			154
	Other (income) expense		(111	)		10			(38	)		—			—			(139	)
	Income before taxes																	2,663
	Total assets	$	6,278		$	20,155		$	20,826			—			—		$	47,259
Predecessor:
	Nine months ended September 30, 2002:
	Revenue from external customers	$	84,797		$	2,530		$	—		$	—		$	—		$	87,327
	Revenue from intersegment operations		—			36,096			—			—			(36,096	)		—
	Depreciation and amortization		489			4,011			—			—			—			4,500
	Operating income (loss)		(6,120	)		373			(593	)		—			—			(6,340	)
	Interest expense		—			42			2,091			—			—			2,133
	Other (income) expense		3,336			475			5,256			—			—			9,067
	Loss before taxes																	(17,540	)
	Total assets	$	3,687		$	19,802		$	23,865			—			—		$	47,354
	Year ended December 31, 2001:
	Revenue from external customers	$	135,052		$	112,437		$	—		$	—		$	—		$	247,489
	Revenue from intersegment operations		—			52,857			—			—			(52,857	)		—
	Depreciation and amortization		622			25,404			—			—			—			26,026
	Operating income (loss)		(27,903	)		(69,306	)		(1,211	)		—			384			(98,036	)
	Interest expense		3,702			3,349			—			—			—			7,051
	Other (income) expense		7,796			35,584			(718	)		—			—			42,662
	Loss before taxes																	(147,749	)
	Total assets	$	19,626		$	18,896		$	471,046		$	81,433		$	(419,395	)	$	171,606
	Year ended December 31, 2000:
	Revenue from external customers	$	170,255		$	196,579		$	—		$	—		$	—		$	366,834
	Revenue from intersegment operations		860			131,909			—			—			(132,769	)		—
	Depreciation and amortization		617			35,767			—			—			—			36,384
	Operating income (loss)		1,295			(960	)		(14,377	)		—			11,364			(2,678	)
	Interest expense		5,504			7,769			(522	)		—			—			12,751
	Other (income) expense		4,261			16,876			(1,716	)		—			—			19,421
	Loss before taxes																	(34,850	)
	Total assets	$	61,042		$	177,609		$	517,442		$	(174,782	)	$	(138,370	)	$	442,941

F-24

17.        Quarterly Financial Information

          The following table reflects selected quarterly operating results, which have not been audited. The information has been prepared on the same basis as the consolidated financial statements and include all adjustments, consisting of only normal recurring adjustments, necessary for a fair presentation of the information shown. Our results may vary significantly from quarter to quarter and the operating results for any quarter are not necessarily indicative of the results that may be expected for any future period.

	Predecessor																					Successor
	Quarter Ended
	March 31, 2001			June 30, 2001			September 30, 2001			December 31, 2001			March 31, 2002			June 30, 2002			September 30, 2002			December 31, 2002
	unaudited																					audited
	(in thousands, except per share data)
Total revenue	$	68,279		$	66,406		$	54,452		$	58,352		$	25,087		$	30,595		$	31,645		$	34,476
Gross profit (loss) from continuing operations		(2,047	)		(3,040	)		(64,886	)		(16,244	)		(4,048	)		2,007			1,625			4,818
Operating income (loss)		(5,146	)		(7,060	)		(66,785	)		(19,045	)		(4,570	)		1,604			(3,374	)		2,678
Income (loss) from continuing operations	$	(8,836	)	$	(10,078	)	$	(80,346	)	$	(48,489	)	$	(9,129	)	$	(1,552	)	$	(6,859	)	$	2,663
Basic and diluted net income (loss) from continuing operations per share	$	(0.52	)	$	(0.59	)	$	(4.69	)	$	(2.82	)	$	(0.53	)	$	(0.09	)		$(0.40	)		$0.05	(1)

(1) For the purpose of calculating basic and diluted net income from continuing operations per share for the quarter ended December 31, 2002, the shares of common stock and warrants to acquire common stock to be issued under the plan of reorganization are deemed to be outstanding as of October 1, 2002. In addition, because the warrants have a nominal exercise price, the shares of common stock underlying the warrants are also deemed to be outstanding.

F-25

Schedule II
Kitty Hawk, Inc.
Valuation and Qualifying Accounts

(amounts in thousands)

				Additions
Description		Balance at the Beginning of the Period (1)		Charged to Expense (1)		Charged to Other Accounts (1)		Deductions (1)			Balance at the End of the Period (1)
Year ended December 31, 2000:
	Allowance for doubtful accounts	$	926	$	4,246	$	—	$	(1,330	)	$	3,842
Year ended December 31, 2001:
	Allowance for doubtful accounts		3,842		2,547		500		(3,696	)		3,193
Nine months ended September 30, 2002:
	Allowance for doubtful accounts		3,193		381		353		(1,742	)		2,185
Three months ended December 31, 2002:
	Allowance for doubtful accounts	$	2,185	$	—	$	—	$	1,693		$	492

(1) Amounts include only the activity related to the Company’s continuing operations.

F-26

EX-2.3

                                                                     Exhibit 2.3

                      IN THE UNITED STATES BANKRUPTCY COURT
                       FOR THE NORTHERN DISTRICT OF TEXAS
                               FORT WORTH DIVISION

IN RE:                                  ss.        Chapter 11
                                        ss.
KITTY HAWK, INC., et. al                ss.        Case no. 400-42069-BJH and
                                        ss.        Case nos. 400-42141  through
         Debtors                        ss.        Case no. 400-42149
                                        ss.
                                        ss.        Jointly Administered Under
                                        ss.        Case no. 400-42141-BJH
                                        ss.


                    ORDER GRANTING DEBTORS' MOTION TO MODIFY
                   DEBTORS' FINAL JOINT PLAN OF REORGANIZATION

     On September 26, 2002, the Court considered the Motion to Modify Debtors'
Final Joint Plan of Reorganization (the "Motion") filed by Kitty Hawk, Inc.,
Kitty Hawk Aircargo, Inc., Kitty Hawk Charters Inc., Kitty Hawk International,
Inc., Kitty Hawk Cargo, Inc., Aircraft Leasing, Inc., American International
Travel, Inc., Flight One Logistics, Inc., Longhorn Solutions, Inc. and OK
Turbines, Inc., (together, the "Debtors"). The Court finds that the Debtors'
Final Joint Plan of Reorganization (the "Plan") has not been substantially
consummated and thus may be modified pursuant to 11 U.S.C.ss.1127. The Debtors
seek to modify the definition of the Effective Date. The proposed modification
makes the Effective Date a later date than that originally provided in the Plan.
The Debtors have delayed the Effective Date in order to address certain concerns
raised by the Department of Transportation. The Debtors have informed the Court
that this is the sole reason for the delay and that they are ready to make the
Plan effective. The Court finds that the proposed modification does not
negatively impact the creditors in these cases and that the Motion should be
granted. The Court further finds


ORDER GRANTING DEBTORS' MOTION TO MODIFY
DEBTORS' FINAL JOINT PLAN OF REORGANIZATION

                                                                         Page 1



that the request of the Indenture Trustee that the Order allow the Indenture
Trustee to change the Record Date to adjust to the later Effective Date is
reasonable and should be granted. Accordingly, it is

     ORDERED as follows:

     1. The Debtors are authorized to modify the Plan to substitute "October 1,
2002" for "September 1, 2002" in the definition of the "Effective Date."

     2. The Indenture Trustee is authorized to set the Record Date as the same
date as the Effective Date or such other date as the Indenture Trustee deems
appropriate.

Signed:  September 26, 2002             /s/ BARBARA J. HOUSER
                                        ----------------------------------------
                                        Barbara J. Houser
                                        United States Bankruptcy Judge

EX-10.1

                                                                    EXHIBIT 10.1

                        AIRCRAFT AND ENGINE USE AGREEMENT

This AIRCRAFT AND ENGINE USE AGREEMENT (hereafter the "Agreement") dated as of
September 30, 2002, is made by and between Kitty Hawk Aircargo, Inc.
("Aircargo") and the Kitty Hawk Collateral Liquidating Trust (the "Trust") by
Langdon Asset Management, Inc., its manager (the "Trust Manager"). Aircargo and
the Trust agree that Aircargo shall have the right and obligation to use certain
aircraft and engines owned by the Trust on the terms set forth herein.

     1. Minimum Utilization. For a term commencing on September 30, 2002, which
is the Effective Date (as defined therein) of the Debtors' Joint Plan of
Reorganization dated May 22, 2002 (the "Plan"), and ending on September 30, 2004
(or, for any airframe, such earlier date on which the airframe has been removed
pursuant to this Agreement from Schedule A), Aircargo will use the Airframes
identified on Schedule A (along with all records, logs, manuals and documents or
other materials of any kind relating to the condition, use, location,
maintenance or of repairs or overhauls to any part of the Airframes identified
on Schedule A, collectively referred to as the "Airframes") collectively, in
total, a minimum of 450 block hours per month (the "Minimum Airframe Usage");
provided however, that if, for any reason whatsoever, fewer than four (4) heavy
weight Airframes (the four current heavy weight Airframes being N278US, N279US,
N281KH and N284KH) are available for Aircargo's use, the Minimum Airframe Usage
for the month will be reduced by 100 hours for each of the four (4) heavy weight
Airframes not available for Aircargo's use. In the event that an Airframe is not
available for use for any reason whatsoever for only part of a month, the
reduction in the Minimum Airframe Usage for the month shall be prorated for such
part based on a thirty-day month.

     If Aircargo for any month fails to achieve the Minimum Airframe Usage
(subject to the reduction provisions set forth in the immediately preceding
paragraph), then on the date that payment for actual usage for the month is
required under Paragraph 4 of this Agreement, Aircargo shall pay to the Trust an
amount equal to the Minimum Airframe Usage block hour shortfall for the month
multiplied by $375. The Minimum Airframe Usage for the time between the
effective date of this Agreement and the last day of the month of such effective
date shall be prorated based on a 30-day month.

     2. Rates for Airframes. The block hour rate for utilization of each of the
Airframes is as follows:

                  Airframe                Rate per Block Hour
                  --------                -------------------
                   N278US                       $400.00
                   N279US                       $400.00
                   N281KH                       $400.00
                   N284KH                       $400.00
                   N69739                       $375.00
                   N69740                       $375.00
                   N854AA                       $375.00
                   N855AA                       $375.00
                   N252US                       $350.00
                    N6809                       $350.00
                    N6827                       $350.00
                    N6833                       $350.00



     3. Engines and Rates for Engines. Pursuant to the terms of the Plan and
this Agreement, Aircargo shall transfer all of its right, title and interest in
certain engines that it owns to the Trust in exchange for the Trust transferring
all of its right, title and interest in certain engines currently owned by the
Trust. Schedule B identifies the engines that Aircargo will transfer ownership
to the Trust, and likewise, identifies the engines that the Trust will transfer
ownership to Aircargo. Schedule C identifies the engines that will be owned by
the Trust after the ownership transfers contemplated above and shall be the
Engines (along with all records, logs, manuals and documents or other materials
of any kind relating to the condition, use, location, maintenance or of repairs
or overhauls to any part of the Engines identified on Schedule C, collectively
referred to as the "Engines") subject to this Agreement and sets forth the block
hour rate that Aircargo will pay for the use of each of the Engines, regardless
of the airframe upon which an Engine is operated.

     Aircargo will use the Engines collectively, in total, a minimum of 1,350
block hours per month (the "Minimum Engine Usage"); provided however, that if,
for whatever reason whatsoever, fewer than four (4) heavy weight Airframes (the
four current heavy weight Airframes being N278US, N279US, N281KH and N284KH) are
available for Aircargo's use, the Minimum Engine Usage requirement will be
reduced by 300 hours for each of the four (4) heavy weight Airframes not
available for Aircargo's use. In the event that an Airframe is not available for
use for any reason whatsoever for only part of a month, the reduction in the
Minimum Engine Usage for the month shall be prorated for such part based on a
thirty-day month.

     If Aircargo for any month fails to achieve the Minimum Engine Usage
(subject to the reduction provisions set forth in the immediately preceding
paragraph), then on the date that payment for actual usage for the month is
required under Paragraph 4 of this Agreement Aircargo shall pay to the Trust an
amount equal to the Minimum Engine Usage block hour shortfall for the month
multiplied by $75. The Minimum Engine Usage for the time between the effective
date of this Agreement and the last day of the month of such effective date
shall be prorated based on a thirty-day month.

     4. Time for Payment of Hourly Rates. On or about the 10th day of each month
following the first month after the Effective Date, Aircargo will provide to the
Trust a schedule of the hours flown per Airframe and Engine and will pay to the
Trust the applicable block hour rate for each block hour each Airframe and
Engine has been used in the immediately preceding month.

     5. Maintenance. Aircargo will perform line maintenance of the Airframes and
Engines in accordance with Aircargo's maintenance program. The Airframe
maintenance for which Aircargo is responsible hereunder will be limited to "A"
checks, "B" checks, and repairs or incidental replacement of parts and rotables
not to exceed $50,000 for any check or other event. In the event that a
maintenance check, incidental repair or replacement of parts exceeds $50,000,
the Trust will determine if it wants such maintenance work to be conducted, and
if so, will be responsible for such costs. The Engine maintenance for which
Aircargo is responsible hereunder will be limited to repairs and replacement of
parts and rotables not to exceed $50,000 for any check or other event. In the
event that Engine maintenance, incidental repair or replacement of parts exceeds
$50,000, the Trust will determine if it wants such maintenance work to be
conducted, and if so, will be responsible for such costs. Aircargo shall be
required to make any repairs, replacements, or improvements to any Airframe or
Engine necessary as the result of an Airworthiness Directive or Service Bulletin
or similar requirement issued by any regulating body not to exceed $50,000 for
any Airworthiness Directive, Service Bulletin or



similar requirement issued by any regulating body. In the event that any repair,
replacement or improvements to any Airframe or Engine is necessary as a result
of an Airworthiness Directive or Service Bulletin or similar requirement issued
by any regulating body exceeds $50,000, the Trust determine if it wants such
repair, replacement or improvement to be conducted, and if so, will be
responsible for such costs.

     6. Insurance. During the term of this Agreement, Aircargo shall cause the
Airframes and Engines to be covered by hull and liability insurance in
accordance with Aircargo's fleet plan which policies shall show the Trust as a
loss payee and an additional insured; provided that, for any Airframe removed
from Schedule A and the Engines mounted on such Airframe, Aircargo's obligation
to insure the Airframe and Engines shall terminate upon the Trust's receipt of
the Deliverables (defined below).

     7. Removal of Airframes and Engines from the terms of this Agreement. Upon
60 days written notice to Aircargo, the Trust may withdraw an Airframe from
Schedule A. An Airframe removed from Schedule A shall be referred to as a
"Terminated Airframe." On the 60th day of the notice period, Aircargo shall
deliver physical possession of the Terminated Airframe to a place within the
United States designated by the Trustee, along with (i) a current certificate of
airworthiness; (ii) three serviceable, unencumbered Pratt & Whitney engines of
the type appropriate for such aircraft; and (iii) all technical records,
including but not limited to current maintenance and operations records relating
to the Terminated Airframe and engines (all of the foregoing, for any Terminated
Airframe, being the "Deliverables"). In the event that Aircargo proposes to
deliver to the Trust free and clear title to an engine that is not owned by the
Trust in lieu of an Engine, the Trust shall convey an engine of similar type and
condition (determined by a comparison of engine disk profiles and limiters) to
Aircargo.

     8. Operation of Aircraft. Aircargo may operate the Airframes and Engines in
such types of service as it deems appropriate; provided that Aircargo shall not
"Dry Lease" any of the Airframes or Engines.

     9. Financial Reporting. Aircargo will provide the consolidated, unaudited
financial statements of its parent company, Kitty Hawk, Inc., on a monthly basis
delivered timely to the Trust Manager.



IN WITNESS WHEREOF, this Agreement is executed by it duly authorized
representative as of the date set forth above.

KITTY HAWK AIRCARGO, INC.                 KITTY HAWK COLLATERAL
                                          LIQUIDATING TRUST


   /s/ Drew Keith                            /s/ Glen Langdon
- -------------------------------           -------------------------------------
By: Drew Keith                            By: Langdon Asset Management Trust
    ---------------------------
Its: V.P.                                 By: Glen Langdon
    ---------------------------



                                   SCHEDULE A

                                    Airframes
                                    ---------

                                     N278US

                                     N279US

                                     N281KH

                                     N284KH

                                     N69739

                                     N69740

                                     N854AA

                                     N855AA

                                     N252US

                                      N6809

                                      N6827

                                      N6833



                                   SCHEDULE B

  Trust Engines To Be Transferred to      Aircargo Engines to be Transferred to
  ----------------------------------      -------------------------------------
               Aircargo                                 the Trust
               --------                                 ---------

                                                         655968

               687662                                    674498

               657394                                    696629

                                                         649269

               665294                                    665348

               665899                                    665230

                                                         665676

               656066                                    648784

               665591                                    653365

               653835                                    654158

               654677                                    654979
                                                         653897

                                                         653619



                                   SCHEDULE C

  No.                Serial No.                       Block Hour Rate

   1                   655968                              $83.33
   2                   674498                              $83.33
   3                   687698                              $83.33
   4                   700451                              $83.33
   5                   700377                              $83.33
   6                   687659                              $83.33
   7                   702952                              $83.33
   8                   696629                              $83.33
   9                   657070                              $83.33
  10                   700522                              $83.33
  11                649269 (9a)                            $75.00
  12                   708328                          N/A-sold/paid
  13                   696499                              $83.33
  14                   685501                              $83.33
  15                   688689                              $83.33
  16                   687788                              $75.00
  17                   665348                              $75.00
  18                   665230                              $75.00
  19                   665356                              $75.00
  20                   665676                              $75.00
  21                   655829                              $66.67
  22                   657666                              $66.67
  23                   648784                              $66.67
  24                   653365                              $66.67
  25                   665275                          N/A-sold/paid
  26                   649583                              $66.67
  27                   654158                              $66.67
  28                   654792                              $66.67
  29                   654305                              $66.67
  30                   657315                              $66.67
  31                   649514                          N/A-sold/paid
  32                   654979                              $66.67
  33                   654368                              $66.67
  34                   654914                              $66.67
  35                   653897                              $66.67
  36                   653619                              $66.67

EX-10.2

                                                                    Exhibit 10.2

                          Aircraft Operating Agreement

This Aircraft Operating Agreement is made as of this 19th day of December 2002,
effective as of January 6, 2003, by and between BAX Global Inc., a Delaware
corporation ("BAX"), and Kitty Hawk Cargo, a Delaware Corporation and Kitty Hawk
Aircargo, a Texas Corporation.

Agreement Details BAX:
- ----------------------
BAX will provide (2) DC8-71 aircraft, operated by Air Transport International
("ATI"), its subsidiary, on an ACMI basis to Kitty Hawk Cargo. The ACMI block
hour rate will be $3200.00 per block hour. The planned routings and block hours
for the ATI aircraft in the Kitty Hawk Cargo system are:
LAX-FWA-LAX at an estimated block hour use of 8.9 hours daily.
PHX-ELP-FWA-ELP-PHX at an estimated block hour use of 8.2 hours daily.
Both aircraft are expected to operate 5 nights a week, excluding holidays.

Agreement Details Kitty Hawk Aircargo:
- --------------------------------------
Kitty Hawk Aircargo will provide three (3) B727-200 aircraft on an ACMI basis to
BAX. The Monthly ACMI rate per aircraft is $225,000.00 with 265 block hours
included, combined utilization. The Kitty Hawk Aircargo aircraft in the BAX
system will operate;
CLT-TOL-PHL-CLT
PHL-TOL-PHL
BRO-MEM-TOL-MEM-BRO
The BRO based aircraft is expected to operate 5 nights a week and the CLT and
PHL aircraft only 4 nights a week, excluding holidays.

Agreement duration:
- -------------------
This agreement is for the year 2003, beginning January 6, and terminating
December 25. Either party may give the other party 30 days written notice
terminating the agreement prior to the planned termination date of December 25.

Payment Process:
- ----------------
BAX will invoice Kitty Hawk Cargo every two weeks for services performed during
the invoice period.
Kitty Hawk Aircargo will invoice BAX monthly for the services performed during
the invoice period.
Payment will be due 30 days from invoice date and payable by wire transfer.
Information concerning wire transfer is on file at each organization's account
payables office.



General:
- --------
Each air carrier will operate the aircraft in accordance with all applicable
laws, rules and regulations governing Aircraft Operations.
This agreement is for ACMI services only, all other customary services for
handling the aircraft is the responsibility of the system operator.
Each air carrier will cause to be carried and maintained the applicable
insurance coverage as provided for in BAX standard ACMI agreement.
Each party agrees that this Agreement and the ACMI services performed pursuant
to this Agreement are subject to the terms and conditions in the BAX standard
ACMI agreement, which are incorporated by reference and made a part of this
Agreement. A sample of which is attached.
This represents a memorandum of understanding and will be followed by a more
definitive agreement not later than March 31, 2003.

     DENNIS EITTREIM
BAX Global Inc.                         Kitty Hawk Cargo and Kitty Hawk Aircargo

Name:    Dennis Eittreim                     Name:    Robert W. Zoller
     -------------------------------               -----------------------------

Title:   President - Americas                Title:   President & CEO
      ------------------------------               -----------------------------

Date:    12/19/02                            Date:    12/19/02
     -------------------------------              ------------------------------

Signature: /s/ DENNIS EITTREIM               Signature: /s/ ROBERT ZOLLER
          --------------------------                   -------------------------

EX-10.3

                                                                    EXHIBIT 10.3

[1ST SOURCE BANK LOGO]    Aircraft Division

860002

                           AIRCRAFT SECURITY AGREEMENT

THIS AGREEMENT is made this 2nd of November 2000, by and between 1st SOURCE
BANK, ("Bank") of P.O. Box 783, South Bend, Indiana 46624, and KITTY HAWK
AIRCARGO, INC. ("Buyer"), a Texas corporation, of 1515 West 20th Street, DFW
International Airport, Dallas, TX 75261.

1.   Concurrently herewith, Bank has loaned and advanced to Buyer and Buyer
     hereby acknowledges receipt of the principal sum specified in any Exhibit
     A, including official fees disbursed on Buyer's behalf (the "Loan") to
     finance for Buyer the aircraft identified below. For the purpose of this
     Agreement, Exhibit "A" means the original Exhibit A attached hereto and any
     subsequent Exhibit A evidencing new or additional advances that may be made
     from time to time.

2.   Buyer hereby grants to Bank a lien and security interest under the Uniform
     Commercial Code in and to the following described aircraft, its airframe
     and engines, complete with all logs, records and manuals relating thereto
     except those manuals developed by Buyer for use exclusively in conjunction
     with its Part 121 operating certificate, and all equipment, furnishing,
     avionics, navionics, parts, attachments and accessories now or hereafter
     attached to (or stored in an agreed location) or otherwise related to said
     aircraft; and with all present and future repairs, additions, accessions,
     substitutions, exchanges, replacements and all returned and repossessed
     goods; and all present and future insurance proceeds. Buyer shall further
     grant a security interest as provided herein to Bank in instruments,
     documents, accounts (including lease and rental accounts), general
     intangibles, chattel paper, and all leases and temporary rental contracts,
     and all lease payments, rental payments, proceeds (both cash and noncash)
     and other collections arising therefrom, all of which shall be specifically
     and irrevocably assigned if at any time Aircraft is subject to any contract
     which specifically identifies said Aircraft by FAA registration number or
     serial number or if Buyer becomes bankrupt, whether voluntarily or
     involuntarily, in any state or federal proceeding and the Aircraft is
     repossessed by Bank within sixty (60) days from the date of filing of
     record of the bankruptcy (all hereinafter collectively called the
     "Aircraft"). The security interest granted herein shall secure payment of
     all obligations and liabilities of Buyer to Bank hereunder, whether
     absolute or contingent, direct or indirect, now existing or hereafter
     arising, as well as the punctual performance of Buyer of all warranties and
     agreements contained herein.


                                                                      
     ---------------------------------------------------------------------------------------------
     YEAR MFG          MANUFACTURER OF AIRCRAFT                          MODEL NO.   SERIAL NO.
     ---------------------------------------------------------------------------------------------
     1. 1969           Boeing                                            727-222     20040
     2. 1969           Boeing                                            727-222     20041
     ---------------------------------------------------------------------------------------------
     MFG OF ENGINE(S)           ENGINE MODEL NO(S) ENGINE SERIAL NO(S)   FAA NO.     HOME AIRPORT
     ---------------------------------------------------------------------------------------------
                                                                         N90AX
                                                                         N180AX
     Pratt & Whitney            JT8D-7B            P653709B
     Pratt & Whitney            JT8D-7B            P655282B
     Pratt & Whitney            JT8D-7B            P653826B
     Pratt & Whitney            JT8D-7B            P653468B
     Pratt & Whitney            JT8D-7B            649234
     Pratt & Whitney            JT8D-7B            653815
     ---------------------------------------------------------------------------------------------
     DESCRIBE EXTRA EQUIPMENT


     ---------------------------------------------------------------------------------------------

3.   Buyer further agrees that this security interest shall not be terminated in
     whole or in part until all debts and obligations to Bank are fully paid and
     performed by Buyer; provided however, that, in the event Buyer fully
     satisfies all debts and obligations under this Agreement or if more than
     one Aircraft is described hereon, Bank, in its sole discretion is satisfied
     that Buyer has fully paid for an Aircraft, and Buyer is not in default
     under this Agreement or any other instrument or agreement with Bank, then
     Bank shall release and terminate its security interest in that Aircraft or
     Aircrafts for which payment in full has been received and accepted by Bank.

4.   The Aircraft shall not be removed from the United States for a period
     exceeding 30 consecutive days, without the prior written consent of Bank.
     Buyer shall permit Bank to inspect both Aircraft and all books, manuals,
     records and logs relating to Aircraft, its flights and its maintenance, at
     all reasonable times.

5.   Aircraft will be kept airworthy and in good repair and operating condition
     in accordance with the rules and regulations of the Federal Aviation
     Administration (hereinafter referred to as "FAA") and Buyer will promptly
     repair any and all damage Aircraft may incur and shall not sell, assign,
     mortgage, grant a security interest in or otherwise dispose of Aircraft or
     any interest therein, or any part thereof, including any of its equipment
     or accessories. Aircraft will not be leased or rented for any period
     exceeding 30 consecutive days to a third party under a contract
     specifically identifying Aircraft except with the prior written consent of
     Bank, which shall not be unreasonably withheld. Bank specifically
     acknowledges that Buyer need not seek the consent of Bank in connection
     with an ACMI (Aircraft, Crew, Maintenance and Insurance) contract for the
     use of the Aircraft, provided Aircraft is not specifically identified by
     FAA registration number or serial number. Buyer will not suffer or permit
     any material lien, encumbrance or charge of any character whatsoever upon
     or against Aircraft without cure within 30 days of written notice thereof,
     except this Agreement, and will pay or cause to be paid all taxes that may
     be levied against Aircraft. Buyer will notify Bank immediately if the
     police or any authority seizes or impounds Aircraft.

6.   Buyer warrants and agrees that it is the absolute owner of Aircraft with
     full power to grant and convey a security interest herein to Bank.

7.   Aircraft will be used at all times in accordance with all material laws,
     rules, regulations and ordinances of the United States, each of the states
     and municipalities thereof and all other sovereign jurisdictions in which
     Aircraft may be operated, including but not limited to those relating to
     intoxicating liquors, narcotics, or controlled substances, and shall
     conform with all material laws, rules and regulations governing Aircraft.
     Aircraft will be used only for the purposes and in the manner set forth in
     the insurance covering said Aircraft. Aircraft will be operated at all
     times by a currently certified flight crew having the minimum total pilot
     hours required by such insurance and Aircraft will at all times be
     maintained in an airworthy condition necessary for its operating license
     under the laws, ordinances, rules and regulations of the United States,
     each of the states and municipalities thereof, and any other sovereign
     jurisdictions in which Aircraft shall be at any time operated.

8.   At its own cost and expense, Buyer shall insure and at all times continue
     to maintain insurance on Aircraft, with companies acceptable to Bank, and
     in the amount of the full insurable value of Aircraft, or in such other
     amount(s) as shall be satisfactory to Bank, insuring against any and all
     loss, damage, and other risks and hazards as are customary in the industry,
     including but not limited to fire, theft, burglary, crash, collision, and
     bodily injury. In no event shall such coverage be in an amount whereby Bank
     shall be deemed a co-insurer of all or any part of Aircraft. Buyer shall
     deliver a copy of the original policies of insurance to Bank together with
     any certificates or other evidence satisfactory to Bank of compliance with
     these provisions. All policies of insurance shall have attached to and made
     a part thereof a standard long form, Loss Payable Endorsement, in favor of
     both Buyer and Bank. If an Event of Default occurs hereunder, or if the
     aircraft is damaged beyond economic repair, Buyer hereby assigns to Bank
     the proceeds of any and all such policies of insurance (including any
     refund of premium) and Buyer hereby directs each insurer to make payments
     of any losses or refunds directly to Bank, and further, Buyer hereby
     appoints Bank as Attorney-in-Fact for Buyer in obtaining payment, adjusting
     canceling or settling any claims upon or under any such insurance and
     related to the Aircraft, and hereby authorizes Bank to endorse in the name
     of Buyer any checks, drafts or other instruments received or given in
     payment or liquidation of any claim under any such policy of insurance, and
     to perform each and every act deemed necessary by Bank in connection with
     such Power of Attorney, the same being coupled with an interest and
     therefore non-revocable. Each policy of insurance shall provide that Bank's
     interest therein will not be invalidated by the acts, omissions or neglect
     of anyone other than Bank, and shall contain the insurer's agreement to
     give thirty (30) days written notice (7 days notice with regard to war risk
     and allied perils coverage) to Bank before cancellation of or any material
     change in any such policy will become effective as to Bank, whether such
     cancellation or change is at the direction of Buyer or insurer. Bank's
     acceptance of policies in lesser amounts or risks other than as specified
     herein will neither be, nor deemed to be, a waiver of Buyer's foregoing
     obligations.

9.   Buyer warrants to Bank that none of the terms or conditions of this
     Agreement or any other agreements or contracts between Buyer and Bank are
     in violation of any provision of the Articles of Incorporation or By-Laws
     of Buyer or any material agreements Buyer may have with any third party,
     and the execution and delivery thereof, and all other agreements or
     writings by and between Buyer and Bank have been duly authorized by
     appropriate action of the business organization, or have received the
     appropriate consent.

10.  Should Buyer fail to keep Aircraft free and clear of all encumbrances,
     liens and charges, except as herein provided; or fail to pay any tax, levy,
     assessment or public charge thereon (except (i) liens for taxes not yet due
     or which are being contested in good faith (and for payment of which
     adequate assurances in Bank's judgment have been provided to Bank) by
     appropriate proceedings so long as such proceedings do not involve any
     material risk of sale, forfeiture or loss of the Aircraft and do not and
     will not adversely affect Bank's right, title and interest in the Aircraft;
     and (ii) materialman's, mechanic's, workman's, repairman's employee's or
     other like liens arising in the ordinary course of business of Buyer for
     sums not yet delinquent or being contested in good faith (and for the
     payment of which adequate assurances in Bank's judgment have been provided
     to Bank); or neglect or refuse to protect and maintain Aircraft and/or keep
     the same airworthy, in good order, repair and operating condition in
     accordance with the rules and regulations of the FAA if same is not cured
     within thirty (30) days after such notice thereof; or fail to obtain or
     keep in force all required insurance, then Bank, at its discretion, may
     discharge such encumbrance, lien or charge; pay such tax, levy, assessment

AIR 52331 Rev 3/00                Page 1 of 3



     or public charge; or expend such amounts as are necessary to protect and
     maintain Aircraft and/or to keep the same airworthy, in good order, repair
     and operating condition in accordance with the rules and regulations of the
     FAA; or obtain or keep in force all required insurance. All sums of money
     thus expended, and all other monies paid by Bank to protect its interest in
     Aircraft shall be repayable by Buyer to Bank on demand, and if not so
     repaid, shall be added to the Loan and bear interest, and be secured in
     like manner as the Loan.

11.  Buyer will at all times be liable to and indemnify and save Bank harmless
     from and against any and all claims and liabilities on account of death,
     bodily injury or property damage occasioned by the use or ownership of
     Aircraft so long as such claims or liabilities are not the result of Bank's
     gross negligence or willful misconduct.

12.  No transfer, renewal, extension or assignment of this Agreement or any
     interest hereunder, or loss, damage or destruction of Aircraft shall
     release Buyer from Buyer's obligations hereunder.

13.  Buyer agrees to pay on any installment in default for a period of more than
     ten (10) days a one-time delinquency charge on the amount past due (both
     principal and interest) calculated at the rate of one and one-half percent
     (1 1/2%). If the foregoing charge is not permitted by applicable law, then
     Buyer shall pay a delinquency charge on the amount past due at the highest
     lawful rate enforceable against Buyer.

14.  Buyer may prepay the unpaid principal balance of the Loan at any time. The
     unpaid principal balance remaining after application of a partial
     prepayment may, at Bank's sole discretion, be spread over the remaining
     term of the Loan, resulting in a recast schedule of installment payments,
     having due regard for the interest specified herein. The recast schedule
     shall be sent to Buyer by Bank.

15.  Time is of the essence. Buyer will be in default if any one or more of the
     following events takes place and is continuing (an "Event of Default"):

     (a)  Buyer fails to make any payment when due hereunder;
     (b)  Buyer fails to make timely payment or otherwise fails to perform under
          the terms of any obligation for borrowed money in excess of
          $2,500,000.00, or any such obligation is declared due and payable
          before its expressed maturity;
     (c)  Buyer fails to observe or perform any of the terms or conditions
          (other than Loan repayment or providing required insurance coverage)
          to be observed or performed by Buyer hereunder if same is not cured
          within thirty (30) days after notice thereof;
     (d)  Any material representation or warranty made herein by Buyer fails or
          is breached; or any material statement made by Buyer or any Guarantor
          in any credit application, or made in connection with Buyer's purchase
          of Aircraft is incorrect, false or misleading when made if same is not
          cured within ten (10) days after notice thereof or if same is in the
          result of intentional misrepresentation or fraud;
     (e)  Aircraft is stolen, lost, destroyed or damaged without the benefit of
          adequate insurance coverage;
     (f)  The usual business of Buyer is terminated or suspended or Buyer
          becomes insolvent, however evidenced or determined;
     (g)  Buyer or any Guarantor makes an assignment for the benefit of
          creditors;
     (h)  Buyer or any Guarantor becomes unable to pay their respective debts as
          they become due, or an application for relief is filed by or against
          Buyer or any Guarantor, under the United States Bankruptcy Code or any
          state insolvency laws or similar laws;
     (i)  A trustee or receiver is appointed for Buyer or any Guarantor or for a
          substantial part of their respective property;
     (j)  A levy, claim, seizure, writ of garnishment or attachment,
          condemnation complaint or any similar action or process is brought or
          issued against Buyer and/or Aircraft;
     (k)  Any action in connection with liquidation, dissolution or merger, is
          undertaken by or on behalf of Buyer without Bank's consent which will
          not be unreasonably withheld;

     Notwithstanding anything contained in this section to the contrary, Bank
     hereby acknowledges that on May 1, 2000, Buyer and Guarantor each filed for
     Chapter 11 protection under the United States Bankruptcy Code in the U.S.
     Bankruptcy Court, Northern District of Texas, Fort Worth Division, being
     jointly administered under case number 400-42141-BJH (the "Current
     Proceeding"), and that Bank waives its right to assert that an Event of
     Default has occurred as a result of the Current Proceeding or any action
     ancillary or related thereto.

16.  Notwithstanding ADR provisions set forth below, upon the occurrence of any
     of the foregoing Events of Default and at any time thereafter, Bank shall
     have the right to declare all or any part of the remaining unpaid principal
     balance of the Loan and/or any other indebtedness due to Bank from Buyer,
     to be immediately due and payable, together with all unpaid interest
     respectively accrued thereon, without further notice or demand.

17.  If an Event of Default occurs and is continuing, Bank shall have the right
     to:

     (a)  Collect the unpaid principal balance of the Loan and/or all other
          indebtedness becoming or declared due pursuant to the terms hereof by
          suit or otherwise as provided herein.
     (b)  Notwithstanding ADR provisions set forth below, require Buyer to
          assemble Aircraft and deliver it, upon demand, to Bank at a place to
          be designated by Bank which is reasonably convenient to both parties.
          Bank shall also have the right to retake possession of Aircraft with
          or without process of law and for this purpose may enter any premises
          in a lawful manner where Aircraft may be found and remove same, and
          sell Aircraft in a commercially reasonable manner either at public or
          private sale, after giving notice of the time and place of any public
          sale or of the time after which any private sale or any other intended
          disposition thereof is to be made, and at any such public sale Bank
          may purchase Aircraft. Such sale may be conducted with or without
          having Aircraft at place of sale. The requirements of reasonable
          notice shall be met if such notice is mailed, postage prepaid, to the
          address of Buyer set forth on Page One of this Agreement at least ten
          (10) days before the time of sale or disposition. Bank may apply
          proceeds of said sale, after first deducting all expenses and charges
          of obtaining possession of Aircraft, of reconditioning same and of
          said sale, including reasonable attorney fees, to payment of the
          unpaid principal balance of the Loan and all other sums due hereunder,
          and all accrued interest thereon, and any surplus shall be paid to,
          and any deficiency shall be paid by Buyer, including any reasonable
          attorney's fees and court costs incurred in the recover of such
          deficiency. While repossessing Aircraft, or removing it from a place
          of repossession to a place of storage and/or sale, Bank may, if
          permitted by law, use any of Buyer's licenses in respect to Aircraft.
          All of the foregoing shall be deemed to be a commercially reasonable
          method of disposing of Aircraft.

18.  Buyer's obligation to pay this Loan is independent of the obligation of any
     other person who has signed this Agreement or other documents as a Buyer or
     a Guarantor ("Signer(s)"). Bank need not make an effort to collect from all
     Signers in order to collect from any one Signer. It is not necessary for
     bank to repossess Aircraft before collecting from a Signer. Bank may extend
     the time for payment of any installment, reduce the size of monthly
     payments, release Aircraft, release one or more Signers from their
     obligations, waive any right Bank might have against any Signer, extend,
     renew or agree to alter this Agreement, all without releasing other Signers
     from their obligations under this Agreement.

19.  Subject to ADR provisions set forth below, Buyer agrees that any dispute,
     controversy or claim rising under or in connection with this Agreement, its
     performance or its enforcement by Bank shall be decided exclusively by and
     in the state or federal courts sitting in the State of Indiana. For such
     purpose, Buyer hereby submits to the personal jurisdiction of the state and
     federal courts sitting in the State of Indiana, and irrevocably consents
     and agrees that service of process in any action, suit or other proceeding
     brought in any such dispute, controversy or claim may be completed and
     shall be effective and binding upon Buyer when made upon Buyer by certified
     mail, return receipt requested, postage prepaid and properly addressed to
     Buyer at the address set forth on Page One hereof. Buyer hereby waives any
     objection to the personal jurisdiction of such courts and agrees that it
     shall be barred from asserting any such objection, as long as any process
     is served in accordance with the foregoing. In the event that Buyer is
     unable or refuses to accept delivery of such process, then process may be
     served upon the Secretary of the State of Indiana in the same fashion,
     whereupon such service shall be deemed to have been made upon Buyer. For
     purposes hereof, Buyer agrees to and does hereby waive any right to assert
     or move for transfer of venue to any court outside the State of Indiana,
     based upon the doctrine of forum nonconveniens or otherwise. Buyer further
     acknowledges that its agreements contained herein constitute a material or
     substantial element involved in Bank's decision to enter into the
     transaction contemplated hereby. Buyer agrees that nothing in this
     provision shall affect Bank's right to serve legal process in any other
     legal manner, or affect Bank's right to bring any action, suit or
     proceeding against Buyer or its property in any other jurisdiction.

20.  Any delay on the part of either party hereto in exercising any power,
     privilege or right hereunder or under any other instrument executed by
     either party hereto in connection herewith shall not operate as a waiver
     thereof and no single or partial exercise of any power, privilege or right
     shall preclude other or further exercise thereof, or the exercise of any
     other power, privilege or right. Bank's acceptance of late or partial
     payments, or excuse of any default, shall not establish a custom or course
     of conduct as to any waiver of Bank's rights and remedies. The waiver by
     Bank of any default by Buyer shall not constitute a waiver of any
     subsequent defaults, but shall be restricted to the default so waived. If
     any part of this Agreement shall be contrary to any law which Bank might
     seek to apply or enforce or should otherwise be defective, the other
     provisions of this Agreement shall not be affected thereby, but shall
     continue in full force and effect. All rights, remedies and powers of Bank
     hereunder are irrevocable and cumulative, and not alternative or exclusive,
     and shall be in addition to all rights, remedies and powers given hereunder
     or in or by any other instruments or any laws now existing or hereafter
     enacted.

21.  Both Buyer and Bank will do all such acts and execute all instruments of
     further assurance as shall be reasonably requested by the other party to do
     or execute for the purpose of fully carrying out and effectuating this
     Agreement and its intent and each party shall furnish all documents that
     other party shall reasonably request. Each party agrees that a facsimile,
     photographic or other reproduction of this Agreement or of a financing
     statement may be filed as a financing statement to the extent permitted by
     law or regulations. Buyer also agrees, when requested, to execute any
     financing statements or other documents which Bank deems necessary to
     perfect the security interests created in this Agreement, including any FAA
     form relating to Aircraft as security, as well as any Uniform Commercial
     Code financing statement(s), and to do all other things necessary to
     perfect Bank's security interests in Aircraft.

AIR 52331 Rev 3/00                Page 2 of 3




22.  If Bank refers this Loan, or any part thereof, for collection or
     enforcement to any attorney who is not Bank's salaried employee, and if
     permitted by applicable law, Buyer agrees to pay actual attorney's fees
     incurred together with all costs of legal proceedings.

23.  Buyer, including any guarantor hereunder, hereby waives presentment,
     demand, protest, notice of protest, notice of non-payment or dishonor,
     notice of sale of Aircraft or any part thereof and all benefit of
     valuation, appraisement, and all exemption laws now in force and hereafter
     passed, including stay of execution and condemnation.

24.  Notwithstanding ADR provisions below and subject to the occurrence of an
     Event of Default, Bank shall have a continuing right of set-off against and
     upon all funds, credits, securities, instruments and other property,
     tangible or intangible, at any time in Bank's possession and belonging to
     Buyer, as security for all of Buyer's obligations to Bank due or to become
     due, or that may hereafter be contracted.

25.  This Agreement shall apply and inure to the benefit of and bind the respect
     heirs, administrators, successors and assigns of Buyer and Bank, as the
     case may be, and the terms "Buyer" and "Bank" shall include and mean,
     respectively, the heirs, administrators, successors and assigns of Buyer
     and Bank, as the case may be.

26.  This Agreement, the Court Order authorizing this Agreement (a copy of which
     is attached hereto as Exhibit B) and every Exhibit A constitutes the entire
     agreement between the parties and includes all oral or written agreements,
     representations, covenants, warranties and communications between Buyer and
     Bank and their respect agents, servants and employees and constitutes the
     full and complete agreement between Buyer and Bank. This Agreement can be
     modified or amended only by means of a written document signed by both
     parties hereto; provided that, Bank may by written notice to Buyer correct
     any error or complete any blank space necessary to cause this Agreement to
     be effective.

27.  Due to the high cost and time involved in commercial litigation before a
     jury, Bank and Buyer, including any Guarantors hereunder, waive all rights
     to a jury trial on all issues in any action or proceeding relating to this
     Agreement, the transaction evidenced by this Agreement, or any documents
     executed in connection with this Agreement, and no attempt shall be made to
     consolidate, by counterclaim or otherwise, any such action or proceeding
     with any other action or proceeding in which there is a trial by jury or in
     which a jury trial cannot be or has not been waived.

28.  Buyer agrees that this is an Indiana transaction; the formal and essential
     validity of this Agreement and this Loan transaction shall be construed
     according to, and governed in all respects by, the laws of the State of
     Indiana.

29.  Except as otherwise provided in this paragraph, the parties hereto waive
     litigation and agree that the sole procedure for resolving every claim or
     dispute in connection with this Agreement shall be by applying the methods
     set forth in the Indiana Rules for Alternative Dispute Resolution (ADR) at
     the Bank's office in 60 day increments as follows: (i) conduct mediation
     and (ii) conduct a mini-trial on any issues not resolved, with a neutral
     party to preside over the hearing and assist in resolving the issues. Each
     party shall pay an equal share of the costs of (i) and (ii), above. The
     parties shall agree upon a mediator and all other aspects of ADR but, if
     necessary, a party may commence an action in Indiana to compel ADR.
     Judgment on an ADR award with costs may be entered in any court with
     jurisdiction. The provisions of this paragraph shall be specifically
     enforceable by any court having jurisdiction. THIS ADR PROVISION IS FOR THE
     PURPOSE OF SAVING THE PARTIES THE TIME AND EXPENSE OF LITIGATING ISSUES AND
     IS INTENDED TO BENEFIT ALL PARTIES HERETO; PROVIDED, HOWEVER, THAT NOTHING
     HEREIN SHALL AFFECT A PARTY'S RIGHT BEFORE, DURING OR AFTER ADR TO EXERCISE
     SELF-HELP REMEDIES, SUCH AS REPOSSESSION OR SET-OFF, UNDER THE UNIFORM
     COMMERCIAL CODE OR OTHER APPLICABLE LAW, INCLUDING A PARTY'S RIGHT TO BRING
     AN ACTION IN ANY COURT OF COMPETENT JURISDICTION FOR THE PURPOSE OF
     ENFORCING SAID SELF-HELP REMEDIES AND THESE REMEDIES ARE NOT WAIVED.

NOTICE: (1) BUYER AGREES THAT THIS LOAN IS BEING MADE TO BUYER IN INDIANA. (2)
BUYER AGREES THAT BUYER'S PAYMENTS ARE MADE WHEN ACCEPTED BY BANK IN INDIANA.
(3) BUYER AGREES TO ALL THE TERMS OF THIS AGREEMENT. (4) THIS AGREEMENT IS NOT
EFFECTIVE UNTIL IT IS COMPLETED AND SIGNED BY BUYER, AND RECEIVED, APPROVED, AND
ACCEPTED BY BANK OF INDIANA. (5) BUYER ACKNOWLEDGES THAT BUYER HAS RECEIVED AND
RETAINED A COMPLETED COPY OF THIS AGREEMENT.


IN WITNESS WHEREOF, Buyer has caused this Agreement to be duly executed on the
day and year first above written, intending to be legally bound hereby.


ATTEST OR WITNESS:                         KITTY HAWK AIRCARGO, INC.

By:                                        By:      /s/  DREW KEITH
   --------------------------                 ----------------------------------

Title                                      Title    V.P. & C.F.O.
     ------------------------                   --------------------------------


APPROVED AND ACCEPTED by Bank, in South Bend, Indiana, this 2nd of November,
2000 (the Effective Date).

                                            1st Source Bank

                                            By:
                                               ---------------------------------

                                            Title
                                                 -------------------------------

AIR 52331 Rev 3/00                Page 3 of 3



[1ST SOURCE BANK LOGO]     Aircraft Division

860002

                                    EXHIBIT A
                                    ---------
     (This Exhibit is in addition to and supersedes all previous Exhibits A
        to the extent of new or additional advances as set forth below)

1.   This Exhibit is made a part of and subject to the terms of the Aircraft
     Security Agreement ("Agreement") between Buyer and Bank, dated November 2,
     2000 (together with all amendments and supplements to and replacements for
     said Agreement).

2.   Buyer hereby acknowledges receipt of the Total Amount Loaned specified
     below:

     1.   Existing Loan Balance                              $0.00
                                                             -----
     2.   New Advance                                $8,464,438.22
                                                     -------------
     3.   Fees                                           $1,000.00
                                                         ---------
     4.   Total Amount Loaned                        $8,465,438.22
                                                     -------------

3.   Buyer promises to pay to Bank or to Bank's order, at such office as Bank
     may direct, the unpaid principal balance of the Loan and all other sums
     which become due under the Agreement, plus interest, based on a 360 day
     year and the days actually elapsed, as follows:

     (1)  [X]  Buyer Agrees to pay the unpaid principal balance in consecutive
               monthly installments as set forth in schedule below. The interest
               is computed at the constant rate of 8.90% per annum on the unpaid
               principal balance as it changes from time to time.

     (2)  [ ]  Buyer agrees to pay the unpaid principal balance together with
               interest in consecutive monthly installments as set forth in the
               schedule below. The interest shall be computed on the unpaid
               principal balance hereunder, as it changes from time to time, at
               the rate of % per annum more than the PRIME RATE. Prime Rate
               shall mean the Prime Rate as published in The Wall Street
               Journal, and which is described as the base rate on corporate
               loans at large U.S. money center commercial banks, as such rate
               may vary from time to time. If such base is expressed in a range
               in said publication, the higher rate of the reported range will
               apply. In the event The Wall Street Journal ceases to publish a
               Prime Rate, 1st Source shall use a similar source to determine
               said Prime Rate. All payments shall be applied first to the
               interest and then to principal unless otherwise noted herein. The
               PRIME RATE shall be determined on the last day of each [ ]
               Calendar moth or [ ] Three-month, [ ] Six-month, [ ]
               Twelve-month, anniversary of this Agreement and shall be the
               basis for establishing the interest assessed on the average daily
               unpaid principal balance for the next succeeding indicated
               period.

     -------------------------------------------------------------------------
     BEGINNING DATE   NO. OF PYMTS   PAYMENT AMOUNT
     -------------------------------------------------------------------------
     12/1/00          50             $202,000.00 (principal and interest)

     2/1/05            1             Remaining principal balance plus interest
     -------------------------------------------------------------------------


ATTEST OR WITNESS:                      KITTY HAWK AIRCARGO, INC.

By:                                     By:      /s/  DREW KEITH
   -----------------------------           ---------------------------------

Title                                   Title    V.P. & C.F.O.
     ---------------------------             -------------------------------

APPROVED AND ACCEPTED by Bank in South Bend, Indiana, as of November 2, 2000.

                                         1st Source Bank

                                         By:
                                            ------------------------------------

                                         Title
                                              ----------------------------------


AIR 53221 Rev 3/00



[1ST SOURCE BANK LOGO]    Aircraft Division

                               GUARANTY OF PAYMENT

FOR VALUE RECEIVED and in consideration of any loan or any other financial
accommodation heretofore or hereafter made or granted to KITTY HAWK AIRCARGO,
INC. (the "Borrower") by 1st Source Bank ("Bank"), as an inducement to Bank to
make such loans and financial accommodations to Borrower, the undersigned,
jointly and severally if more than one person or entity ("Guarantors") hereby
promise and guarantee to Bank that Borrower shall promptly and fully pay any and
all Indebtedness, and upon failure of Borrower so to pay, Guarantors jointly and
severally promise to pay all Indebtedness to Bank on demand together with all
expenses of enforcing this Guaranty, including attorneys' and legal assistants'
fees, legal expenses and all other costs of collection. This Guaranty
constitutes and is an absolute, unconditional and continuing guarantee of
payment and shall apply to each and every default in payment by Borrower. It is
understood that repeated and successive demands may be made and recoveries had
hereunder.

In this Guaranty, "Indebtedness" is limited to the financing of a 1969 Boeing
727-222, S/N 20040, N90AX; 1969 Boeing 727-222, S/N 20041, N180AX; and six (6)
Pratt & Whitney JT8D-7B engines S/N 653815, 649234, P653468B, P653826B,
P655282B, and P653709B in the amount of $8,465,438.22.

The liability of the Guarantors hereunder shall be discharged and this Guaranty
shall terminate 120 days after payment in full of the Indebtedness if within
such 120-day period no petition is filed by or against the Borrower pursuant to
the United States Bankruptcy Code, as amended from time to time, or under any
similar law of any jurisdiction. If such a petition is filed within said 120-day
period, this Guaranty shall continue and shall remain in full force and effect
until such time as the Indebtedness has been paid in full and is no longer
subject to repayment by, or recovery from, Bank under any such law.

Demand, presentment for payment, notice of dishonor, notice of non-payment,
protest, notice of protest, diligence by Bank in collection or brining suit on
this Guaranty, notice of the creation and existence of any Indebtedness, all
benefits of valuation and appraisement laws, and all rights of sureties and
accommodation parties are hereby waived by Guarantors. Guarantors hereby also
assume the same obligations as a co-maker of the Indebtedness and waive all
rights to have Bank first attempt to secure payment of the Indebtedness from
Borrower or any collateral now or hereafter held by Bank. Bank may take new,
additional or substitute security for the Indebtedness without releasing or
impairing the obligation of Guarantors to Bank hereunder, which security may be
taken without notice to Guarantors. The liability of the Guarantors hereunder
shall not be affected or impaired by any irregularity in or amendment of the
Indebtedness or any loan agreement, security document or other instrument
related thereto or (a) any collateral security therefor, (b) any transfer of the
collateral security therefor, (c) any documents or instruments executed in
connection therewith, (d) any compromise, release, renewal, extension,
forbearance, indulgence, alteration, change in, modification of, grant of
participation in, or other disposition of any such loan agreement, security
document, or other instrument or any note executed in connection therewith, or
of any collateral therefor, (e) any release of any Guarantor or any other person
or the failure of Bank to pursue its remedies against any one or more of the
Guarantors or any other person, (f) failure to collect any of the Indebtedness
when due, (g) failure to notify any Guarantors of any payments owing hereunder,
or (h) any delay or omission by Bank in the exercise of any right or remedy
hereunder. Guarantors waive all defenses at law or in equity other than payment
and agree this instrument shall be binding on the heirs, personal
representatives, successors and assigns of Guarantors and shall inure to the
benefit of the successors and assigns of Bank.

Notwithstanding any payments made by Guarantors hereunder, the Guarantors shall
not by reason of this Guaranty have, and Guarantors hereby waive, (i) any claim
or right of subrogation in and to the Indebtedness or any loan agreement,
security document, note or other instrument related thereto or any collateral
security therefor, (ii) any claim or right of reimbursement, exoneration,
contribution or indemnification from or against any party, and (iii) any right
to participate in any claim or remedy of Bank against the Borrower or any
collateral security for the Indebtedness, whether or not such claim, right or
remedy arises in equity or under contract, statute, or common law.

Bank shall have the right to apply all amounts received hereunder, in such
amounts and in such proportions as Bank in its sole discretion shall determine,
to the costs and expenses of enforcement and collection and to the full or
partial satisfaction of the Indebtedness. Demand for payment under this Guaranty
shall be effective upon Bank placing notice in the United States mail addressed
to Guarantors at the addresses stated below by first class, registered or
certified mail.

Bank is hereby granted and shall have a lien upon and a right of setoff against
all balances, credits, deposits, accounts, moneys, securities, and other
property of Guarantors now or hereafter in the possession of or on deposit with
Bank, and every such lien and right of setoff may be exercised without demand
upon or notice to Guarantors.

To induce Bank to make the loans to Borrower, each of the undersigned covenants
and agrees to provide to Bank, on an annual basis within ninety (90) days after
the end of each year, a complete financial statement in form satisfactory to
Bank.

This Guaranty has been delivered at South Bend, Indiana, and shall be
interpreted, construed and governed by the laws of the State of Indiana.
Wherever possible, each provisions of this Guaranty shall be interpreted in such
manner as to be effective and valid under applicable law, and any provision of
this Guaranty prohibited or unenforceable under applicable law shall be
ineffective only to the extent of such prohibition or unenforceability without
invalidating the remaining provisions of this Guaranty.

Each Guarantor agrees to give Bank written notice, by registered or certified
mail, postage-prepaid, of any known action or inaction by Bank or any agent or
attorney of Bank in connection with the Indebtedness or this Guaranty or the
transactions contemplated thereby that may be actionable against Bank or any
agent or attorney of Bank or a defense to payment of the Indebtedness or this
Guaranty, including, but not limited to, commission of a tort or violation of
any contractual duty or duty implied by law. Each Guarantor hereby agrees that
unless such notice is duly given as promptly as possible (and in any event
within thirty (30) days) after such Guarantor has knowledge or with the exercise
of reasonable diligence should have had knowledge of any such action or
inaction, such Guarantor shall not assert, and such Guarantor shall be deemed to
have waived, any such claim or defense.


AIR 52736 Rev 2/99                Page 1 of 2

EX-10.4

                                                                    Exhibit 10.4

                                October 31, 2002

Mr. Jay Gardner
KBK Financial, Inc.
2200 City Center II
301 Commerce Street
Fort Worth, Texas  76102

         Re:      Account Transfer and Purchase Agreement by and between KBK
                  Financial, Inc., Kitty Hawk, Inc., Kitty Hawk Aircargo, Inc.
                  and Kitty Hawk Cargo, Inc.

Mr. Gardner:

         Kitty Hawk, Inc., Kitty Hawk Aircargo, Inc. and Kitty Hawk Cargo, Inc.
(collectively "Reorganized Kitty Hawk" or the "Debtors") warrant, represent and
agree as follows:

                  (1) All conditions to the effectiveness of the Debtors' Final
         Joint Plan of Reorganization (the "Plan") which was approved pursuant
         to the terms of the Order Confirming Debtors' Final Plan of
         Reorganization (the "Confirmation Order") on August 5, 2002 by Judge
         Barbara Houser, Judge of the United States Bankruptcy Court for the
         Northern District of Texas, Fort Worth Division (the "Court") (in
         connection with the bankruptcy matter styled In Re: Kitty Hawk, Inc.,
         et al.) jointly administered under Case Number 400-42141-BJH-)
         including, but not limited to the following have occurred, have been
         satisfied or met:

                           (a) The Confirmation Order has been signed by the
                           Court and duly entered on the docket for the
                           Reorganization Cases by the clerk of the Court in
                           form and substance acceptable to the Debtors;

                           (b) The Confirmation Order has become an Effective
                           Confirmation Order and has not been stayed, modified,
                           reversed or amended;

                           (c) The Debtors have received $30.9 million from USPS
                           on the TforC Claim;

                           (d) The Debtors have executed the Aircraft Use
                           Agreement;

                           (e) The Debtors have available resources, including
                           any working capital financing, to fund the
                           Reorganized Debtors' obligations under the Plan and
                           to meet its ongoing business needs.

                  (2) Substantially all Collateral, as that term is defined in
         the Account Transfer and Purchase Agreement (the "Purchase Agreement")
         by and between KBK Financial, Inc. ("KBK") and Reorganized Kitty Hawk,
         is located in Texas and Indiana.



Mr. Jay Gardner
October 31, 2002
Page 2

- ------------

                  (3) Within one business day after receipt, Reorganized Kitty
         Hawk shall provide KBK with a copy of all pleadings, motions, notices,
         orders, etc. pertaining to any stay, appeal, modification, reversal
         and/or amendment of the Confirmation Order and immediate written notice
         of the occurrence of any event which might reasonably result in the
         imposition of a stay, or the granting of an appeal, modification,
         reversal and/or amendment of the Confirmation Order.

                  (4) Reorganized Kitty Hawk shall provide KBK with a written
         certification each month certifying full compliance with Article 3,
         Section 3.1(g) of the Plan and upon payment of all franchise taxes and
         related interest and penalties, if any, shall provide KBK with a
         certificate of good standing from the State of Texas and the State of
         Delaware.

                  (5) Reorganized Kitty Hawk shall indemnify KBK from and
         against any and all damages, costs, expenses, attorney's fees, expert
         fees, losses or judgments incurred by KBK as a result of or arising
         out of, directly or indirectly, (1) Reorganized Kitty Hawk's failure
         to comply with all of the terms, conditions and requirements of the
         Plan and Confirmation Order; and/or (2) the failure of any condition
         to the effectiveness of the Plan, as set forth in Article 9.1 of the
         Plan, to have occurred or been satisfied by the date of this letter,
         including, but not limited to the execution of the Registration Rights
         Agreement, as referenced in Article 9.1(d) of the Plan.

                  (6) The Effective Date of the Plan has occurred.

                  (7) The Bank Group's liens against Reorganized Kitty Hawk's
         assets other than the Class 1 Escrow Funds (as defined in the
         Confirmation Order) have been released and discharged and the Bank
         Group has executed and delivered to Reorganized Kitty Hawk appropriate
         lien release documents to release the Bank Group's liens against (and
         all security interest in) Reorganized Kitty Hawk's assets (except the
         Class 1 Escrow Funds).

                  (8) Reorganized Kitty Hawk warrants and represents that, to
         its knowledge, nothing contained in the Purchase Agreement is
         inconsistent with the Plan, the confirmation Order or the Findings of
         Fact, Conclusions of Law Regarding Debtors' Final Plan of
         Reorganization dated August 5, 2002.

                  (9) All representations and warranties and agreements
         contained herein are hereby incorporated by reference into the Purchase
         Agreement as if fully set forth therein. The breach of any
         representation, warranty and/or agreement contained herein shall
         constitute a material breach of the Purchase Agreement and an event of
         default thereunder.

         Additionally, Reorganized Kitty Hawk expressly authorizes KBK to sign
         the






Mr. Jay Gardner
October 31, 2002
Page 3

- ------------


Purchase Agreement and agrees that the Purchase Agreement is effective as of the
date of this letter.

         Unless otherwise indicated above, all terms contained herein shall have
the same meaning as in the Plan. The foregoing representations, warranties and
agreements shall be effective as of the date of this letter.

                       KITTY HAWK, INC.,
                       a Delaware corporation

                       By:           /s/ Tilmon J. Reeves
                          -----------------------------------------------------
                       Name:             Tilmon Reeves
                       Title:           Chairman & C.E.O.
                       Date:             Oct. 31, 2002
                            ---------------------------------------------------


                       KITTY HAWK CARGO, INC.,
                       a Delaware corporation

                       By:           /s/ Tilmon J. Reeves
                          -----------------------------------------------------
                       Name:             Tilmon Reeves
                       Title:           Chairman & C.E.O.
                       Date:             Oct. 31, 2002
                            ---------------------------------------------------


                       KITTY HAWK AIRCARGO, INC.,
                       a Texas corporation

                       By:           /s/ Tilmon J. Reeves
                          -----------------------------------------------------
                       Name:             Tilmon Reeves
                       Title:           Chairman & C.E.O.
                       Date:             Oct. 31, 2002
                            ---------------------------------------------------




                     ACCOUNT TRANSFER AND PURCHASE AGREEMENT

This Account Transfer and Purchase Agreement (this "Agreement") is dated this
___ day of August, 2002, and is between KBK Financial, Inc., a Delaware
corporation authorized to do business in Texas ("KBK"), and KITTY HAWK, INC., a
Delaware corporation, KITTY HAWK CARGO, INC., a Delaware corporation and KITTY
HAWK AIRCARGO, INC., a Texas corporation (collectively the "Seller"). This
Agreement shall become effective as of the day it is accepted in the State of
Texas by KBK as indicated at the end hereof by the date and signature on behalf
of KBK.

         WHEREAS, KBK is in the business of purchasing accounts receivable
         ("accounts"); and

         WHEREAS, Seller desires, from time to time during the term of this
         Agreement, to sell accounts to KBK; and

         WHEREAS, the parties hereto desire to enter into this Agreement to
         govern the purchase and sale of accounts;

         NOW THEREFORE, in consideration of the premises, the mutual agreements
         herein contained and for other good and valuable consideration, the
         receipt and sufficiency of which are hereby acknowledged, the parties
         agree as follows:

1.       Offer of Accounts. At its election from time to time during the term
         of this Agreement, Seller agrees to offer for sale to KBK certain of
         its accounts arising out of sales of goods, or services rendered, by
         Seller, and to sell to KBK on the terms set forth in this Agreement
         such of the offered accounts as KBK may accept for purchase in the
         State of Texas. KBK shall have the absolute right in its sole
         discretion to reject any offered accounts that KBK, in its sole
         discretion, believes are not collectible, do not meet KBK's
         collectability criteria, or if KBK deems itself insecure with respect
         to that particular account, whether or not KBK has previously
         purchased accounts of any particular account debtor hereunder. This
         Facility Amount is offered in anticipation of KBK participating with
         another financial institution. All parties agree that: 1) KBK will use
         its best efforts to find a participant; 2) KBK will have no obligation
         to do so; 3) KBK will have no liability in the event an acceptable
         participant is not found; and 4) all obligations of Seller remain in
         force regardless of whether or not an acceptable participant is
         ultimately found. The parties agree that, without the prior consent of
         KBK, the maximum Gross Amount (as defined below) of accounts that KBK
         may purchase hereunder at any time, together with the Gross Amount of
         accounts previously purchased by KBK from Seller hereunder which then
         remain outstanding, will not exceed Ten Million and 00/100 Dollars
         ($10,000,000.00) (the "Facility Amount"), if a Participant is
         obtained. At no time will KBK's individual maximum Gross Amount exceed
         Five Million and 00/100 Dollars ($5,000,000.00). KBK's consent to
         purchase accounts in excess of such amount may be evidenced by KBK's
         acceptance for purchase of such offered accounts.

2.       Purchase and Sale of Accounts. Each account purchased by KBK hereunder
         shall be purchased by KBK without recourse against Seller. All losses
         incurred by KBK from the financial inability of the applicable account
         debtor to pay such account over and above any and all Residual
         Payments (as hereinafter defined) and Reserve (as hereinafter defined)
         amounts offset shall be borne solely by KBK; provided, however, that
         nothing in this Agreement shall be construed to relieve Seller from
         liability for any breach by Seller of any representation, warranty or
         agreement of Seller contained herein. Notwithstanding any provision in
         this Agreement to the contrary, it is contemplated by and the
         intention of the parties hereto that accounts of Seller may be
         considered and purchased as one account (herein a "batch") and the
         terms "account" and "accounts" as used herein may also refer to and
         mean a "batch" or "batches," as the case may be.

         In connection with each offer of accounts to KBK, Seller shall (i)
         forward electronically to KBK copies of its accounts receivable aging,
         sales journal and collection journal, and (ii) deliver to KBK a
         complete certificate in the form of Exhibit 1 attached hereto. Seller
         shall maintain at its offices a written assignment of all accounts
         offered to KBK, together with a copy of all invoices relating to such
         accounts, and evidence of delivery of the related goods or performance
         of the related services (and, if requested, the original purchase
         orders, airway bills or contracts from the applicable customers), all
         in a form satisfactory to KBK, and to make available to KBK all such
         assignments, invoices and evidence in accordance with Section 12
         hereof. In order for an account to be eligible for purchase by KBK, the
         related invoice must set forth, as the sole address for payment, the
         following post office box: Kitty Hawk Aircargo, Inc., P.O. Box 971389,
         Dallas, Texas 75397, Account Number 0100130152; Kitty Hawk Cargo, Inc.
         and Kitty Hawk, Inc., P.O. Box 971406, Dallas, Texas 75397, Account
         Number 1559691322 ("Authorized Remittance Address") (or, upon notice
         from KBK, another post office box of KBK) and, in the case of payments
         to be effected by wire transfer or other electronic means, the related
         invoice must set forth, as the sole bank account for such payment, a
         bank account of KBK (or a third party designated by KBK) designated by
         KBK from time to time (except in each case as otherwise agreed in
         writing by KBK). KBK's acceptance for purchase of offered accounts
         shall be evidenced by KBK's tendering of the Initial Payment (as
         hereinafter defined) to Seller or otherwise delivering to Seller a
         schedule of accounts accepted for purchase by KBK. Seller's
         transference of offered accounts shall not be effective as to any
         accounts not accepted for purchase by KBK. Seller hereby sells,
         transfers, assigns and otherwise conveys to KBK (as a sale by Seller
         and a purchase by KBK, and not as security for any indebtedness or
         other obligation of Seller to KBK) all right, title and





         interest of Seller in and to all accounts accepted by KBK
         for purchase hereunder, together with all related rights (but not
         obligations) of Seller with respect thereto, including all contract
         rights, guarantees, letters of credit, liens in favor of Seller,
         insurance and other agreements and arrangements of whatever character
         from time to time supporting or securing payment of such accounts and
         all right, title and interest of Seller in any related goods,
         including Seller's rights and remedies under Article 2, Part 7 of the
         applicable Uniform Commercial Code ("UCC"). The foregoing sale,
         transfer, assignment and conveyance does not constitute and is not
         intended to result in an assumption by KBK of any obligation of Seller
         or any other person in connection with the accounts or related rights
         or under any agreement or instrument relating thereto. Seller agrees
         to execute and deliver such bills of sale, assignments, letters of
         credit, notices of assignment, financing statements (including
         continuation statements) under the applicable UCC and other documents,
         and make such entries and markings in its books and records, and to
         take all such other actions (including the negotiation, assignment or
         transfer of negotiable documents, letters of credit or other
         instruments) as KBK may request to further evidence or protect the
         sales and assignments of accounts and related rights to KBK hereunder,
         as well as KBK's interest in any returned goods referred to in Section
         7 hereof.

3.       Terms of Accounts. Except as otherwise may be agreed to in writing by
         KBK from time to time, the terms of sale offered by Seller to its
         account debtors with respect to all accounts offered to KBK for
         purchase hereunder shall be NET 30 DAYS. After an account has been
         purchased by KBK, Seller shall not have the right to vary the terms of
         sale set forth in the invoice relating to such account, or any other
         aspect of the account, except in Seller's capacity as agent for KBK for
         purposes of collection of accounts purchased by KBK as set forth in
         Section 8 hereof, and then only with the prior written consent of KBK.

4.       Purchase Price. The purchase price for each account purchased hereunder
         shall consist of and be paid by the Initial Payment and the Residual
         Payment. The Initial Payment shall be payable by KBK to Seller on the
         business day that KBK accepts for purchase the related account, and the
         Residual Payment shall be payable by KBK to Seller within five business
         days after KBK receives and deposits the proceeds of collection for the
         subject account in an amount equal to the Net Amount (as hereinafter
         defined) of such account (subject to KBK's right to withhold payment of
         Residual Payments hereunder, and subject to KBK's right to withhold,
         offset and charge, each as described below).

         "Initial Payment" means eighty-five percent (85%) of the Gross Amount
         of an account. "Gross Amount" of an account means the gross face amount
         payable pursuant to the related invoice. "Net Amount" of an account
         means the Gross Amount of such account, less all permitted discounts,
         deductions and allowances. "Residual Payment" with respect to an
         account means the aggregate amount collected with respect to such
         account, less the sum of (i) the Initial Payment with respect to such
         account, (ii) the KBK Discounts (as hereinafter defined), (iii) any and
         all reasonable attorneys' fees and other costs of collection.

5.       Fixed and Variable  Discounts.  "Fixed  Discount" means a discount of
         six-tenths of one percent (0.60%) of the Gross Amount of such account.
         "Variable Discount" means a discount computed on the Initial Payment
         and accruing on the basis of actual days elapsed from the date of
         Initial Payment until and including three business days after KBK
         receives and deposits the proceeds of collection of such account at a
         per annum rate equal to KBK's Base Rate (as hereinafter defined) in
         effect on the date of purchase of such account plus two percent (2.0%)
         per annum; provided, however, in no event shall the Variable Discount
         with respect to any account purchased hereunder be less than six and
         75/100 percent (6.75%) per annum. "Base Rate" means that per annum
         variable rate (expressed as a per annum percentage based on a year
         consisting of 360 days) determined from time to time by KBK without
         notice to Seller as KBK's Base Rate for purposes of calculating
         variable discounts under KBK's account transfer agreements. The Fixed
         Discount and the Variable Discount shall be collectively referred to
         herein as the "KBK Discounts". The KBK Discounts may be subject to one
         or more adjustments during the term of this Agreement if a Performance
         Based Pricing Addendum is attached hereto. If a Performance Based
         Pricing Addendum is attached hereto, it is then made a part hereof as
         though fully written herein. In the event the Base Rate hereunder
         exceeds the "Prime Rate" published in The Wall Street Journal by more
         than 25 basis points for more than 30 consecutive days, then Seller
         may terminate this Agreement prior to the end of the Term without
         being required to pay a Termination Fee.

6.       Reserve. In the event that KBK believes Seller has breached any
         material representation, warranty, covenant or agreement contained
         herein (including, without limitation, in the event an account
         purchased by KBK becomes a Disputed Account as hereinafter defined),
         any account is not paid in full within 90 days from the date of
         purchase of such account, or KBK deems itself insecure hereunder, KBK
         may at its election, withhold and accumulate the payment of the
         Residual Payments ("Reserve") with respect to any or all accounts
         purchased hereunder to the extent necessary to maintain a Reserve in
         an amount up to the sum of (a) the total Initial Payments made by KBK
         with respect to accounts purchased by KBK hereunder which remain
         uncollected, plus (b) the total of the KBK Discounts with respect to
         such accounts and (c) such other amounts which may become due by
         Seller to KBK hereunder or under any other agreement. Seller hereby
         authorizes KBK to offset and charge any and all amounts for which
         Seller or the Reserve may be obligated to pay to KBK pursuant to the
         terms of this Agreement against the Reserve, and at KBK's election,
         against any funds of Seller in the possession or control of KBK, from
         whatever source. However, if, on any business day that KBK regularly
         makes a payment to Seller for accounts purchased, none of the
         foregoing conditions exists and no other breach of this Agreement by
         Seller exists, then KBK shall distribute to Seller the Residual
         Payments then due and all funds it then has on hand that it has
         collected from accounts that KBK has not then purchased.

7.       Certain Security. For the purpose of securing KBK (a) in the payment of
         any and all sums of money that




         may become due and owing KBK from Seller by reason of this Agreement,
         (b) in the performance by Seller of Seller's obligations hereunder,
         and under any other agreement, contract, document, note or other
         instrument in favor of KBK or its assignees and (c) in the performance
         of all the obligations of all Affiliates (as hereinafter defined)
         under each Affiliate's agreements, contracts, documents, notes or
         other instruments in favor of KBK or its assigns, Seller hereby grants
         to KBK a security interest in (i) all of Seller's present and future
         inventory, equipment (with the exception of Seller's aircraft and
         aircraft engines, which are expressly excluded from the Collateral (as
         defined below), and in which KBK shall have no security interest),
         accounts, account and contract rights, proceeds of inventory,
         contracts, drafts, acceptances, documents, instruments, chattel paper,
         deposit accounts, general intangibles and all products and proceeds
         therefrom, including all returned or repossessed goods, as well as all
         books and records pertaining to all of the foregoing, (ii) all amounts
         due as Residual Payments or withheld by KBK as the Reserve pursuant to
         Section 6 hereof and (iii) all money and other funds of Seller now or
         hereafter in the possession, custody or control of KBK, from whatever
         source (the "Collateral"). The term "Affiliate" shall mean with
         respect to any person or entity in question, any other person or
         entity owned or controlled by, or which owns or controls or is under
         common control or is otherwise affiliated with such person or entity
         in question. Seller agrees to execute and deliver such financing
         statements under the applicable UCC and other documents, and make such
         entries and markings in its books and records and to take all such
         other actions, as KBK may request to further evidence, perfect,
         preserve or protect the security interest granted to KBK hereunder.
         KBK shall have all rights and remedies in respect of the lien and
         security interest herein granted as are provided in this Agreement,
         the UCC and other applicable law, including the right at any time, KBK
         deems itself insecure before an event of default by Seller or after
         any default by Seller of any of its obligations hereunder, to notify
         account debtors and obligors on instruments to make payment to KBK (or
         its designee) and to take control of proceeds to which KBK is
         entitled, and to apply proceeds to (in addition to other obligations
         of Seller to KBK) the reasonable attorneys' fees and legal expenses
         incurred by KBK in connection with the disposition of collateral or
         the other exercise of rights and remedies by KBK. In the event that
         KBK has not obtained a qualified Participant (as contemplated by
         Section 1 above) with an additional commitment in the amount of at
         least Five Million and 00/100 Dollars ($5,000,000.00) by October 31,
         2002, upon Seller's written request, KBK will release its security
         interest in Seller's contracts with and accounts receivable owed by
         the United States Postal Service as long as KBK does not deem itself
         insecure at that time and/or Seller is not in default under the terms
         of this Agreement or any other agreement executed by Seller in
         connection herewith.

         Seller hereby authorizes KBK to file in any jurisdiction KBK may deem
         appropriate, without the signature of Seller, one or more financing
         statements, and all amendments and continuations with respect thereto,
         relating to the Collateral and hereby ratifies, confirms and consents
         to any such filings made by KBK prior to the date hereof. Seller
         further agrees that a carbon, photographic or other reproduction of
         this Agreement or any financing statement describing any Collateral is
         sufficient as a financing statement and may be filed in any
         jurisdiction KBK may deem appropriate.

         Seller herein acknowledges and warrants to KBK that it has received and
         will receive, direct and indirect benefits by and from granting this
         security interest to KBK to secure the obligations of any Affiliate to
         KBK.

         In the event a security interest has heretofore been granted and given
         to KBK by Seller in a prior agreement(s) or document(s) to secure
         certain obligations, then, in such event, and notwithstanding anything
         in this Agreement to the contrary, including Section 23 hereof, the
         lien and security interest herein granted and given to KBK is in
         renewal and extension, and not in extinguishment of, all such prior
         liens and security interests and are valid and subsisting liens and
         security interests to secure all prior, existing and new obligations of
         Seller to KBK hereunder and under any such prior agreements, which
         obligations are likewise herein renewed and extended, in any manner,
         including any action required in connection with or by virtue of the
         United States Bankruptcy Code (the "Bankruptcy Code").

8.       Servicing. KBK hereby appoints Seller as servicing agent for KBK
         ("Servicer") for the purpose of expediting the payment of accounts
         purchased by KBK hereunder which become past due. Servicer agrees to
         maintain an active, on-going and regular dialogue with each Account
         Debtor. Servicer further agrees to utilize all powers, influences and
         rights and take every action within its control in accordance with its
         customary practices and applicable law to expedite the collection of
         the accounts purchased by KBK which become past due and direct such
         payments in specie exclusively to the Authorized Remittance Address.
         Seller will furnish to KBK, upon request, any and all papers,
         documents and records in its possession or control related to accounts
         purchased by KBK hereunder, or related to Seller's business
         relationship with the respective account debtors, and agrees to
         cooperate fully with KBK in all matters related to collection of
         accounts purchased by KBK hereunder. KBK reserves the right to
         terminate such servicing relationship at any time with or without
         cause and without notice to Servicer; provided, however, KBK will
         provide Servicer with written notice of such termination within 10
         days after the termination.

         Seller authorizes KBK to forward directly to account debtors
         statements or invoices on accounts purchased by KBK hereunder, and to
         request payment at such address or to such bank account as may be
         designated by KBK. Seller agrees that, if any payment is made to
         Seller on any account purchased by KBK from Seller hereunder, Seller
         (i) will hold such payment in trust for KBK, (ii) will not commingle
         such payment with any funds of Seller, and (iii) will deliver such
         payment to KBK, in the exact form received, by the close of business
         on the next business day following receipt thereof by Seller. Such
         payment will be deemed delivered to KBK once such payment is deposited
         in the lock box at the Authorized Remittance Address. With respect to
         all accounts purchased by KBK from Seller hereunder, Seller shall
         direct all




         account debtors for such accounts to remit all payments pertaining to
         such accounts directly to the Authorized Remittance Address. If any
         payment on such accounts is received by Seller (rather than sent to
         the Authorized Remittance Address), Seller shall give prompt notice
         thereof to KBK. Without limiting the other rights and remedies of KBK
         under this Agreement or otherwise, Seller's failure to strictly comply
         with this Section 8 shall constitute an immediate breach of and
         default under this Agreement, entitling KBK (in KBK's discretion) to
         immediately terminate this Agreement. If any goods relating to an
         account purchased by KBK hereunder shall be returned to or repossessed
         by Seller, Seller shall give prompt notice thereof to KBK and shall
         hold such goods in trust for KBK, separate and apart from Seller's own
         property, and such goods shall be owned solely by KBK and be subject
         to KBK's direction and control. Seller shall properly store and
         protect such goods and agrees to cooperate fully with KBK in any
         subsequent disposition thereof for the benefit of KBK.

         Seller authorizes KBK to collect, sue for and give releases for in the
         name of Seller or KBK in KBK's sole discretion, all amounts due on
         accounts sold to KBK hereunder. Seller specifically authorizes KBK to
         endorse, in the name of Seller, all checks, drafts, trade acceptances
         or other forms of payment tendered by account debtors in payment of
         accounts sold to KBK hereunder and made payable to Seller. KBK shall
         have no liability to Seller for any mistake in the application of any
         payment received with respect to any account, IT BEING THE SPECIFIC
         INTENT OF THE PARTIES HERETO THAT KBK SHALL HAVE NO LIABILITY HEREUNDER
         FOR ITS OWN NEGLIGENCE except for its own gross negligence or willful
         misconduct. Seller hereby waives notice of nonpayment of any account
         sold to KBK hereunder as well as any and all other notices with respect
         to such accounts, demands or presentations for payment, and agrees that
         KBK may extend or renew from time to time the payment of, or vary or
         reduce the amount payable under or compromise any of the terms of, any
         account purchased by KBK, in each case without notice to or the consent
         of Seller. Seller further authorizes KBK (or its designee) to open and
         remove the contents of any post office box of Seller or KBK (or its
         designee) which KBK believes contains mail relating to accounts, and in
         connection therewith or otherwise, to receive and, open mail addressed
         to Seller which KBK believes may relate to accounts, and in order to
         further assure receipt by KBK (or its designee) of mail relating to
         such accounts, to notify other parties including customers and postal
         authorities to change the address for delivery of such mail addressed
         to Seller to such address as KBK may designate. KBK agrees to use
         reasonable measures to preserve the contents of any such mail which
         does or does not relate to accounts purchased hereunder and to deliver
         same to Seller (or, at the election of KBK, if Seller ceases
         operations, to notify Seller of the address where Seller may take
         possession of such contents; provided, if Seller does not take
         possession of such contents within 30 days after notice from KBK to
         take possession thereof, KBK may dispose of such contents without any
         liability to Seller). Seller hereby irrevocably appoints KBK (and any
         employee, agent or other person designated by KBK, any of whom may act
         without joinder of the others) as Seller's attorneys-in-fact and
         agents, in Seller's name, place and stead, to take all actions, execute
         and deliver all notices, negotiate such instruments and other
         documents, as may be necessary or advisable to permit KBK (or its
         designee) to take any and all of the actions described in this
         paragraph or to carry out the purpose and intent thereof, as fully and
         for all intents and purposes as Seller could itself do, and hereby
         ratifies and confirms all that said attorneys-in-fact and agents may do
         or cause to be done by virtue hereof. This power of attorney is
         irrevocable and deemed coupled with an interest for so long as there
         are any outstanding obligations under this Agreement.

9.       Representations and Warranties of Seller. Seller hereby represents and
         warrants to KBK with respect to each account offered by Seller to KBK
         hereunder that (i) Seller is the sole owner of such account, which
         account is free and clear of any liens, claims, equities or
         encumbrances whatsoever, and upon each purchase by KBK of such
         account, KBK will own such account free and clear of any liens,
         claims, equities or encumbrances whatsoever and the consideration
         received by Seller from KBK for such account is fair and adequate,
         (ii) Seller is the sole obligee under such account, and has full power
         and is duly authorized to sell, assign and transfer such account to
         KBK hereunder, and the date of sale of such account is not more than
         30 days after the date of the original invoice relating to such
         account, (iii) Seller has no knowledge of any fact which would lead it
         to expect that, at the date of sale of such account to KBK , such
         account will not be paid in the full stated amount when due, (iv) such
         account arises out of a bona fide sale of conforming goods or the bona
         fide rendition of services by Seller, and all underlying goods have
         been delivered to the account debtor, or all underlying services have
         been rendered by Seller, in complete fulfillment of all of the terms
         and conditions of a fully executed, delivered and unexpired contract
         with the account debtor, and the account debtor has accepted the goods
         or services to which the account relates, (v) such account is
         denominated and payable only in United States dollars and constitutes
         the legal, valid and binding payment obligation of the account debtor,
         enforceable in accordance with its terms (except as such
         enforceability may be limited by applicable bankruptcy, insolvency,
         reorganization, moratorium or other similar laws affecting the
         enforcement of creditors' rights generally), (vi) such account is
         current and not past due as of the date of purchase by KBK, has not
         been paid by or on behalf of the account debtor in whole or in part,
         and to Seller's knowledge is not and will not be subject to any
         dispute, rescission, set-off, recoupment, defense or claim by the
         account debtor, whether relating to price, quality, quantity,
         workmanship, delay in delivery, set off, counterclaim or otherwise,
         and the account debtor has not and will not claim any defense of any
         kind or character (other than bankruptcy or insolvency arising after
         the date of sale of such account to KBK hereunder) against payment of
         such account, and (vii) as of the date of purchase by KBK of such
         account, the account debtor with respect to such account is located
         (within the meaning of Section 9-307 of the applicable UCC) and has
         its principal executive offices within the nited States. Seller
         further represents and warrants to KBK that (a) the execution,
         delivery and performance of this Agreement by Seller have been duly
         authorized and this Agreement constitutes the legal, valid and binding
         obligation of Seller, enforceable against Seller in accordance with
         its terms (except as such enforceability may be limited by applicable
         bankruptcy, insolvency, reorganization, moratorium or other similar
         laws affecting the enforcement of creditors' rights generally), (b)
         Seller is not



          a debtor in any bankruptcy proceedings, insolvent, undergoing
          composition or adjustment of debts or unable to make payment of its
          obligations when due and no petition in bankruptcy has been filed by
          or against Seller or any Affiliate, nor has Seller or any Affiliate
          filed any petition seeking an adjustment of its debts or for any other
          relief under the Bankruptcy Code, and no application for appointment
          of a receiver or trustee for all or a substantial part of the property
          of Seller or any Affiliate is pending, nor has Seller or any Affiliate
          made any assignment for the benefit of creditors, (c) Seller is not in
          default of any debt or obligation to KBK, any other lender or other
          creditor, (d) Seller's principal place of business, chief executive
          office, the location where all records concerning its books of account
          and contract rights are kept, and (except any additional locations
          listed on Schedule A attached hereto) the sole location of any
          property subject to the security interest granted herein is its
          "Address for Notices" set forth on the signature page hereon, and (e)
          Seller is organized under the laws of the State of Delaware, Delaware
          and Texas respectively and its charter number(s) or similar
          organization number(s) in such state(s) are 2445463, 9685346, and
          011001872-0 respectively. Seller agrees not to change the location of
          its principal place of business or chief executive office, the
          location where its records concerning its books of account or contract
          rights are kept, or the location of any property subject to the
          security interest granted herein, without giving at least 15 days
          advance written notice thereof to KBK pursuant to Section 19 herein.
          Seller does business under no trade or assumed names except as may be
          listed on Schedule A attached hereto.

          Each representation and warranty of Seller contained in this Agreement
          shall be deemed to be made at and as of the date hereof and at and as
          of the date of each sale of accounts to KBK hereunder.

          Seller agrees to indemnify and hold all Indemnified Persons (as
          hereinafter defined) harmless against any breach by Seller of any
          representation, warranty or agreement of Seller contained in this
          Agreement, and against any claims or damages arising out of the
          manufacture, sale, possession or use of, or otherwise relating to,
          goods, or the performance of services, associated with or relating to
          accounts or related rights purchased (or with respect to which a
          security interest is granted) hereunder. The term "Indemnified
          Persons" shall mean KBK and its officers, directors, shareholders,
          employees, attorneys, representatives, agents, Affiliates, successors
          and assigns.

          Seller agrees to notify KBK immediately of any breach by Seller of any
          material representation, warranty or agreement of Seller contained
          herein or should any representation, warranty or agreement made herein
          become untrue or false at any time. Seller further agrees to notify
          KBK immediately of the assertion by any account debtor of any dispute
          or other claim (including any defense or offset asserted by any
          account debtor) with respect to any account sold to KBK hereunder, or
          with respect to any related goods or services ("Disputed Accounts").
          Upon KBK's request, Seller agrees to settle, at its own expense and
          for the benefit of KBK, all such Disputed Accounts; provided, that any
          such settlement shall be made only with the prior written consent of
          KBK. Unless KBK is advised in writing by Seller to the contrary, any
          account that has not been approved by the account debtor within sixty
          (60) days from the date of the invoice upon which the account is
          based, shall be deemed to be a Disputed Account. As to any Disputed
          Account, KBK shall have the right, in its sole discretion, (i) to
          settle at the expense of Seller (including all attorneys' fees and
          expenses of KBK) and for the benefit of KBK any such dispute or claim
          upon such terms as KBK may in its sole discretion deem advisable or
          (ii) to assign the related account to Seller, without recourse to KBK
          , and charge any unpaid balance with respect thereto (up to the amount
          of the Initial Payment with respect thereto and KBK's Discounts
          through the date of such charge with respect thereto) against the
          Reserve or deduct such unpaid balance from any Initial Payments or
          against any money or other funds of Seller in the possession, custody
          or control of KBK, from whatever source. Seller agrees that, in lieu
          of KBK charging any such unpaid balance against the Reserve, Initial
          Payments or against such other funds, KBK may require Seller to pay
          (and Seller hereby agrees to pay) to KBK on demand any such unpaid
          balance. An account with respect to which the account debtor has
          asserted an Insolvency Claim is not a Disputed Account. As used
          herein, "Insolvency Claim" means any defense or other claim by an
          account debtor with respect to an account sold to KBK hereunder
          arising solely out of the bankruptcy or insolvency of the account
          debtor or the financial inability of the account debtor to pay, if
          Seller has not breached its representation contained in clause (vi) of
          the first paragraph of this Section. Notwithstanding anything herein
          to the contrary, KBK shall have the right to charge all accounts not
          paid because of an Insolvency Claim against the Reserve and such
          charge shall have priority over and be paid before any Disputed
          Account charge.

          Seller covenants and agrees that at the end of each fiscal month
          during the effectiveness of this Agreement, the Seller's Dilution
          shall not exceed three percent (3.0%). As used herein, the term
          "Dilution" means for any period of time the percentage obtained by
          dividing (a) the aggregate amount of credit memos, discounts and other
          downward adjustments to the original invoiced price of inventory sold
          or services rendered by Seller during such period, by (b) gross sales
          for such period, all as determined by KBK.

10.       Financial Statements. Seller represents and warrants that all
          financial and other information provided by Seller to KBK in
          connection with or in Seller's application to KBK or to induce KBK to
          enter into this Agreement is true, complete and correct in all
          material respects. Seller agrees to furnish to KBK (i) within 90 days
          after the last day of each fiscal year of Seller, a consolidated
          statement of income and a consolidated statement of cash flows of
          Kitty Hawk, Inc. for such fiscal year, and a consolidated balance
          sheet of Kitty Hawk Inc. as of the last day of such fiscal year, in
          each case audited by an independent certified public accounting firm
          acceptable to KBK, together with a copy of any report to management
          delivered to Kitty Hawk, Inc. by such accountants in connection
          therewith; (ii) within 90 days after the last day of each fiscal year
          of Seller, company prepared unaudited statements of income and cash
          flow for





          Kitty Hawk Cargo, Inc. and Kitty Hawk Aircargo, Inc. for such fiscal
          year, and balances sheets for Kitty Hawk Cargo, Inc. and Kitty Hawk
          Aircargo, Inc. as of the last day of such fiscal year; (iii) within 30
          days after the last day of each fiscal month of Seller, an unaudited
          consolidated statement of income and statement of cash flows of Kitty
          Hawk, Inc. for such fiscal month, and an unaudited consolidated
          balance sheet of Kitty Hawk, Inc as of the last day of such fiscal
          month; and (iv) within 30 days after the last day of each fiscal month
          of Seller, an unaudited consolidated statement of income and statement
          of cash flows of Kitty Hawk Cargo, Inc. and Kitty Hawk Aircargo, Inc.
          for such fiscal month, and an unaudited consolidated balance sheet of
          Kitty Hawk Cargo, Inc and Kitty Hawk Aircargo, Inc. as of the last day
          of such fiscal month. Seller represents and warrants that each such
          statement of income and statement of cash flows will fairly present,
          in all material respects, the results of operations and cash flows of
          each entity constituting the Seller for the period set forth therein,
          and that each such balance sheet will fairly present, in all material
          respects, the financial condition of each entity constituting Seller
          as of the date set forth therein, all in accordance with generally
          accepted accounting principles applied on a consistent basis, except
          as otherwise noted in the accompanying auditors' report (or, with
          respect to unaudited financial statements, in the notes thereto).
          Seller also agrees to furnish to KBK, upon request, such additional
          financial and business information concerning Seller and its business
          as KBK may reasonably request, including copies of its Form 941
          returns filed with the Internal Revenue Service and evidence of
          payment of related taxes. KBK and its agents, representatives and
          accountants shall have the right, at all times during normal business
          hours and with 48 hours prior notice to Seller (or no notice if KBK
          deems itself insecure), to conduct an audit or other examination of
          the financial and business records of Seller and to examine and make
          copies of all books and records of Seller for the purpose of assuring
          or verifying compliance by Seller with the terms of this Agreement,
          and Seller agrees to cooperate fully with KBK and its agents,
          representatives and accountants in connection therewith and to timely
          pay all costs associated with such audits at a rate equal to $750.00
          per day, per person, plus out-of-pocket expenses. KBK agrees to limit
          such audit visits to a monthly basis so long as KBK does not deem
          itself insecure or no event of default has occurred. Seller agrees to
          properly reflect the effect of this Agreement, and all sales related
          thereto, in all financial reports and disclosures, written or
          otherwise, provided to Seller's creditors and other interested
          parties. Seller specifically agrees that all accounts purchased by KBK
          will be excluded from Seller's reported accounts receivable balances.
          Seller also specifically agrees to immediately notify KBK of any
          material adverse change in Seller's financial condition or business.

11.       Taxes. All taxes and governmental charges of any kind imposed with
          respect to the sale of goods or the rendering of services relating to
          accounts purchased by KBK hereunder shall be for the account of, and
          paid by, Seller.

12.       Fees. Seller has paid to KBK a one-time commitment fee (the
          "Commitment Fee") of Fifty Thousand and No/100 Dollars ($50,000.00).
          An additional Commitment Fee equal to one percent (1.0%) of the
          additional commitment amount will be due to KBK from Seller upon
          securing a qualified Participant acceptable to KBK for fundings over
          Five Million Dollars with an additional commitment amount equal to or
          in excess of Two Million and 00/100 Dollars ($2,000,000.00). Seller
          and KBK acknowledge and agree that the Commitment Fee(s) is intended
          as reasonable compensation to KBK for making this facility available
          under the terms of this Agreement and for no other purpose.
          Additionally, in the event the Facility is terminated and replaced by
          an alternative working capital facility at KBK, with a Facility Amount
          equal to current Facility, KBK shall not assess an additional
          Commitment Fee for the origination of such facility.

          Seller hereby agrees to pay to KBK a termination fee equal to two
          percent (2.0%) of the Facility Amount (the "Termination Fee") and the
          payment shall be an obligation of Seller secured under Section 7
          hereof. This Termination Fee is payable upon termination of this
          Agreement by Seller for any reason or upon termination by KBK at its
          election for the reasons set forth in the second sentence of Section
          13 below. However, if this Agreement is so terminated after the
          expiration of one (1) year from the date of KBK's execution hereof,
          but before the expiration of two (2) years from such date, one-half of
          the Termination Fee shall be waived. If the Agreement is terminated
          more than two (2) years after the date of KBK's execution hereof, all
          of the Termination Fee shall be waived. Notwithstanding the foregoing,
          KBK will waive the Termination Fee after the expiration of six (6)
          months from the date of KBK's execution hereof if KBK is unable to
          secure a participant with an additional commitment amount of at least
          Two Million and 00/100 Dollars (in addition to KBK's commitment of
          Five Million and 00/100 Dollars ($5,000,000.00)) for fundings greater
          than Five Million and 00/100 Dollars ($5,000,000.00).

13.       Termination. This Agreement may be terminated by either party hereto
          by delivery of written notice of termination of this Agreement to the
          other party specifying the date of termination, which date shall be at
          least 30 days after the date such notice is given. KBK may, at its
          election, terminate this Agreement immediately and without the
          requirement of notice to Seller if (i) Seller shall fail to perform
          any of its obligations hereunder or shall breach any of its
          representations and warranties hereunder, (ii) Seller or any of its
          Affiliates shall become insolvent or suspend all or a substantial part
          of its or their business, (iii) a petition under the Bankruptcy Code
          or any other insolvency or debtor statute shall be filed by or against
          Seller or any Affiliate or any receivership proceedings with respect
          thereto shall commence, (iv) any guarantee of any of Seller's
          obligations hereunder shall be terminated or become impaired, (v) an
          event of default occurs under any other agreement now or hereafter
          executed between Seller and KBK, or (vi) KBK otherwise determines that
          it is insecure hereunder.

          Termination of this Agreement shall not affect the rights and
          obligations of the parties hereunder with respect to transactions
          occurring on or prior to the date of such termination, and this
          Agreement shall continue to govern the rights and obligations of the
          parties hereto with respect to accounts purchased by





         KBK from Seller on or prior to the date of such termination. All
         security interests granted or contemplated by this Agreement shall
         survive the termination of this Agreement until all amounts payable to
         KBK with respect to transactions occurring on or prior to the date of
         termination have been paid to KBK, and Seller has performed all its
         obligations to KBK with respect to such transactions and all
         obligations under this Agreement including but not limited to payment
         of any fees owing hereunder. KBK agrees to release all security
         interests granted or contemplated by this Agreement once Seller's
         obligations hereunder have been satisfied as determined by KBK.

14.      Notice of Proposed Refinancing. Seller hereby agrees that in the event
         (a) Seller receives a written proposal from any third party to provide
         financing or factoring ("Proposed Refinancing"), (b) the terms of the
         Proposed Refinancing are acceptable to Seller, and (c) Seller is
         considering accepting the Proposed Refinancing from the offeror
         ("Offeror"), Seller will immediately advise KBK in writing of the
         identity of the Offeror, and provide a description of the terms of the
         Proposed Refinancing. Seller agrees not to accept the Proposed
         Refinancing from the Offeror until at least 5 business days after
         delivery of the foregoing items to KBK.

15.      Attorney's Fees, Litigation Expense. Seller agrees to reimburse KBK
         upon demand for KBK's attorneys' fees, court costs and other fees and
         expenses incurred in collecting any sums due or to become due to KBK
         hereunder, enforcing any of KBK's rights under this Agreement and all
         actions taken by KBK that it deems necessary or desirable under the
         Bankruptcy Code or should any provisions of the Bankruptcy Code be
         applicable to any rights or obligations of any party to this
         Agreement, as well as all appearances, motions and actions to which
         KBK may be or become a party in any bankruptcy case of Seller. Any
         fees or costs incurred by KBK relating to the bankruptcy of an account
         debtor will be charged to the Reserve account.

16.      Governing Law; Venue; Submission to Jurisdiction. THIS AGREEMENT SHALL
         BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE
         OF TEXAS WITHOUT GIVING EFFECT TO THE PRINCIPLES OF CONFLICTS OF LAWS
         THEREOF, EXCEPT TO THE EXTENT PERFECTION AND THE EFFECT OF PERFECTION
         OR NON-PERFECTION OF THE SECURITY INTEREST GRANTED HEREUNDER, IN
         RESPECT OF ANY PARTICULAR COLLATERAL, ARE GOVERNED BY THE LAWS OF A
         JURISDICTION OTHER THAN THE STATE OF TEXAS. THIS AGREEMENT IS
         PERFORMABLE BY THE PARTIES IN TARRANT COUNTY, TEXAS. SELLER AND KBK
         EACH AGREE THAT TARRANT COUNTY, TEXAS SHALL BE THE EXCLUSIVE VENUE FOR
         LITIGATION OF ANY DISPUTE OR CLAIM ARISING UNDER OR RELATING TO THIS
         AGREEMENT, AND THAT SUCH COUNTY IS A CONVENIENT FORUM IN WHICH TO
         DECIDE ANY SUCH DISPUTE OR CLAIM. SELLER AND KBK EACH CONSENT TO THE
         PERSONAL JURISDICTION OF THE STATE AND FEDERAL COURTS LOCATED IN
         TARRANT COUNTY, TEXAS FOR THE LITIGATION OF ANY SUCH DISPUTE OR CLAIM.
         SELLER IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, ANY
         OBJECTION WHICH IT MAY NOW OR HEREAFTER HAVE TO THE LAYING OF THE
         VENUE OF ANY SUCH PROCEEDING BROUGHT IN SUCH A COURT AND ANY CLAIM
         THAT ANY SUCH PROCEEDING BROUGHT IN SUCH A COURT HAS BEEN BROUGHT IN
         AN INCONVENIENT FORUM.

17.      Waiver of Jury Trial. SELLER AND KBK EACH HEREBY IRREVOCABLY WAIVES, TO
         THE MAXIMUM EXTENT PERMITTED BY LAW, ANY RIGHT IT MAY HAVE TO A TRIAL
         BY JURY IN RESPECT OF ANY LITIGATION DIRECTLY OR INDIRECTLY AT ANY TIME
         ARISING OUT OF, UNDER OR IN CONNECTION WITH THIS AGREEMENT OR ANY
         TRANSACTION CONTEMPLATED HEREBY OR ASSOCIATED HEREWITH.

18.      Amendments; Waivers. This Agreement may be amended only in writing
         signed by the parties hereto. No failure on the part of KBK to
         exercise, and no delay by KBK in exercising, and no course of dealing
         by KBK with respect to, any right, power or privilege under this
         Agreement shall operate as a waiver thereof, nor shall any single or
         partial exercise of any right, power or privilege hereunder by KBK
         preclude any other or further exercise thereof or the exercise of any
         other right, power or privilege. The remedies of KBK hereunder are
         cumulative and not exclusive of any remedies provided by law.

19.      Notices. All notices and other communications provided for herein shall
         be given or made in writing and telecopied or delivered by courier or
         by certified mail, return receipt requested, to the intended recipient
         at the "Address for Notices" specified opposite its name on the
         signature page hereto, or at such other address or telecopy number as
         shall be designated by a party to the other party in the manner
         specified in this Section. All such notices and other communications
         shall be deemed to have been duly given when transmitted by telecopier
         (with receipt thereof confirmed by telecopier) or personally delivered
         or, in the case of a mailed notice, upon deposit in the United States
         Postal System postage prepaid and properly addressed, in each case
         given or addressed as aforesaid.

20.      Indemnification. Seller agrees to indemnify, defend and hold the
         Indemnified Persons harmless from and against any and all loss,
         liability, obligation, damage, penalty, judgment, claim, deficiency and
         expense (including interest, penalties, attorneys' fees and amounts
         paid in settlement) owing to any third party to which any Indemnified
         Person may become subject arising out of or based upon this Agreement
         as well as any prior relationship of Seller with any Indemnified
         Person, WHETHER BY ALLEGED OR ACTUAL NEGLIGENCE OF ANY INDEMNIFIED
         PERSON, except and to the extent caused by the gross negligence or
         willful misconduct of any Indemnified Person.




21.       Waiver and Release. Seller and KBK, by their execution of this
          Agreement, do hereby covenant, warrant and represent that (i) neither
          of them is in default and no default exists under any prior agreements
          or transactions with the other party hereto , (ii) Seller and KBK each
          releases, relinquishes and waives any and all defenses to the
          enforceability of any prior agreements or transactions with the other
          party hereto in connection therewith to which Seller or KBK may have
          otherwise been entitled as of the date hereof, (iii) Seller and KBK
          each relinquishes, waives and releases the other party hereto from any
          and all claims known or unknown which Seller or KBK may or might have
          against the other party hereto arising directly or indirectly out of
          or from any prior agreements or transactions between Seller and KBK,
          (iv) the benefit received and to be received by Seller and KBK as a
          result of this Agreement shall and does constitute sufficient and
          valuable consideration to Seller and KBK for entering into and
          performing their respective obligations under this Agreement, (v) the
          execution, delivery and performance by Seller and KBK of this
          Agreement and the consummation of the transaction contemplated thereby
          are (a) not prohibited by any indenture, contract or agreement, law or
          corporate or partnership documents, including, but not limited to the
          Bylaws and Articles of Incorporation or Certificate of Incorporation,
          as the case may be, if Seller is a corporation, or Seller's
          partnership agreement, if Seller is a partnership, (b) duly authorized
          by appropriate action of Seller and KBK, and (c) legally valid and
          binding obligations of Seller and KBK and will continue to be such and
          enforceable according to their terms (except as such enforceability
          may be limited by applicable bankruptcy, insolvency, reorganization,
          moratorium or other similar laws affecting the enforcement of
          creditors' rights generally), (vi) that this Agreement will be
          executed and delivered by properly authorized officers of Seller and
          KBK, (vii) KBK has no obligation to continue the prior agreements or
          enter into this Agreement except for the considerations herein
          expressed, and (viii) the representations and warranties set forth
          herein will survive the execution and delivery of this Agreement.

22.       Captions; Final Agreement; Counterparts; Successors and Assigns.
          Captions and headings appearing herein are included solely for
          convenience of reference and are not intended to affect the
          interpretation of any provision of this Agreement. This Agreement
          represents the final agreement between the parties hereto with respect
          to the subject matter hereof, and supersedes all prior proposals,
          negotiations, agreements and understandings, oral or written, related
          to such subject matter. This Agreement may be executed in any number
          of counterparts, all of which taken together shall constitute one and
          the same instrument. Delivery of an executed counterpart of this
          Agreement by telecopy shall be equally as effective as delivery of a
          manually executed counterpart of this Agreement. Any party delivering
          an executed counterpart of this Agreement by telecopy also shall
          deliver a manually executed counterpart of this Agreement but the
          failure to deliver a manually executed counterpart shall not affect
          the validity, enforceability, and binding effect of this Agreement.
          This Agreement may not be assigned by Seller without the prior written
          consent of KBK. This Agreement may be assigned by KBK, and any
          accounts purchased by KBK hereunder, together with all rights and
          interests related thereto granted to KBK hereunder, may be assigned by
          KBK, all without notice to or the consent of Seller. This Agreement
          shall be binding upon the parties hereto and their respective
          successors and permitted assigns.

23.       Effectiveness of Agreement. This Agreement shall become effective only
          upon acceptance by KBK at its offices in Fort Worth, Tarrant County,
          Texas as evidenced by KBK's signature hereon.

24.       True Sales. Seller and KBK acknowledge and agree that the sale of
          accounts contemplated and covered hereby are fully intended by the
          parties hereto as true sales governed by the provisions of Section
          306.103 of the Texas Finance Code and Section 9.109(e) of the Texas
          Business and Commerce Code, as each may be amended from time to time,
          and, accordingly, legal and equitable title in all of Seller's
          accounts sold to and purchased by KBK from time to time hereunder will
          pass to KBK.



IN WITNESS WHEREOF, the parties hereto, heretofore duly authorized, have
executed this Agreement as of the date first set forth above.

Address for Notices:                         SELLER:
1515 w. 20/th/ Street                        KITTY HAWK, INC.,
P.O. BOX 612787                              a Delaware corporation
DFW AIRPORT, TX
75261
Telecopy No.:  (972) 456-2449                By: /s/ TILMON J. REEVES
                                                --------------------------------
                                                Name: Tilmon Reeves
                                                Title: Chairman & C.E.O.

1515 W. 20/th/ Street                          KITTY HAWK CARGO, INC.,
P.O. BOX 612787                              a Delaware corporation
DFW AIRPORT, TX
75261
Telecopy No.:  (972) 456-2449                By: /s/ TILMON J. REEVES
                                                --------------------------------
                                                Name: Tilmon Reeves
                                                Title: Chairman & C.E.O.

1515 W. 20/th/ Street                          KITTY HAWK AIRCARGO, INC.,
P.O. BOX 612787                              a Texas corporation
DFW AIRPORT, TX
75261
Telecopy No.:  (972) 456-2449                By: /s/ TILMON J. REEVES
                                                --------------------------------
                                                Name: Tilmon Reeves
                                                Title: Chairman & C.E.O.

Address for Notices:                         KBK FINANCIAL, INC.:
301 COMMERCE STREET
2200 CITY CENTER                             By:    /s/ MARY E. HILTON
FORT WORTH, TEXAS  76102                           -----------------------------
Telecopy No.:  (817) 258-6114                Name:      Mary E. Hilton
                                                   -----------------------------
                                             Title:     Asst. Vice President
                                                   -----------------------------
                                             Date:         10/31/02
                                                   -----------------------------








                                   SCHEDULE A
                                       TO
                     ACCOUNT TRANSFER AND PURCHASE AGREEMENT
                             Dated August ___, 2002
                                 By and Between
                               KBK FINANCIAL, INC.
                                       AND
                                KITTY HAWK, INC.,
                             KITTY HAWK CARGO, INC.,
                            KITTY HAWK AIRCARGO, INC.

The addresses of any other locations of Collateral referenced in Section 9:

12602 Global Drive
- --------------------------------------------
YODER, IN 46798
- --------------------------------------------

Any trade or assumed names referenced in Section 9:

None.




                                   EXHIBIT 1

      KITTY HAWK, INC, KITTY HAWK CARGO, INC, and KITTY HAWK AIRCARGO, INC

                              Officer's Certificate

The undersigned hereby certify that they are a duly elected officer of
a         corporation (the "Company"), and are authorized by the Board of
Directors to execute this Certificate on behalf of the Company. This certificate
is issued pursuant to Section 2 of the Account Transfer and Purchase Agreement
("Purchase Agreement"), dated as of ______________ between KBK Financial, Inc.
("KBK") and the Company. Terms defined in the Purchase Agreement are used herein
as so defined. The undersigned further certify the following:

     1.   All invoices ("Offered Accounts") submitted on __________ are offered
          for sale to KBK by the Seller. True and complete sales journal,
          collections journal, and accounts receivable aging related to the
          Offered Accounts have been sent to KBK electronically in accordance
          with the terms of the Purchase Agreement.

     2.   The representations and warranties of Company (Seller) in Section 9 of
          the Purchase Agreement are true and correct as of the date hereof as
          to all accounts and specifically as to the accounts submitted
          electronically to KBK of even date herewith.

     3.   Seller further represents and warrants that for all of the accounts
          electronically submitted:

          (a)  such account arises out of a bona fide sale of conforming goods
               or the bona fide rendition of services by Seller, and all
               underlying goods have been delivered to the account debtor, or
               all underlying services have been rendered by Seller, in complete
               fulfillment of all of the terms and conditions of a fully
               executed, delivered and unexpired contract with the account
               debtor, and the account debtor has accepted the goods or services
               to which the account relates;

          (b)  such account is current and not past due as of the date of
               purchase by KBK, has not been paid by or on behalf of the account
               debtor in whole or in part, and is not and will not be subject to
               any dispute, rescission, set-off, recoupment, defense or claim by
               the account debtor, whether relating to price, quality,
               quantity, workmanship, delay in delivery, set off, counterclaim
               or otherwise, and the account debtor has not and will not claim
               any defense of any kind or character (other than bankruptcy or
               insolvency arising after the date of sale of such account to KBK
               hereunder) against payment of such account;

          (c)  the accounts are payable according to trade terms disclosed and
               agreed to by KBK;

          (d)  the accounts remain unpaid when purchased by KBK; and;

     4.   The Company has not converted any proceeds of previously purchased
          accounts.

IN WITNESS WHEREOF, the undersigned has executed this Certificate as of the ____
day of ____________, 20__.

                                            KITTY HAWK, INC., KITTY HAWK CARGO,
                                            INC., and KITTY HAWK AIRCARGO, INC.,


                                            By:________________________________
                                            Name:______________________________
                                            Title:_____________________________




                                LIMITED GUARANTY

This Limited Guaranty ("Guaranty") is made by the following corporations with
mailing addresses as set forth below (referred to herein collectively as the
"Guarantors")

       Kitty Hawk, Inc.        Kitty Hawk Cargo, Inc.  Kitty Hawk Aircargo, Inc.
       P.O. Box 612787         P.O. Box 612787         P.O. Box 612787
       DFW Airport, TX  75261  DFW Airport, TX  75261  DFW Airport, TX  75261

to and for the benefit of KBK FINANCIAL, INC. ("KBK"), a Delaware corporation
authorized to transact business in Texas.

A.       KBK has contemporaneously herewith entered into that certain Account
         Transfer and Purchase Agreement of even date herewith (such agreement,
         and all amendments and modifications thereof, collectively, the
         "Purchase Agreement"), to which reference is made for all purposes,
         with KITTY HAWK, INC., a Delaware corporation, KITTY HAWK CARGO, INC.,
         a Delaware corporation, KITTY HAWK AIRCARGO, INC., a Texas corporation,
         (collectively referred to herein as the "Seller"), pursuant to which
         KBK has purchased or will purchase all right, title and interest in
         certain accounts receivable of the Seller (the "Accounts"), on those
         terms and conditions set forth in the Purchase Agreement.

B.       KBK is willing to enter into the Purchase Agreement only if the
         Guarantors execute and deliver this Guaranty to KBK.

NOW, THEREFORE, in consideration of the aforesaid premises and other good and
valuable consideration, and for the purpose of inducing KBK to enter into the
Purchase Agreement and to purchase accounts receivables from the Seller pursuant
to the terms thereof, the sufficiency of which is hereby acknowledged, the
Guarantors hereby covenant and agree as follows:

1.       The Guarantors hereby unconditionally and irrevocably guarantee the
         payment in full of any losses incurred by KBK under the Purchase
         Agreement (collectively the "Obligations") to the extent that such
         losses are related to or attributable to any of the following limited
         circumstances only:

         (a)      In the event any of the representations and warranties set
                  forth in Section 9 of the Purchase Agreement was not true when
                  made or ceases to be true for any reason.

         (b)      In the event that the Seller, any Guarantor, or any other
                  person, without receiving prior written consent from KBK,
                  shall cash, deposit, or retain, any checks, drafts, monies or
                  proceeds of the Accounts purchased by KBK, and the Seller
                  shall fail to immediately tender the entire amount of the same
                  to KBK.

2.       KBK shall not be required, as a condition precedent to making a demand
         upon the Guarantors or to bringing an action against the Guarantors
         under this Guaranty, to make demand upon, or to institute any action
         or proceeding, at law or in equity against the Seller or anyone else,
         or to exhaust its remedies against the Seller, or anyone else, or
         against any collateral security. All remedies afforded to KBK by
         reason of this Guaranty are separate and cumulative remedies and it is
         agreed that not one of such remedies, whether exercised by KBK or not,
         shall be deemed to be exclusive of any of the other remedies available
         to KBK and shall not limit or prejudice any other remedy which KBK may
         have against any party, including the Guarantors.

3.       The Guarantors shall remain liable on this Guaranty notwithstanding any
         change or changes in the terms, covenants or conditions of the Purchase
         Agreement, or any amendment thereto, hereafter made or granted, or any
         delay on the part of KBK in exercising its rights hereunder or
         thereunder, it being the intention hereof that each of the Guarantors
         shall remain liable as principals until the full amount of the
         Obligations guaranteed hereby, with interest and any sums which may be
         due thereon, shall have been fully paid, notwithstanding any act or
         omission which might otherwise operate as a legal or equitable
         discharge of the Guarantors.

4.       The Guarantors hereby waive (a) notice of acceptance of this Guaranty;
         (b) presentment and demand for payment of the Obligations or any
         portion thereof; (c) protest and notice of dishonor or default to the
         Guarantors or to any other person or party with respect to the
         Obligations or any portion thereof; (d) all other notices to which the
         Guarantors might otherwise be entitled; (e) any demand for payment or
         performance of this Guaranty; and (f) all Guaranty and suretyship
         defenses or other defenses in the nature thereof (including, without
         limitation, all rights Guarantor has under, or the requirements imposed
         by, Chapter 34 of the Texas Business and Commerce Code, as may be
         amended from time to time).

5.       Each Guarantor shall promptly furnish to KBK at any time and from time
         to time such financial statements and other financial information of
         Guarantor as KBK may require, in form and detail satisfactory to KBK
         (including, without limitation, annual financial statements within 90
         days after the end of each calendar year).

6.       This Guaranty shall inure to the benefit of, and may be enforced by
         KBK, and its respective successors and assigns, and shall be binding
         upon and enforceable against the Guarantors and their respective heirs,
         executors, legal representatives, administrators, or successors and
         assigns thereof. All obligations of the Guarantors hereunder shall be
         joint and several.



7.       The Guarantors agree that in the event this Guaranty is placed in the
         hands of an attorney for enforcement, the Guarantors will reimburse KBK
         for all expenses incurred, including reasonable attorneys' fees.

8.       This Guaranty cannot be modified or amended except in a writing, duly
         executed by the Guarantors and KBK.



9.       Each Guarantor has received, and will receive, direct and/or indirect
         benefits by and from the making of this Guaranty and the execution of
         the Purchase Agreement by KBK.

10.      THIS GUARANTY SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH
         THE LAWS OF THE STATE OF TEXAS WITHOUT GIVING EFFECT TO THE PRINCIPLES
         OF CONFLICTS OF LAWS THEREOF. THIS GUARANTY IS PERFORMABLE IN TARRANT
         COUNTY, TEXAS. EACH GUARANTOR AGREES THAT TARRANT COUNTY, TEXAS SHALL
         BE THE EXCLUSIVE VENUE FOR LITIGATION OF ANY DISPUTE OR CLAIM ARISING
         UNDER OR RELATING TO THIS GUARANTY, AND THAT SUCH COUNTY IS A
         CONVENIENT FORUM IN WHICH TO DECIDE ANY SUCH DISPUTE OR CLAIM. EACH
         GUARANTOR CONSENTS TO THE PERSONAL JURISDICTION OF THE STATE AND
         FEDERAL COURTS LOCATED IN TARRANT COUNTY, TEXAS FOR THE LITIGATION OF
         ANY SUCH DISPUTE OR CLAIM. EACH GUARANTOR IRREVOCABLY WAIVES, TO THE
         FULLEST EXTENT PERMITTED BY LAW, ANY OBJECTION WHICH IT MAY NOW OR
         HEREAFTER HAVE TO THE LAYING OF THE VENUE OF ANY SUCH PROCEEDING
         BROUGHT IN SUCH A COURT AND ANY CLAIM THAT ANY SUCH PROCEEDING BROUGHT
         IN SUCH A COURT HAS BEEN BROUGHT IN AN INCONVENIENT FORUM.

11.      EACH GUARANTOR HEREBY IRREVOCABLY WAIVES, TO THE MAXIMUM EXTENT
         PERMITTED BY LAW, ANY RIGHT EACH GUARANTOR MAY HAVE TO A TRIAL BY JURY
         IN RESPECT TO ANY LITIGATION DIRECTLY OR INDIRECTLY AT ANY TIME ARISING
         OUT OF, UNDER OR IN CONNECTION WITH THIS GUARANTY OR ANY TRANSACTION
         CONTEMPLATED HEREBY OR ASSOCIATED HEREWITH.

12.      THIS GUARANTY REPRESENTS THE FINAL AGREEMENT BETWEEN THE PARTIES HERETO
         WITH RESPECT TO THE TRANSACTIONS CONTEMPLATED HEREIN AND MAY NOT BE
         CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL
         AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS
         BETWEEN THE PARTIES.

IN WITNESS WHEREOF, the undersigned have executed this Guaranty this ___ day of
August, 2002.

GUARANTORS:

KITTY HAWK, INC.                           KITTY HAWK CARGO, INC.

By:    /s/ TILMON J. REEVES                By:    /s/ TILMON J. REEVES
   -------------------------------------      ----------------------------------
Name:  Tilmon Reeves                       Name:    Tilmon Reeves
Title: Chairman & C.E.O.                   Title:   Chairman & CEO
                                                  ------------------------------


KITTY HAWK AIRCARGO, INC.

By:    /s/ TILMON J. REEVES
   -----------------------------------------
Name:    Tilmon Reeves
Title:   Chairman & CEO
      --------------------------------------

EX-10.7

                                                                    EXHIBIT 10.7

                          REGISTRATION RIGHTS AGREEMENT

         This Registration Rights Agreement, dated as of December 15, 2002 (the
"Agreement"), is by and among Kitty Hawk, Inc., a Delaware corporation (the
"Company"), and the persons listed on the signature page hereto (the "Initial
Holders").

                              W I T N E S S E T H :

         WHEREAS, in connection with the financial restructuring of the Company
pursuant to the Plan, the Company proposes to grant certain registration rights
to the Initial Holders; and

         WHEREAS, the Company desires to enter into this Agreement to set forth
the terms and conditions of the registration rights granted to the Initial
Holders;

         NOW, THEREFORE, in consideration of the premises and the mutual
representations, warranties, covenants, conditions and agreements hereinafter
set forth, and for other good and valid consideration, the parties agree as
follows:

                             SECTION 1. DEFINITIONS

         Unless otherwise defined herein, capitalized terms used in this
Agreement shall have the meanings ascribed to them in the Plan. Each reference
herein to an agreement, document or instrument shall mean that agreement,
document or instrument as from time to time amended, modified or supplemented in
accordance with its terms, including in each case all exhibits, annexes and
schedules to such agreement, document or instrument, all of which are
incorporated by reference to such agreement, document or instrument.

         As used in this Agreement, the following capitalized terms shall have
the meanings ascribed to them below:

         "Affiliates" means, with respect to a specified Person, a Person that
directly or indirectly through one or more intermediaries, controls or is
controlled by, or is under common control with, the Person.

         "Business Day" means any day other than a Saturday, a Sunday or a day
on which banking institutions located in the State of New York are authorized or
obligated by law or executive order to close.

         "Chapter 11 Cases" means the cases under Chapter 11 of the Bankruptcy
Code entitled In re: Kitty Hawk, Inc. et al., Case No. 400-42069-BJH and Case
No. 400-42141 through Case No. 400-42149, before the United States Bankruptcy
Court for the Northern District of Texas, Fort Worth Division, jointly
administered under Case No. 400-42141-BJH.

         "Company Indemnitee" has the meaning set forth in Section 6(B).

         "Demand Registration" has the meaning set forth in Section 2(A).



         "Effective Date" means August 6, 2002, which is the date immediately
following the date the Plan is confirmed in the Chapter 11 Cases.

         "Everest Capital" means Everest Capital Limited, a limited partnership
organized under the laws of Bermuda, and its Affiliates.

         "Exchange Act" means the Securities Exchange Act of 1934, as amended.

         "Holder" means each of Stockton, Everest Capital and Resurgence Asset
Management, and any of their respective successors and assigns.

         "Holder Indemnitor" has the meaning set forth in Section 6(B).

         "New Common Stock" means the common stock of the Company issued in
connection with the financial restructuring of the Company pursuant to the Plan.

         "Person" means any natural person, corporation, partnership, limited
liability company, association, joint stock company, business trust or other
legal entity.

         "Piggyback Registration" has the meaning set forth in Section 3(A).

         "Plan" means the plan of reorganization as filed and confirmed in
connection with the Chapter 11 Cases.

         "Prospectus" means the prospectus included in any Registration
Statement, as amended or supplemented by any prospectus supplement with respect
to the terms of the offering of any portion of the Registrable Securities
covered by such Registration Statement or any other amendments and supplements
to such prospectus, including without limitation any preliminary prospectus, any
pre-effective or post-effective amendment and all material incorporated by
reference in any prospectus.

         "Registrable Securities" means (x) shares of New Common Stock which are
issued to the Initial Holders pursuant to the Plan and (y) any securities issued
or issuable to the Holders in respect of or in exchange for any of such shares
of New Common Stock referred to in clause (x) by way of a stock dividend or
other distribution, stock split, reverse stock split or other combination of
shares, recapitalization, reclassification, merger, consolidation or exchange
offer. As to any particular Registrable Securities, once issued such securities
shall cease to be Registrable Securities when (i) a Registration Statement with
respect to the sale of such securities shall have become effective under the
Securities Act and such securities shall have been disposed of in accordance
with such Registration Statement, (ii) such securities shall have been sold to
the public pursuant to Rule 144 (or any successor provision) under the
Securities Act, (iii) such securities shall have been otherwise transferred or
exchanged and new certificates for such securities not bearing a legend
restricting further transfer shall have been delivered by the Company or (iv)
such securities shall have ceased to be outstanding.

         "Registration Expenses" has the meaning set forth in Section 5.

                                       -2-



         "Registration Statement" means any registration statement of the
Company which covers Registrable Securities pursuant to the provisions of this
Agreement, all amendments and supplements to such registration statement,
including post-effective amendments, and all exhibits and all material
incorporated by reference in such registration statement.

         "Resurgence Asset Management" means Resurgence Asset Management L.L.C.,
a Delaware limited liability company, acting on behalf of its Affiliates and
its managed accounts.

         "Rule 144" shall mean Rule 144 promulgated under the Securities Act or
any similar rule as may be in effect from time to time.

         "SEC" means the Securities and Exchange Commission or any other federal
agency at the time administering the Securities Act or the Exchange Act.

         "Section 3 Notice" has the meaning set forth in Section 3(A).

         "Securities Act" means the Securities Act of 1933, as amended.

         "Stockton" means Stockton, LLC, a Delaware limited liability company,
and its Affiliates.

                         SECTION 2. DEMAND REGISTRATIONS

         A. Requests for Registration. Subject to the provisions of this Section
2, any Holder may at any time after the 180th day following the Effective Date
make a written request for registration under the Securities Act of all or any
part of such Holder's Registrable Securities (a "Demand Registration"), which
request shall specify the amount of Registrable Securities to be registered and
the intended method or methods of disposition thereof; provided, however, the
Company shall not be required to effect a Demand Registration unless the sale of
the Registrable Securities proposed to be sold by the Holders will result in
aggregate gross proceeds of at least $2.0 million; provided further, the Company
shall not be required to effect a Demand Registration as a "shelf-registration"
under Rule 415 of the Securities Act. Promptly after receipt of such request,
the Company shall send written notice of such request to all Holders from whom
written notice has not been received and shall, subject to the provisions of
this Section 2, include in such Demand Registration all Registrable Securities
with respect to which the Company receives written requests (each request
specifying the amount of Registrable Securities to be registered and the
intended method or methods of disposition thereof) for inclusion therein within
30 days after the date on which the Company's notice is sent. As promptly as
practicable thereafter, but in no event later than 60 days after the end of such
30 day period, but subject to Section 2(C), the Company shall use its best
reasonable efforts to file with the SEC a Registration Statement, registering
all Registrable Securities requested to be included in such Demand Registration
for disposition in accordance with the intended method or methods set forth in
the written requests of the Holders. The Company shall use its best reasonable
efforts to cause such Registration Statement to be declared effective as soon as
practicable after filing and to remain effective until the earlier of (i) 180
days following the date on which it was declared effective and (ii) the date on
which all of the Registrable Securities covered thereby are disposed of in
accordance with the method or methods of disposition stated therein. Subject to

                                       -3-



Section 2(D), the Company may include in any Demand Registration additional
shares of capital stock to be sold for the Company's account pursuant to such
Demand Registration.

         B. Number of Registrations. The Company shall not be required to effect
more than one (1) Demand Registration for each of (i) Everest Capital, (ii)
Resurgence Asset Management and (iii) Stockton, pursuant to this Agreement.

         C. Suspension of Registration. The Company shall have the right to (i)
delay the filing or effectiveness of the Registration Statement for any Demand
Registration, (ii) to require the Holders not to sell any Registrable Securities
under any Registration Statement or (iii) to delay the preparation and filing of
any supplement or post-effective amendment to the applicable Registration
Statement or Prospectus or any document incorporated therein by reference, in
each case during one or more periods aggregating not more than 60 days in each
12 month period if, in each such instance, (x) the Company would, in accordance
with the advice of its counsel, be required to make public disclosure of
information in the Prospectus or Registration Statement the public disclosure of
which would materially and adversely affect any existing or prospective material
business situation, transaction or negotiation involving the Company or
otherwise materially and adversely affect the Company or (y) in the good faith
judgment of the Company's Board of Directors, there is a reasonable likelihood
that effecting such Registration Statement at such time would adversely affect
any existing or prospective material business situation, transaction or
negotiation involving the Company or otherwise materially and adversely affect
the Company; provided, however, that each Holder has received a certificate of
the Company executed by its chief executive officer or the Chairman of the Board
of Directors confirming (x) or (y) above.

         D. Priority. If the managing underwriter for a Demand Registration that
involves an underwritten offering shall advise the Company that, in its opinion,
the inclusion of the amount of securities to be sold for the Company's account
or the Registrable Securities to be sold for the account of Holders that did not
initiate the Demand Registration would (x) create a substantial risk that the
proceeds or price per share that will be derived from such Demand Registration
will be materially reduced or that the number of securities to be registered on
such Demand Registration is too large to be reasonably sold or (y) materially
and adversely effect such Demand Registration in any other respect, then the
amount of securities to be sold for the Company's account or the Registrable
Securities to be sold for the account of such non-initiating Holders shall be
reduced (and may be reduced to zero) in accordance with the managing
underwriter's recommendation. In the event of such reduction, the number of
Registrable Securities included in such Demand Registration shall be determined
by giving (i) first priority to the Registrable Securities owned by the Holder
that initiated such Demand Registration (which shall not be reduced), (ii)
second priority to the Registrable Securities owned by the Holders that did not
initiate such Demand Registration, allocated if necessary pro rata among all
such Holders, and (iii) third priority to the securities sought to be included
by the Company. If no Registrable Securities of a Holder in category (ii) above
are cut back, a Demand Registration shall be deemed to have been requested by
such Holder for purposes of Section 2(B). If any Registrable Securities of a
Holder in category (ii) above are cut back, no Demand Registration shall be
deemed to have been requested by such Holder for purposes of Section 2(B)
whether or not such Holder includes any of the Registerable Securities in the
Demand Registration. In addition, such Holder may elect to withdraw its
Registrable Securities from such Demand

                                       -4-



Registration upon prompt written notice to the Company of such withdrawal;
provided, however, that such withdrawal election shall be irrevocable and, after
making a withdrawal election, a Holder shall no longer have any right to include
Registrable Securities in the Demand Registration as to which such withdrawal
election was made. If any such withdrawal election is made, the number of
Registrable Securities included in the Demand Registration shall be increased by
the lesser of the amount of Registrable Securities withdrawn and the aggregate
amount of Registrable Securities cut back pursuant to this Section 2(D), and in
accordance with the priority provided by this Section 2(D).

         E. Interrupted Registration. No Demand Registration requested pursuant
to this Section 2 shall be deemed to have been requested by any Holder of
Registrable Securities for purposes of Section 2(B): (i) unless a Registration
Statement with respect thereto has been declared effective by the SEC; provided,
however, that if a Demand Registration is not effected after the Company has
filed a Registration Statement with respect thereto solely by reason of the
refusal of the requesting Holders to proceed therewith, a Demand Registration
shall be deemed to have been effected by the Company at the request of such
withdrawing Holders unless the withdrawing Holders shall have paid all
Registration Expenses of the Company in connection with such Demand
Registration, (ii) if after a Registration Statement has become effective, such
Demand Registration is interfered with by any stop order, injunction or other
order or requirement of the SEC for any reason other than a misrepresentation or
an omission by the requesting Holders, (iii) if the conditions to closing
specified in the underwriting agreement, if any, entered into in connection with
such Demand Registration are not satisfied or waived by the managing
underwriter, other than by reason of some wrongful act or omission, or act or
omission in bad faith, by the requesting Holders or (iv) if such request has
been withdrawn by the requesting Holders prior to the filing of the Registration
Statement with the SEC and such Holders shall have paid all Registration
Expenses of the Company in connection with such Demand Registration.

                       SECTION 3. PIGGYBACK REGISTRATIONS

         A. Right to Include Registrable Securities. If at any time after the
Effective Date the Company proposes to register any of its equity securities
under the Securities Act, whether or not for sale for its own account (other
than a registration on Form S-4 or Form S-8, or any successor or similar forms),
in a manner that would permit registration of Registrable Securities for sale to
the public under the Securities Act (a "Piggyback Registration"), it will each
such time promptly give prior written notice to all Holders: (i) of its
intention to do so, (ii) of the registration form of the SEC that has been
selected by the Company and (iii) of rights of Holders under this Section 3 (the
"Section 3 Notice"). The Company will include in a Piggyback Registration all
Registrable Securities with respect to which the Company has received a written
request from the Holders for inclusion therein within 30 days after the Section
3 Notice is given by the Company; provided, however, that (i) if, at any time
after giving a Section 3 Notice and prior to the effective date of the
Registration Statement filed in connection with such Piggyback Registration, the
Company shall determine for any reason that none of such equity securities shall
be registered, the Company may, at its election, give written notice of such
determination to all Holders who so requested to be included in such Piggyback
Registration and, thereupon, shall be relieved of its obligation to register any
Registrable Securities in connection with such abandoned Piggyback Registration
and (ii) in case of a determination by the Company to delay registration of its
equity

                                       -5-



securities, the Company shall be permitted to delay a Piggyback Registration for
the same period as the delay in registering such other equity securities by the
Company. No Piggyback Registration shall be deemed a Demand Registration for
purposes of Section 2(B). Notwithstanding anything to the contrary in Section 2,
provided that the securities offered by the Company are successfully registered
within 90 days from the date a Section 3 Notice is given by the Company and
provided that a Holder did not have its allocation cut back pursuant to Section
3(B)(1), no Holder shall have the right to require the Company to effect a
Demand Registration of any Registrable Securities pursuant to Section 2 until
the earlier of (A) the completion of the distribution of the securities offered
and registered pursuant to a Section 3 Notice and (B) 90 days after the date
each Registration Statement effected under this Section 3 is declared effective.

     B.     Priority; Registration Form.

            (1) If the managing underwriter for a Piggyback Registration in
which Registrable Securities are proposed to be included pursuant to this
Section 3 that involves an underwritten offering shall advise the Company that,
in its opinion, the inclusion of the amount of Registrable Securities to be sold
for the account of Holders would (x) create a substantial risk that the proceeds
or price per share that will be derived from such Piggyback Registration will be
materially reduced or that the number of securities to be registered on such
Piggyback Registration is too large to be reasonably sold or (y) materially and
adversely affect such Piggyback Registration in any other respect, then the
number of Registrable Securities to be sold for the account of such Holders
shall be reduced (and may be reduced to zero) in accordance with the managing
underwriter's recommendation. In the event that the number of Registrable
Securities to be included in any Piggyback Registration is reduced (but not to
zero), the number of such Registrable Securities included in such Piggyback
Registration shall be allocated pro rata among all requesting Holders and all
other holders of New Common Stock having the right to include their shares of
New Common Stock in such registration, on the basis of the relative number of
shares of such New Common Stock each such Holder or other holder has requested
to be included in such Piggyback Registration. If, as a result of the proration
provisions of this Section 3(B), any Holder shall not be entitled to include all
Registrable Securities in a Piggyback Registration pursuant to this Section 3
that such Holder has requested be included, such Holder may elect to withdraw
its Registrable Securities from the registration; provided, however, that such
withdrawal election shall be irrevocable and, after making a withdrawal
election, a Holder shall no longer have any right to include Registrable
Securities in the Piggyback Registration as to which such withdrawal election
was made. If any such withdrawal election is made, the number of Registrable
Securities included in the Piggyback Registration shall be increased by the
lesser of the amount of Registrable Securities withdrawn and the aggregate
amount of Registrable Securities cut back pursuant to this Section 3(B)(1), and
in accordance with the priority provided by this Section 3(B)(1).

            (2) If the Company is using a Form S-3 to effectuate a registration
pursuant to this Section 3 or Section 2, but it would not be eligible to use
such form for the number of Registrable Securities to be included at the request
of other Holders, the Company may elect to not include such Registrable
Securities in such registration.

     C.     Merger, Consolidation, etc. Notwithstanding anything in this Section
3 to the contrary, Holders shall not have any right to include their Registrable
Securities in any

                                       -6-



distribution or registration of equity securities by the Company, which is a
result of a merger, consolidation, acquisition, exchange offer,
recapitalization, other reorganization, dividend reinvestment plan, stock option
plan or other employee benefit plan, or any similar transaction having the same
effect.

                       SECTION 4. REGISTRATION PROCEDURES

     A.     The Company to Use Best Reasonable Efforts. In connection with the
Company's registration obligations pursuant to Sections 2 and 3, the Company
shall use its best reasonable efforts to effect such registrations to permit the
sale of such Registrable Securities in accordance with the intended method or
methods of disposition thereof, and pursuant thereto the Company shall as
promptly as reasonably practicable:

             (1) prepare and file with the SEC a Registration Statement or
Registration Statements relating to the applicable registration on any
appropriate form under the Securities Act, and to cause such Registration
Statements to become effective as soon as reasonably practicable and to remain
continuously effective for the time period required by this Agreement to the
extent permitted under the Securities Act or until the distribution contemplated
in the Registration Statement is completed; provided, however, that as soon as
reasonably practicable but in no event later than three Business Days before
filing such Registration Statement, any related Prospectus or any amendment or
supplement thereto, other than any amendment or supplement made solely as a
result of incorporation by reference of documents filed with the SEC subsequent
to the filing of such Registration Statement, the Company shall furnish to the
Holders of the Registrable Securities covered by such Registration Statement,
their counsel selected as provided in Section 5(vi) and the underwriters, if
any, copies of all such documents proposed to be filed, which Holders, counsel
and underwriters shall be afforded a reasonable opportunity to review such
documents and comment thereon;

             (2) prepare and file with the SEC, as promptly as reasonably
practicable, such amendments and post-effective amendments to each Registration
Statement as may be necessary to keep such Registration Statement effective for
the applicable period set forth in Section 2(A); and cause the Registration
Statement and the related Prospectus to be supplemented by any required
Prospectus supplement, and as so supplemented to be filed in accordance with the
Securities Act and any rules and regulations promulgated thereunder; and
otherwise comply with the provisions of the Securities Act as may be necessary
to facilitate the disposition of all Registrable Securities covered by such
Registration Statement during the applicable period in accordance with the
intended method or methods of disposition by the selling Holders thereof set
forth in such Registration Statement or such Prospectus or Prospectus
supplement;

             (3) notify the selling Holders and the managing underwriters, if
any, as promptly as reasonably practicable if at any time (A) any Prospectus,
Registration Statement or amendment or supplement thereto is filed (other than
any amendment or supplement made solely as a result of incorporation by
reference of documents filed with the SEC subsequent to the filing of such
Registration Statement), (B) any Registration Statement, or any post-effective
amendment thereto, becomes effective, (C) the SEC requests any amendment or
supplement to, or any additional information in respect of, any Registration
Statement or Prospectus, (D) the SEC issues any stop order suspending the
effectiveness of a Registration Statement or initiates

                                       -7-



any proceedings for that purpose, (E) the Company receives any notice that the
qualification of any Registrable Securities for sale in any jurisdiction has
been suspended or that any proceeding has been initiated for the purpose of
suspending such qualification or (F) any event occurs which requires that any
changes be made in such Registration Statement or any related Prospectus so that
such Registration Statement or Prospectus will not contain any untrue statement
of a material fact or omit to state any material fact required to be stated
therein or necessary to make the statements therein not misleading; provided,
however, that in the case of this subclause (F), such notice need only state
that an event of such nature has occurred, without describing such event. The
Company hereby agrees to promptly reimburse any selling Holders for any
reasonable out-of-pocket losses and expenses incurred in connection with any
uncompleted sale of any Registrable Securities in the event that the Company
fails to timely notify such Holder that the Registration Statement then on file
with the SEC is no longer effective;

             (4) use its best reasonable efforts to obtain the withdrawal of any
order suspending the effectiveness of a Registration Statement, or the
qualification of any Registrable Securities for sale under the applicable
securities or blue sky laws in any jurisdiction in the United States, at the
earliest reasonably practicable moment;

             (5) if requested by the managing underwriters or the Holders of a
majority of the Registrable Securities being sold in connection with an
underwritten offering, incorporate into a Prospectus supplement or a
post-effective amendment to the Registration Statement any information which the
managing underwriters and the Holders of a majority of the Registrable
Securities being sold in connection therewith reasonably agree is required to be
included therein relating to such sale of Registrable Securities; and file such
supplement or post-effective amendment as soon as practicable in accordance with
the Securities Act and the rules and regulations promulgated thereunder;

             (6) furnish to each selling Holder and each managing underwriter,
if any, one signed copy of the Registration Statement or Registration Statements
and any post-effective amendment thereto, including all financial statements and
schedules thereto, all documents incorporated therein by reference and all
exhibits thereto (including exhibits incorporated by reference) as promptly as
practicable after filing such documents with the SEC;

             (7) deliver to each selling Holder and each underwriter, if any, as
many copies of the Prospectus or Prospectuses (including each preliminary
Prospectus) and any amendment or supplement thereto as such selling Holder or
underwriter, if any, may reasonably request; and consent to the use of such
Prospectus or any amendment or supplement thereto by each such selling Holder
and underwriter, if any, in connection with the offering and sale of the
Registrable Securities covered by such Prospectus, amendment or supplement;

             (8) prior to any public offering of Registrable Securities, (i) use
its best reasonable efforts to register or qualify, or to cooperate with the
selling Holders, the underwriters, if any, and their respective counsel in
connection with the registration or qualification of, such Registrable
Securities for offer and sale under the securities or blue sky laws of such
jurisdictions in the United States as may be requested by the Holders of a
majority of the Registrable Securities included in such Registration Statement;
(ii) use its best reasonable efforts to keep each such registration or
qualification effective during the period set forth in

                                       -8-



Section 2(A) that the applicable Registration Statement is required to be kept
effective; and (iii) do any and all other acts or things reasonably necessary to
enable the disposition in such jurisdictions of the Registrable Securities
covered by such Registration Statement; provided, however, that the Company will
not be required to qualify generally to do business in any jurisdiction where it
is not then so qualified or to take any action which would subject it to general
service of process in any jurisdiction where it is not then so subject;

             (9)  cooperate with the selling Holders and the underwriters, if
any, in the preparation and delivery of certificates representing the
Registrable Securities to be sold, such certificates to be in such denominations
and registered in such names as such selling Holders or managing underwriters
may request at least two Business Days prior to any sale of Registrable
Securities represented by such certificates;

             (10) subject to Section 2(C), upon the occurrence of any event
described in subclause (F) of clause (3) above, promptly prepare and file a
supplement or post-effective amendment to the applicable Registration Statement
or Prospectus or any document incorporated therein by reference, and any other
required documents, so that such Registration Statement and Prospectus will not
thereafter contain an untrue statement of a material fact or omit to state any
material fact necessary to make the statements therein not misleading; and use
its best reasonable efforts to cause such supplement or post-effective amendment
to become effective as soon as practicable;

             (11) take all other actions in connection therewith as are
reasonably necessary or desirable in order to facilitate the disposition of the
Registrable Securities included in such Registration Statement and, in the case
of an underwritten offering: (A) enter into an underwriting agreement in
customary form with the managing underwriter (such agreement to contain standard
and customary indemnities, representations, warranties and other agreements of
or from the Company); (B) use its reasonable best efforts to obtain opinions of
counsel to the Company (which, if reasonably acceptable to the underwriters, may
be the Company's inside counsel) addressed to the underwriters, such opinions to
be in customary form; and (C) use its reasonable best efforts to obtain
"comfort" letters from the Company's independent certified public accountants
addressed to the underwriters, such letters to be in customary form;

             (12) make available for inspection by any selling Holder of
Registrable Securities, any underwriter participating in any disposition
pursuant to such Registration Statement, and any attorney, accountant or other
agent retained by any such selling Holder or underwriter all financial and other
records, pertinent corporate documents and properties of the Company as shall be
necessary to enable them to fulfill their due diligence responsibilities, and
cause the Company's officers, directors, employees, attorneys and independent
accountants to supply all information reasonably requested by any such selling
Holders, underwriters, attorneys, accountants or agents in connection with such
Registration Statement as shall be necessary to enable them to fulfill their due
diligence responsibilities; provided, however, that information which the
Company determines, in good faith, to be confidential shall not be disclosed by
such persons unless (x) the disclosure of such information is necessary to avoid
or correct a misstatement or omission in such Registration Statement, or (y) the
release of such information is ordered pursuant to a subpoena or other order
from a court of competent jurisdiction. Each selling Holder of Registrable
Securities agrees, on its own behalf and on behalf of all its

                                       -9-



underwriters, accountants, attorneys and agents, that the information obtained
by it as a result of such inspections shall be kept confidential by it and not
disclosed by or on behalf of it, and shall not be used by it as the basis for
any market transactions in the securities of the Company, in each case unless
and until such information is made generally available to the public other than
by or on behalf of such selling Holder. Each selling Holder of Registrable
Securities further agrees, on its own behalf and on behalf of all its
underwriters, accountants, attorneys and agents, that it will, upon learning
that disclosure of such information is sought in a court of competent
jurisdiction, give prompt notice to the Company and allow the Company, at its
expense, to undertake appropriate action to prevent disclosure of the
information deemed confidential;

             (13) use its reasonable best efforts to cause all Registrable
Securities registered pursuant hereunder to be listed or quoted on each
securities exchange or quotation medium on which similar securities by the
Company are then listed, and in the event that the Company does not have any
such securities, the Company will use its reasonable best efforts to cause all
Registrable Securities registered pursuant hereunder to be listed or quoted on a
securities exchange or quotation medium;

             (14) provide a transfer agent and registrar for all Registrable
Securities registered pursuant hereunder and a CUSIP number for all such
Registrable Securities; and

             (15) take all such other actions not inconsistent with the terms of
this Agreement as the Holders of a majority of the Registrable Securities being
sold or the underwriters, if any, reasonably request in order to expedite or
facilitate the disposition of such Registrable Securities.

     B.   Holders' Obligation to Furnish Information. The Company may require
each Holder of Registrable Securities as to which any registration is being
effected under Section 2 or Section 3 herein to furnish to the Company (i) a
standard selling stockholder questionnaire requesting information to determine
compliance with all applicable securities laws and (ii) such information
regarding (x) the intended method or methods of distribution of such Registrable
Securities as the Company may from time to time reasonably request and (y) such
other information about the Holder and its Affiliates as is required to be set
forth in the Registration Statement or Prospectus.

     C.   Suspension of Sales Pending Amendment of Prospectus. Each Holder
agrees that, upon receipt of any notice from the Company of the happening of any
event of the kind described in subclauses (C)-(F) of subsection A(3) above, such
Holder will suspend the disposition of any Registrable Securities covered by
such Registration Statement or Prospectus until such Holder's receipt of the
copies of a supplemented or amended Prospectus or until it is advised in writing
by the Company that the use of the applicable Prospectus may be resumed, and, if
so directed by the Company, such Holder will deliver to the Company all copies,
other than permanent file copies, then in such Holder's possession of any
Prospectus covering such Registrable Securities. If the Company shall have given
any such notice during a period when a Demand Registration is in effect, the
180-day period described in Section 2(A) shall be extended by the number of days
of such suspension period.

                                      -10-



     D. No Required Registration. The Company shall not be required to file a
Registration Statement at the request of a Holder pursuant to the provisions of
Section 2 if the Company shall receive a written opinion from its counsel that
the Registrable Securities which such Holder has requested or may request to
have registered may, as of the date of such opinion, be sold in the public
market during any 90-day period, under Rule 144 or otherwise, without
registration under the Securities Act, provided that such opinion is also
addressed to, and is reasonably acceptable to, such Holder.

                        SECTION 5. REGISTRATION EXPENSES

     All expenses incident to the Company's performance of or compliance with
its obligations under this Agreement, including without limitation all (i)
registration and filing fees, (ii) fees and expenses of compliance with
securities or blue sky laws, (iii) printing expenses, (iv) fees and
disbursements of its counsel and its independent certified public accountants
(including the expenses of any special audit or "comfort" letters required by or
incident to such performance or compliance), (v) securities acts liability
insurance (if the Company elects to obtain such insurance), (vi) reasonable fees
and expenses of one counsel for the Holders of Registrable Securities covered by
each Registration Statement, with such counsel to be selected by Holders of a
majority of such Registrable Securities (all such expenses being herein referred
to in clauses (i) through (vi) as "Registration Expenses"), and (vii) the
expenses and fees for listing securities to be registered on each securities
exchange on which similar securities by the Company are then listed shall,
subject to Section 2(E), be borne by the Company; provided, however, that
Registration Expenses shall not include any underwriting discounts, commissions
or fees attributable to the sale of the Registrable Securities.

                           SECTION 6. INDEMNIFICATION

     A. Indemnification by the Company. In the event of any registration of any
securities of the Company under the Securities Act pursuant to Section 2 or 3,
the Company shall indemnify and hold harmless each selling Holder of any
Registrable Securities covered by such Registration Statement, its Affiliates,
general and limited partners, members and shareholders and each of its and their
directors, officers, managers, employees, attorneys, investment advisors and
agents, each other Person who participates as an underwriter, if any, in the
offering or sale of such securities and each other Person, if any, who controls
such selling Holder or any such underwriter within the meaning of the Securities
Act, against any and all losses, claims, damages or liabilities, joint or
several, and expenses (including any amounts paid in any settlement effected
with the Company's consent, which consent shall not be unreasonably withheld) to
which such selling Holder or other indemnified Person may become subject under
the Securities Act, the Exchange Act, other applicable federal or state
securities laws or any rule or regulation promulgated under either of them, or
common law, insofar as such losses, claims, damages or liabilities (or actions
or proceedings in respect thereof) arise out of or are based upon (i) any untrue
statement or alleged untrue statement of a material fact contained in any
Registration Statement under which such securities were registered under the
Securities Act or the omission or alleged omission to state therein a material
fact required to be stated therein or necessary to make the statements therein,
in light of the circumstances under which they were made, not misleading, (ii)
any untrue statement or alleged untrue statement of a material fact contained in
any preliminary Prospectus, together with the documents incorporated by
reference therein (as amended or supplemented if the Company shall have filed
with the SEC any amendment thereof or supplement thereto), if used prior to the
effective date of such Registration Statement, or contained in the Prospectus,
together with the documents incorporated by reference therein (as

                                      -11-



amended or supplemented if the Company shall have filed with the SEC any
amendment thereof or supplement thereto), or the omission or alleged omission to
state therein a material fact required to be stated therein or necessary in
order to make the statements therein, in light of the circumstances under which
they were made, not misleading or (iii) any violation by the Company of the
Securities Act, the Exchange Act, other applicable federal or state securities
laws or any rule or regulation promulgated under either of them, or common law
applicable to the Company and relating to action required of or inaction by the
Company in connection with any such registration, and the Company will reimburse
such selling Holder and each other indemnified Person for any legal or any other
expenses reasonably incurred by any of them in connection with investigating or
defending any such loss, claim, liability, action or proceeding; provided,
however, that the Company shall not be liable to any such selling Holder or
other indemnified Person in any such case to the extent that any such loss,
claim, damage, liability (or action or proceeding in respect thereof) or expense
arises out of or is based upon any untrue statement or alleged untrue statement
or omission or alleged omission made in such Registration Statement or amendment
thereof or supplement thereto or in any such preliminary, final or summary
Prospectus in reliance upon and in conformity with written information furnished
to the Company by or on behalf of any such selling Holder or other indemnified
Person, specifically for use in the preparation thereof; and provided, further,
that the Company will not be liable to any Person who participates as an
underwriter in any underwritten offering or sale of Registrable Securities, or
to any Person who is a selling Holder in any offering or sale of Registrable
Securities, or any other Person, if any, who controls such underwriter or
selling Holder within the meaning of the Securities Act, under the indemnity
agreement in this Section 6(A) with respect to any preliminary Prospectus or the
final Prospectus (including any amended or supplemented preliminary or final
Prospectus), as the case may be, to the extent that any such loss, claim, damage
or liability of such underwriter, selling Holder or controlling Person results
from the fact that such underwriter, selling Holder or controlling Person sold
Registrable Securities to a person to whom there was not sent or given, at or
prior to the written confirmation of such sale, a copy of the final Prospectus
as then amended or supplemented, whichever is most recent, if the Company has
previously furnished copies thereof to such underwriter, selling Holder or
controlling Person and such final Prospectus, as then amended or supplemented,
has corrected any such misstatement or omission; and provided, further, that the
Company shall not be liable to any Affiliate, general and limited partner,
member and shareholder, director, officer, manager, employee, attorney,
investment advisor or agent of any selling Holder under the indemnity agreement
in this Section 6(A) if the Company is not liable to such selling Holder under
this Section 6(A). Such indemnity shall remain in full force and effect
regardless of any investigation made by or on behalf of such Indemnified
Stockholder or other indemnified Person.

     B. Indemnification by the Sellers. In consideration of the Company's
including any Registrable Securities in any Registration Statement filed in
accordance with Section 2 or 3, each prospective selling Holder (each, a "Holder
Indemnitor") of such Registrable Securities and any underwriter shall indemnify
and hold harmless (in the same manner and to the same extent as set forth in
Section 6(A)) the Company and its directors, officers, employees, managers,
attorneys, investment advisors and agents and each person controlling the
Company within the meaning of the Securities Act (each, a "Company Indemnitee")
against any and all losses, claims, damages

                                      -12-



or liabilities, joint or several, and expenses (including any amounts paid in
any settlement effected with such Holder Indemnitor's consent, which consent
shall not be unreasonably withheld) to which the Company Indemnitees may become
subject under the Securities Act, the Exchange Act, other applicable federal or
state securities laws or any rule or regulation promulgated under either of
them, or common law, insofar as such losses, claims, damages or liabilities (or
actions or proceedings in respect thereof) arise solely out of or are based
solely upon any statement or alleged statement in or omission or alleged
omission from such Registration Statement, any preliminary, final or summary
Prospectus contained therein, or any amendment or supplement, if such statement
or alleged statement or omission or alleged omission was made in reliance upon
and in conformity with written information furnished to the Company or its
representatives by or on behalf of such selling Holder or underwriter
specifically for use in the preparation of such Registration Statement,
preliminary, final or summary Prospectus or amendment or supplement. Such
indemnity shall remain in full force and effect regardless of any investigation
made by or on behalf of the Company or any of its directors, officers or
controlling Persons. The Company may require as a condition to its including
Registrable Securities in any Registration Statement filed hereunder that the
Holder thereof acknowledge its agreement to be bound by the provisions of this
Agreement (including Section 6) applicable to it.

     C. Notices of Claims. Promptly after receipt by an indemnified party
hereunder of written notice of the commencement of any action or proceeding with
respect to which a claim for indemnification may be made pursuant to this
Section 6, such indemnified party will, if a claim in respect thereof is to be
made against an indemnifying party, give written notice to the indemnifying
party of the commencement of such action; provided, however, that the failure of
any indemnified party to give notice as provided herein shall not relieve the
indemnifying party of its obligations under this Section 6, except to the extent
that the indemnifying party is actually prejudiced by such failure to give
notice. If any such claim or action shall be brought against an indemnified
party, and it shall notify the indemnifying party thereof, the indemnifying
party shall be entitled to participate therein, and, to the extent that it
wishes, jointly with any other similarly notified indemnifying party, to assume
the defense thereof with counsel reasonably satisfactory to the indemnified
party; provided, further, that if, in the indemnified party's reasonable
judgment, a conflict of interest between the indemnified party and the
indemnifying party exists in respect of such claim, then such indemnified party
shall have the right to participate in the defense of such claim and to employ
one counsel at the indemnifying party's expense to represent such indemnified
party. No indemnified party will consent to entry of any judgment or enter into
any settlement without the indemnifying party's consent to such judgment or
settlement, which shall not be unreasonably withheld.

     D. Contribution. If the indemnification provided for in this Section 6 is
unavailable or insufficient to hold harmless an indemnified party under this
Section 6, then each indemnifying party shall contribute to the amount paid or
payable by such indemnified party as a result of the losses, claims, damages or
liabilities referred to in this Section 6 in such proportion as is appropriate
to reflect the relative fault of the indemnifying party on the one hand and the
indemnified party on the other hand in connection with statements or omissions
which resulted in such losses, claims, damages or liabilities, as well as any
other relevant equitable considerations. The relative fault shall be determined
by reference to, among other things, whether the untrue or alleged untrue
statement of a material fact or the omission or alleged omission to state a
material

                                      -13-



fact relates to information supplied by the indemnifying party or the
indemnified party and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such untrue statements or
omission. The Company agrees, and the Holders (in consideration of the Company's
including any Registrable Securities in any Registration Statement filed in
accordance with Section 2 or 3) shall be deemed to have agreed, that it would
not be just and equitable if contributions pursuant to this Section 6(D) were to
be determined by pro rata allocation or by any other method or allocation which
does not take account of the equitable considerations referred to in the first
two sentences of this Section 6(D). The amount paid by an indemnified party as a
result of the losses, claims, damages or liabilities referred to in the first
sentence of this Section 6(D) shall be deemed to include any legal or other
expenses reasonably incurred by such indemnified party in connection with
investigating or defending any action or claim (which shall be limited as
provided in Section 6(C) if the indemnifying party has assumed the defense of
any such action in accordance with the provisions thereof) which is the subject
of this Section 6(D). No Person guilty of fraudulent misrepresentation (within
the meaning of Section 11(f) of the Securities Act) shall be entitled to
contribution from any Person who was not guilty of such fraudulent
misrepresentation. Promptly after receipt by an indemnified party of notice of
the commencement of any action against such party in respect of which a claim
for contribution may be made against an indemnifying party under this Section
6(D), such indemnified party shall notify the indemnifying party in writing of
the commencement thereof if the notice specified in Section 6(C) has not been
given with respect to such action; provided, however, that the omission so to
notify the indemnifying party shall not relieve the indemnifying party from any
liability which it may have to any indemnified party otherwise under this
Section 6(D), except to the extent that the indemnifying party is actually
prejudiced by such failure to give notice. Notwithstanding anything in this
Section 6(D) to the contrary, no indemnifying party (other than the Company)
shall be required pursuant to this Section 6(D) to contribute any amount in
excess of the proceeds received by such indemnifying party from the sale of
Registrable Securities in the offering to which the losses, claims, damages or
liabilities of the indemnified parties relate.

                               SECTION 7. RULE 144

     A. At all times following the Effective Date while its securities are
traded on a national exchange or electronic quotation system, the Company shall
provide and file such financial and other information concerning the Company as
may from time to time be required by the SEC, so as to comply with all reporting
requirements under the Exchange Act, and shall, upon request, state in writing
that it has complied with all such requirements, and further agrees that, for so
long as the Company is not subject to Section 13 or 15(d) of the Exchange Act,
the Company shall comply in all respects with paragraph (c)(2) of Rule 144.

     B. Following the Effective Date, subject to the acknowledgement below, the
Company covenants that it will file the reports required to be filed by it under
the Securities Act and the Exchange Act and the rules and regulations adopted by
the SEC thereunder (or, if the Company is not required to file such reports, it
will, upon the request of any holder of Registrable Securities, make publicly
available other information), and it will take such further action as any holder
of Registrable Securities may reasonably request, all to the extent required
from time to time to enable such holder to sell shares of Registrable Securities
without registration under the Securities Act within the limitation of the
exemptions provided by (i) Rule

                                      -14-



144 under the Securities Act, as such Rule may be amended from time to time, or
(ii) any similar rule or regulation hereafter adopted by the SEC.
Notwithstanding the foregoing, the Initial Holders acknowledge that the Company
did not file the Form 10-Q for the quarter ended September 30, 2002 (the "3/rd/
Quarter 2002 Form 10-Q") and that the Company does not intend on filing such
3/rd/ Quarter 2002 Form 10-Q until March 31, 2003, or on such earlier date as
the Company shall deem necessary and appropriate. The Initial Holders hereby
acknowledge that such delinquent filing may delay the ability to exercise their
rights set forth in the Agreement and waive any and all claim that might result
from such delinquent filing of the 3/rd/ Quarter 2002 Form 10-Q. Upon the
request of any holder of Registrable Securities, the Company will deliver to
such holder a written statement as to whether it has complied with such
requirements.

                      SECTION 8. UNDERWRITTEN REGISTRATIONS

     A. Selection of Underwriters. If any of the Registrable Securities covered
by any Demand Registration are to be sold in an underwritten offering, the
underwriter or underwriters and managing underwriter or managing underwriters
that will administer the offering shall be selected by the Holder that initiated
such Demand Registration; provided, however, that such underwriters and managing
underwriters shall be subject to the approval of the Company, which approval
shall not be unreasonably withheld.

     B. Agreements of Selling Holders. No Holder shall sell any of its
Registrable Securities in any underwritten offering pursuant to a registration
hereunder unless such Holder agrees to sell such Registrable Securities on a
basis provided in an underwriting agreement in customary form. No Holder shall
sell any of its Registrable Securities in any offering, whether or not
underwritten, pursuant to a registration hereunder unless such Holder completes
and executes all questionnaires, powers of attorney, indemnities, underwriting
agreements, lock-ups and other documents required under the terms of such
underwriting agreements or as reasonably requested by the Company.

                         SECTION 9. HOLDBACK AGREEMENTS

     A. Restrictions on Public Sales by Holders. To the extent not inconsistent
with applicable law, each Holder that is timely notified in writing by the
managing underwriter or underwriters shall not effect any public sale or
distribution (including a sale pursuant to Rule 144) of any issue being
registered in an underwritten offering (other than pursuant to an employee stock
option, stock purchase, stock bonus or similar plan, or pursuant to a merger, an
exchange offer or a transaction of the type specified in Rule 145(a) under the
Securities Act), any securities of the Company similar to any such issue or any
securities of the Company convertible into or exchangeable or exercisable for
any such issue or any similar issue, during the 15 days prior to the effective
date of the applicable Registration Statement, if such date is known, or during
the period beginning on such effective date and ending on the earlier of (i) the
completion of the distribution of such securities by the Company pursuant to
such offering and (ii) 180 days after such effective date, except as part of
such registration; provided that such restrictions shall apply not more than
once during any nine-month period and in no case shall such restrictions apply
for an aggregate of more than 360 days after the effective date.

                                      -15-



     B. Restrictions on Public Sales by the Company. If so requested by the
managing underwriter or underwriters, the Company shall not effect any public
sale or distribution of any issue of the same class or series as Registrable
Securities being registered in an underwritten offering (other than pursuant to
an employee stock option, stock purchase, stock bonus or similar plan, or
pursuant to a merger, exchange offer or a transaction of the type specified in
Rule 145(a) under the Securities Act), any securities of the Company similar to
any such issue or any securities of the Company convertible into or exchangeable
or exercisable for any such issue, during the 15 days prior to the effective
date of the applicable Registration Statement, if such date is known, or during
the period beginning on such effective date and ending on the earlier of (i) the
completion of the distribution of such securities by the Company pursuant to
such offering and (ii) 180 days after such effective date, except as part of
such registration.

                            SECTION 10. MISCELLANEOUS

     A. Amendments and Waivers. This Agreement may be amended, and waivers or
consents to departures from the provisions hereof may be given, only by a
written instrument duly executed, in the case of an amendment, by all of the
parties hereto, or in the case of a waiver or consent, by the party against whom
the waiver or consent, as the case may be, is to be effective.

     B. Successors, Assigns and Transferees. The rights under this Agreement may
not be transferred or assigned by a Holder to a transferee of the Holder's
Registrable Securities, except in conjunction with a contemporaneous assignment
of Registrable Securities equal to at least five percent (5%) of the outstanding
shares of New Common Stock (at the time of such transfer) without the Company's
consent. This Agreement shall be binding upon and shall inure to the benefit of
the Company, the Holders and their respective successors, assigns and
transferees.

     C. Integration. This Agreement and the documents referred to herein or
delivered pursuant hereto that form a part hereof contain the entire
understanding of the Company and the Initial Holders with respect to its subject
matter. There are no restrictions, agreements, promises, representations,
warranties, covenants or undertakings with respect to the subject matter hereof
other than those expressly set forth herein. This Agreement supersedes all prior
agreements and understandings between the Company and the Initial Holders with
respect to its subject matter. The Company represents to the Holders that it has
not entered into any agreement which is inconsistent with this Agreement.

     D. Legend. Certificates evidencing Registrable Securities held by Initial
Holders may bear a legend substantially in the form below:

     THE SHARES OF COMMON STOCK REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
     REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR UNDER THE
     SECURITIES LAWS OF ANY STATE OR OTHER JURISDICTION AND MAY NOT BE SOLD,
     OFFERED FOR SALE OR OTHERWISE TRANSFERRED UNLESS REGISTERED OR QUALIFIED
     UNDER SUCH ACT AND APPLICABLE STATE SECURITIES LAWS OR UNLESS THE COMPANY
     RECEIVES AN OPINION OF COUNSEL

                                      -16-



     REASONABLY SATISFACTORY TO IT THAT SUCH REGISTRATION OR QUALIFICATION IS
     NOT REQUIRED.

     E. Notices. All notices and other communications provided for hereunder
shall be in writing and shall be sent by first class mail, telecopier or hand
delivery:

     If to the Company, to:

               Kitty Hawk, Inc.
               P.O. Box 612787
               1515 W. 20th Street
               DFW International Airport, Texas  75261
               Attention:  E. Pierce Marshall, Jr.
               Fax:  (972) 456-2449

     with a copy to:

               Haynes and Boone, LLP
               901 Main Street, Suite 3100
               Dallas, Texas  75202-3789
               Attention:  Garrett A. DeVries, Esq.
               Fax:  (214) 200-0428

     If to any Holder, to the address of such Holder as shown in the stock
record books of the Company, with a copy to:

               Wachtell, Lipton, Rosen & Katz
               51 West 52nd Street
               New York, New York 10019
               Attention:  Scott K. Charles, Esq.
               Fax:  (212) 403-2000

All such notices and communications shall be deemed to have been given or made
(i) when delivered by hand, (ii) three Business Days after being deposited in
the mail, postage prepaid or (iii) when telecopied, receipt acknowledged. The
Company may change its address for receipt of notices by notice of such change
given in the manner contemplated hereby to the Holders.

     F. Descriptive Headings. The headings in this Agreement are for convenience
of reference only and shall not limit, expand or otherwise affect the meaning of
the terms contained herein.

     G. Severability. In the event that any one or more of the provisions hereof
is held invalid, illegal or unenforceable in any respect for any reason, the
validity, legality and enforceability of any such provision in every other
respect and of the remaining provisions hereof shall not be in any way impaired,
it being intended that all rights, powers and privileges of the Company and the
Holders shall be enforceable to the fullest extent permitted by law.

                                      -17-



     H. Governing Law. This Agreement shall be governed by, and construed and
enforced in accordance with, the laws of the State of New York, without regard
to the principles thereof relating to conflict of laws. Each party hereto hereby
consents to the exclusive jurisdiction and venue of the state and federal courts
located in the City and County of New York, New York in any action or proceeding
arising hereunder and to service of process by certified mail, return receipt
requested (which shall constitute "personal service")

     I. Counterparts; Facsimile Signatures. This Agreement may be executed in
two or more counterparts, each of which shall be deemed to be an original, but
all of which together shall constitute one and the same instrument. Facsimile
copies of original signatures shall have the same effect as the original.

     J. Effective Date. This Agreement shall be effective on the Effective Date.

                  [Remainder of page intentionally left blank.]

                                      -18-



     IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed on the date set forth above.

                              KITTY HAWK, INC.

                              By: /s/ Robert W. Zoller, Jr.
                                 -----------------------------------------------
                                 Name: Robert W. Zoller, Jr.
                                 Title: President and Chief Executive Officer


                              EVEREST CAPITAL LIMITED on behalf of its and its
                              affiliates' managed funds and accounts




                              By: /s/ Malcolm Stott
                                 -----------------------------------------------
                                 Name: Malcolm Stott
                                 Title: Director



                              By: /s/ Simon Onabowale
                                 -----------------------------------------------
                                 Name: Simon Onabowale
                                 Title: Principal



                              RESURGENCE ASSET MANAGEMENT, L.L.C.,
                              on behalf of its and its affiliates' managed funds
                              and accounts



                              By: /s/ James B. Rubin
                                 -----------------------------------------------
                                 Name: James B. Rubin
                                 Title: Co-Chairman and Chief Investment Officer



                              STOCKTON, LLC


                              By:_______________________________________________
                                 Name: Elliot Greenberg
                                 Title: Vice President

                                      -19-

EX-10.8

                                                                    Exhibit 10.8

- --------------------------------------------------------------------------------

                       Employment and Severance Agreement

- --------------------------------------------------------------------------------

1.0  Parties and Date

     1.1 Parties. The parties to this modified and restated employment agreement
(this "agreement") are Kitty Hawk, Inc. ("Kitty Hawk"), with its principal place
of business located at 1515 W. 20/th/ Street, P.O. Box 612787, DFW International
Airport, Texas 75261, with a fax number of (972) 456-2449, and Jack Andrew
"Drew" Keith ("Keith"), who resides at 9608 Windy Hollow, Irving, Texas 75063.

     1.2 Date. This agreement is dated and effective October 3, 2002.

2.0  Recitations and Acknowledgments

     2.1 Previous Employment Agreements. Keith has been employed by Kitty Hawk
since on or about September 1, 1999, and there is currently no written
employment agreement effective between Keith and Kitty Hawk. This agreement
supersedes, modifies and restates all previous employment agreements between
Keith and Kitty Hawk.

3.0  Terms of Employment

     3.1 Responsibilities. Keith will be Vice President and Chief Financial
Officer of Kitty Hawk, and Vice President of its subsidiaries, Kitty Hawk
Aircargo, Inc. ("Aircargo") and Kitty Hawk Cargo, Inc. ("Cargo"), and will be
subject to the direction of Kitty Hawk's President and Chief Executive Officer
and board of directors, but he will have authority commensurate with his
responsibilities and shall use his full working time and in fulfillment of his
employee and fiduciary duties will commit his productive time and exert his
efforts to the extent normally and generally expected of a full-time chief
financial officer of a corporation of the size and complexity of Kitty Hawk in
carrying out those responsibilities. Keith is expected to continue to be
involved in all of Kitty Hawk's business, and to play a major role in the
success of the entire enterprise. Both Keith and Kitty Hawk expect Keith's
responsibility, authority and compensation to be adjusted from time to time as
determined by Kitty Hawk's board of directors.

     3.2 Annual Compensation. Keith's basic annual compensation ("basic annual
compensation") shall not be less than $225,000.00, payable in equal semi-monthly
installments. His basic annual compensation may otherwise be adjusted from time
to time, and he may be paid other bonus compensation

Employment and Serverance Agreement                                       Page 1



from time to time based upon his performance and the success of the Kitty Hawk
enterprise, all as determined by the board of directors.

     3.3 Fringe Benefits. Keith shall receive the employee fringe benefits that
are generally available to all Kitty Hawk employees, and such other fringe
benefits as may be determined from time to time by the board of directors.

     3.4 Medical Insurance. During his employment under this agreement and as
provided in P. 3.6B below, Kitty Hawk will provide to Keith at no cost to Keith
medical and hospitalization insurance coverage at least substantially equivalent
to the coverage that is now provided to Keith under Kitty Hawk's employee
medical plans.

     3.5 Proprietary information.

     A.   Keith shall while in Kitty Hawk's employ diligently safeguard Kitty
          Hawk's proprietary information; and when leaving Kitty Hawk's
          employment for whatever reason, shall surrender to Kitty Hawk all
          written or recorded evidence of Kitty Hawk's proprietary information,
          as well as all Kitty Hawk property, in Keith' actual or constructive
          possession.

     B.   After leaving Kitty Hawk's employment for whatever reason, Keith shall
          never disclose, disseminate or utilize Kitty Hawk's proprietary
          information unless Kitty Hawk's chief executive officer expressly
          authorizes the disclosure, dissemination or utilization in writing.

     C.   For the purpose of this agreement, the term "proprietary information"
          shall specifically not include: (a) information that is now in or
          hereafter enters the public domain without a breach of this agreement
          by Keith; (b) information Keith knew already prior to the time of his
          employment by Kitty Hawk; (c) information that is obtained, after the
          date of Keith' termination, by Keith from any third party that is
          lawfully in possession of such information, but only if such
          disclosure of information to Keith does not violate any contractual or
          legal obligation to Kitty Hawk on the part of such third party or does
          not breach a confidential relationship of such third party to Kitty
          Hawk; and (d) information required or requested to be disclosed by
          court order, subpoena, data request or other legal process or by
          applicable regulatory authorities; provided, however, that Keith
          provide Kitty Hawk with prompt written notice of any such request or
          requirement so that we may seek a protective order or other
          appropriate remedy.

     3.6 Termination. Both Kitty Hawk and Keith shall have the right to
terminate this employment agreement with or without cause at any time with
30-days' written notice to the other party.

Employment and Serverance Agreement                                       Page 2



     A.   If Keith terminates the agreement without material breach by Kitty
          Hawk, Keith shall waive all rights to any compensation under this
          agreement that would otherwise have been payable after the
          termination. If Keith terminates the agreement without material
          breach, Keith agrees to deliver to Kitty Hawk a letter of resignation
          related to all positions Keith holds within Kitty Hawk, Aircargo and
          Cargo.

     B.   If Kitty Hawk terminates his employment without material breach by
          Keith prior to December 31, 2002, Keith shall be entitled as his
          exclusive remedies to (i) such portion of the basic annual
          compensation he would have received from the date of termination
          through December 31, 2002, payable when it would have been paid in the
          absence of such termination, and (ii) the medical insurance benefits
          provided under P. 3.4 he would have otherwise received through
          December 31, 2002 in the absence of such termination, plus (iii) three
          (3) months worth of his basic annual compensation, payable when it
          would have been paid in the absence of termination and (iv) the
          medical insurance benefits provided under P. 3.4 for a period of three
          (3) months after the date of termination. If Kitty Hawk terminates his
          employment without material breach by Keith after December 31, 2002,
          Keith shall be entitled as his exclusive remedies to (i) three (3)
          months worth of his basic annual compensation, payable when it would
          have been paid in the absence of termination and (ii) the medical
          insurance benefits provided under P. 3.4 for a period of three (3)
          months after the date of termination. If Kitty Hawk terminates Keith'
          employment for cause, he shall not be entitled to the remedies set
          forth in this P. 3.6B. If Kitty Hawk terminates Keith's employment
          without his material breach either before or after December 31, 2002,
          Keith agrees to deliver to Kitty Hawk a letter of resignation related
          to all positions Keith holds within Kitty Hawk, Aircargo and Cargo.

     C.   If because of disability Keith becomes unable to perform his duties
          under his employment prior to any termination, or if Keith dies during
          his employment under this agreement prior to any termination, Keith'
          shall rely on the proceeds of insurance policies covering his
          disability or death as maintained by Kitty Hawk as his sole remedy in
          lieu of the compensation set for in P. 3.6B above. If Keith shall
          become disabled or shall die after termination and during the time the
          severance compensation is being paid, Keith's estate shall be paid the
          compensation as set forth in P. 3.6B above.

4.0  Hiring of Kitty Hawk Employees After Termination. If Keith is terminated
     without material breach of this agreement, for a period of three (3) years
     after Keith's termination, Keith agrees that he will not attempt to
     knowingly hire, directly or by someone under his direct supervision and at

Employment and Serverance Agreement                                       Page 3



     his direction, as an employee, independent contractor or otherwise, any of
     Kitty Hawk's officers or key employees, so long as such officer or key
     employee was not terminated by Kitty Hawk and such officer or key employee
     is still employed by Kitty Hawk.

5.0  RELEASES

     A.   Upon Keith' termination, in consideration of the severance provided in
          p. 3.6B above and other good and valuable consideration, the
          sufficiency of which is hereby acknowledged, Keith shall release, to
          the greatest extent allowable by applicable law, all claims against
          Kitty Hawk, its subsidiaries and each of their respective officers,
          directors, employees and agents, related to his employment and his
          termination, except for any claim of willful breach. subject to the
          preceding sentence, this full, final and unconditional release shall
          include, but is not limited to, any and all claims and causes of
          action whatsoever, whether founded on contract (except for this
          agreement), tort, statute, regulation (federal, state or local),
          common law, or any other theory or grounds, including but not limited
          to, any adminstrative claims, and claims under the Occupational Safety
          and Health Act, the Americans With Disabilities Act, Title VII of the
          Civil Rights Act of 1964 and Any Subsequent Years (Including, But Not
          limited to, the Civil Rights Act of 1991), the Older Workers Benefit
          Protection Act, the federal Age Discrimination in Employment Act, and
          any Discrimination On the Basis of National Origin, Sex, Race, Age,
          Handicap, or Marital Status, Breach of Contract, Breach of Any Other
          Employment agreement or contract, promissory estoppel, hostile work
          environment, wrongful discharge, sexual harassment, breach of covenant
          of good faith and fair dealing, harassment and or discrimination of
          any type, intentional or negligent infliction of emotional distress,
          wrongful termination, fraud, misrepresentation, defamation,
          interference with prospecive economic advantage, failure to pay wages
          or other monies owed.

     B.   Upon Keith' termination, Kitty Hawk shall release Keith of all claims,
          known or unknown, against Keith in connection with his obligations
          arising out of or in connection with this agreement, except

Employment and Serverance Agreement                                       Page 4



     Such Release Shall Not Apply to Claims That are the Result Of KEITH'
     willful misconduct, including but not limited to undiscovered intentional
     breaches of prohibitions against the disclosure of the proprietary
     information of Kitty Hawk or either of its affiliates, or a commitment made
     to bind Kitty Hawk or either of its affiliates without apparent or real
     authority. nothing herein shall be deemed a modification of the
     indemnication provisions of Kitty Hawk's Certificate of Incorporation, and
     if a conflict arises between this agreement and the Certificate of
     Incorporation, the Certificate of Incorporation shall govern.

6.0  General Provisions

     6.1 Entire Agreement and Amendments. This agreement is the entire agreement
between Kitty Hawk and Keith with respect to the subject matter set forth in
this agreement and it merges and supersedes all former agreements, promises or
representations, whether oral or written, express or implied, that relate to
Keith' employment with Kitty Hawk. To amend this agreement, Kitty Hawk and Keith
must sign a written amendment that identifies by paragraph number the provision
that it purports to amend. No noncomplying course of dealing or waiver shall be
construed to amend this agreement.

     6.2 Construction. This agreement has been executed and delivered in Texas,
whose substantive law (excluding conflict of laws rules that might apply the
substantive law of another jurisdiction) shall govern its effect and
construction, except that Delaware corporate law shall govern the internal
affairs of Kitty Hawk and other corporate matters where applicable. No rule of
construction resolving ambiguity against a drafting party shall apply. This
agreement binds and benefits the parties and their respective heirs, personal
representatives, successors and assigns. Keith agrees that his obligations under
this agreement to protect Kitty Hawk's proprietary information are in addition
to Keith' implied obligations under Texas law, and that all of those obligations
may be enforced by equitable remedies, such as injunction, as well as by damages
resulting from their breach. If any provision of this agreement is invalid or
unenforceable, the remaining provisions shall nevertheless be enforceable.

     6.3 Notices. All notices hereunder must be in writing. Notices may be given
by mail, fax or other delivery to a party at its notice address, which is that
party's address in P. 1.0 unless that party has designated another notice
address by notice hereunder. A notice given by Federal Express or U.S. Express
Mail, fee prepaid, return receipt requested, addressed to the intended recipient
at its notice address, will be deemed given three business days after deposit
with Federal Express or the U.S. Postal Service. Any notice given by other means
will be effective only when received by the addressee.

Employment and Serverance Agreement                                       Page 5



     6.4 Breach, Notice and Time to Cure. In the event that either party
breaches this agreement, the non-breaching party shall give the breaching party
written notice of such breach and the breaching party shall have the opportunity
for five (5) business days from the date of receipt of such notice to cure the
breach.

     6.5 Binding Agreement to Arbitrate Disputes. Any controversy or claim
arising out of or relating to this agreement, performance under it, or the
arbitrability of any claim between the parties, must be settled exclusively by
arbitration under the Commercial Arbitration Rules of the American Arbitration
Association ("AAA"); except that (i) P. 6.2 must govern applicable law and
construction, (ii) no arbitration demand or action upon a claim arising out of
or relating to this agreement or its performance may be commenced more than two
years after the cause of action accrues, (iii) the locale of any arbitration
must be Dallas, Texas, (iv) the arbitration shall be conducted by a single
arbitrator, which shall be mutually selected by both parties, (v) the language
of the arbitration must be English, (vi) any award must state the arbitrator's
material findings of fact and conclusions of law, (vii) a party may seek
preliminary injunctive or other equitable relief from any court of competent
jurisdiction only to preserve the status quo pending selection of the
arbitrator, (viii) the arbitrator may by interim or final award grant
declarative and injunctive and other equitable relief; and (ix) a prevailing
party in litigation to require arbitration or to obtain preliminary relief
pending selection of an arbitrator, in arbitration, or in litigation to confirm
or enforce an arbitration award will be entitled to recover its reasonable
attorneys' fees and costs. Any suit to require arbitration under this agreement,
or to enforce judgment upon an arbitration award, may be brought in any court of
competent jurisdiction.

                                        /s/ Drew Keith
                                           -------------------------------------
                                        JACK ANDREW KEITH


                                        KITTY HAWK, INC.



                                        By: /s/ Robert W. Zoller, Jr.
                                           -------------------------------------
                                           Robert W. Zoller, Jr.,
                                           President and Chief Executive Officer

Employment and Serverance Agreement                                       Page 6

EX-10.9

                                                                    EXHIBIT 10.9

- --------------------------------------------------------------------------------

                       EMPLOYMENT AND SEVERANCE AGREEMENT

- --------------------------------------------------------------------------------

1.0      Parties and Date

         1.1 Parties. The parties to this modified and restated employment
agreement (this "agreement") are Kitty Hawk Aircargo, Inc. ("Kitty Hawk"), with
its principal place of business located at 1515 W. 20/th/ Street, P.O. Box
612787, DFW International Airport, Texas 75261, with a fax number of (972)
456-2449, and J. Clark Stevens ("Stevens"), who resides at 2606 Twelve Oaks
Lane, Colleyville, Texas 76034.

         1.2 Date. This agreement is dated and effective October 3, 2002.

2.0      Recitations and Acknowledgments

         2.1 Previous Employment Agreements. Stevens has been employed by Kitty
Hawk since on or about September 1, 1998, and there is currently no written
employment agreement effective between Stevens and Kitty Hawk. This agreement
supersedes, modifies and restates all previous employment agreements between
Stevens and Kitty Hawk.

3.0      Terms of Employment

         3.1 Responsibilities. Stevens will be President of Kitty Hawk, and will
be subject to the direction of Kitty Hawk's Chief Executive Officer and board of
directors, but he will have authority commensurate with his responsibilities and
shall use his full working time and in fulfillment of his employee and fiduciary
duties will commit his productive time and exert his efforts to the extent
normally and generally expected of a full-time president of a corporation of the
size and complexity of Kitty Hawk in carrying out those responsibilities.
Stevens is expected to continue to be involved in all of Kitty Hawk's business,
and to play a major role in the success of the entire enterprise. Both Stevens
and Kitty Hawk expect Stevens' responsibility, authority and compensation to be
adjusted from time to time as determined by Kitty Hawk's board of directors.

         3.2 Annual Compensation. Stevens's basic annual compensation ("basic
annual compensation") shall not be less than $185,000.00, payable in equal
semi-monthly installments. His basic annual compensation may otherwise be
adjusted from time to time, and he may be paid other bonus compensation from
time to time based upon his performance and the success of the Kitty Hawk
enterprise, all as determined by the board of directors.

Employment and Severance Agreement                                        Page 1



         3.3 Fringe Benefits. Stevens shall receive the employee fringe benefits
that are generally available to all Kitty Hawk employees, and such other fringe
benefits as may be determined from time to time by the board of directors.

         3.4 Medical Insurance. During his employment under this agreement and
as provided in P. 3.6B below, Kitty Hawk will provide to Stevens at no cost to
Stevens medical and hospitalization insurance coverage at least substantially
equivalent to the coverage that is now provided to Stevens under Kitty Hawk's
employee medical plans.

         3.5 Proprietary information.

         A.  Stevens shall while in Kitty Hawk's employ diligently safeguard
             Kitty Hawk's proprietary information; and when leaving Kitty Hawk's
             employment for whatever reason, shall surrender to Kitty Hawk all
             written or recorded evidence of Kitty Hawk's proprietary
             information, as well as all Kitty Hawk property, in Stevens' actual
             or constructive possession.

         B.  After leaving Kitty Hawk's employment for whatever reason, Stevens
             shall never disclose, disseminate or utilize Kitty Hawk's
             proprietary information unless Kitty Hawk's chief executive officer
             expressly authorizes the disclosure, dissemination or utilization
             in writing.

         C.  For the purpose of this agreement, the term "proprietary
             information" shall specifically not include: (a) information that
             is now in or hereafter enters the public domain without a breach of
             this agreement by Stevens; (b) information Stevens knew already
             prior to the time of his employment by Kitty Hawk; (c) information
             that is obtained, after the date of Stevens' termination, by
             Stevens from any third party that is lawfully in possession of such
             information, but only if such disclosure of information to Stevens
             does not violate any contractual or legal obligation to Kitty Hawk
             on the part of such third party or does not breach a confidential
             relationship of such third party to Kitty Hawk; and (d) information
             required or requested to be disclosed by court order, subpoena,
             data request or other legal process or by applicable regulatory
             authorities; provided, however, that Stevens provide Kitty Hawk
             with prompt written notice of any such request or requirement so
             that we may seek a protective order or other appropriate remedy.


         3.6 Termination. Both Kitty Hawk and Stevens shall have the right to
terminate this employment agreement with or without cause at any time with
30-days' written notice to the other party.

Employment and Severance Agreement                                        Page 2



         A.  If Stevens terminates the agreement without material breach by
             Kitty Hawk, Stevens shall waive all rights to any compensation
             under this agreement that would otherwise have been payable after
             the termination. If Stevens terminates the agreement without
             material breach, Stevens agrees to deliver to Kitty Hawk a letter
             of resignation related to all positions Stevens holds within Kitty
             Hawk.

         B.  If Kitty Hawk terminates his employment without material breach by
             Stevens prior to December 31, 2002, Stevens shall be entitled as
             his exclusive remedies to (i) such portion of the basic annual
             compensation he would have received from the date of termination
             through December 31, 2002, payable when it would have been paid in
             the absence of such termination, and (ii) the medical insurance
             benefits provided under P. 3.4 he would have otherwise received
             through December 31, 2002 in the absence of such termination, plus
             (iii) three (3) months worth of his basic annual compensation,
             payable when it would have been paid in the absence of termination
             and (iv) the medical insurance benefits provided under P. 3.4 for a
             period of three (3) months after the date of termination. If Kitty
             Hawk terminates his employment without material breach by Stevens
             after December 31, 2002, Stevens shall be entitled as his exclusive
             remedies to (i) three (3) months worth of his basic annual
             compensation, payable when it would have been paid in the absence
             of termination and (ii) the medical insurance benefits provided
             under P. 3.4 for a period of three (3) months after the date of
             termination. If Kitty Hawk terminates Stevens' employment for
             cause, he shall not be entitled to the remedies set forth in this
             P. 3.6B. If Kitty Hawk terminates Stevens' employment without his
             material breach either before or after December 31, 2002, Stevens
             agrees to deliver to Kitty Hawk a letter of resignation related to
             all positions Stevens holds within Kitty Hawk.

         C.  If because of disability Stevens becomes unable to perform his
             duties under his employment prior to any termination, or if Stevens
             dies during his employment under this agreement prior to any
             termination, Stevens' shall rely on the proceeds of insurance
             policies covering his disability or death as maintained by Kitty
             Hawk as his sole remedy in lieu of the compensation set for in P.
             3.6B above. If Stevens shall become disabled or shall die after
             termination and during the time the severance compensation is being
             paid, Stevens' estate shall be paid the compensation as set forth
             in P. 3.6B above.

4.0      Hiring of Kitty Hawk Employees after Termination. If Stevens is
         terminated without material breach of this agreement, for a period of
         three (3) years after Stevens's termination, Stevens agrees that he
         will not attempt to knowingly hire, directly or by someone under his
         direct

Employment and Severance Agreement                                        Page 3



         supervision and at his direction, as an employee, independent
         contractor or otherwise, any of Kitty Hawk's officers or key employees,
         so long as such officer or key employee was not terminated by Kitty
         Hawk and such officer or key employee is still employed by Kitty Hawk.

5.0      Releases

         A.  UPON STEVENS' TERMINATION, IN CONSIDERATION OF THE SEVERANCE
             PROVIDED IN P. 3.6B ABOVE AND OTHER GOOD AND VALUABLE
             CONSIDERATION, THE SUFFICIENCY OF WHICH IS HEREBY ACKNOWLEDGED,
             STEVENS SHALL RELEASE, TO THE GREATEST EXTENT ALLOWABLE BY
             APPLICABLE LAW, ALL CLAIMS AGAINST KITTY HAWK, ITS SUBSIDIARIES AND
             EACH OF THEIR RESPECTIVE OFFICERS, DIRECTORS, EMPLOYEES AND AGENTS,
             RELATED TO HIS EMPLOYMENT AND HIS TERMINATION, EXCEPT FOR ANY CLAIM
             OF WILLFUL BREACH. SUBJECT TO THE PRECEDING SENTENCE, THIS FULL,
             FINAL AND UNCONDITIONAL RELEASE SHALL INCLUDE, BUT IS NOT LIMITED
             TO, ANY AND ALL CLAIMS AND CAUSES OF ACTION WHATSOEVER, WHETHER
             FOUNDED ON CONTRACT (EXCEPT FOR THIS AGREEMENT), TORT, STATUTE,
             REGULATION (FEDERAL, STATE OR LOCAL), COMMON LAW, OR ANY OTHER
             THEORY OR GROUNDS, INCLUDING BUT NOT LIMITED TO, ANY ADMINSTRATIVE
             CLAIMS, AND CLAIMS UNDER THE OCCUPATIONAL SAFETY AND HEALTH ACT,
             THE AMERICANS WITH DISABILITIES ACT, TITLE VII OF THE CIVIL RIGHTS
             ACT OF 1964 AND ANY SUBSEQUENT YEARS (INCLUDING, BUT NOT LIMITED
             TO, THE CIVIL RIGHTS ACT OF 1991), THE OLDER WORKERS BENEFIT
             PROTECTION ACT, THE FEDERAL AGE DISCRIMINATION IN EMPLOYMENT ACT,
             AND ANY DISCRIMINATION ON THE BASIS OF NATIONAL ORIGIN, SEX, RACE,
             AGE, HANDICAP, OR MATRITAL STATUS, BREACH OF CONTRACT, BREACH OF
             ANY OTHER EMPLOYMENT AGREEMENT OR CONTRACT, PROMISSORY ESTOPPEL,
             HOSTILE WORK ENVIRONMENT, WRONGFUL DISCHARGE, SEXUAL HARASSMENT,
             BREACH OF COVENANT OF GOOD FAITH AND FAIR DEALING, HARASSMENT AND
             OR DISCRIMINATION OF ANY TYPE, INTENTIONAL OR NEGLIGENT INFLICTION
             OF EMOTIONAL DISTRESS, WRONGFUL TERMINATION, FRAUD,
             MISREPRESENTATION, DEFAMATION, INTERFERENCE WITH PROSPECIVE
             ECOMONIC ADVANTAGE, FAILURE TO PAY WAGES OR OTHER MONIES OWED.

         B.  UPON STEVENS' TERMINATION, KITTY HAWK SHALL RELEASE STEVENS OF ALL
             CLAIMS, KNOWN OR UNKNOWN, AGAINST STEVENS IN CONNECTION WITH HIS
             OBLIGATIONS ARISING OUT OF OR IN CONNECTION WITH HIS EMPLOYMENT

Employment and Severance Agreement                                        Page 4



             AND THIS AGREEMENT, EXCEPT SUCH RELEASE SHALL NOT APPLY TO CLAIMS
             THAT ARE THE RESULT OF STEVENS' WILLFUL MISCONDUCT, INCLUDING BUT
             NOT LIMITED TO UNDISCOVERED INTENTIONAL BREACHES OF PROHIBITIONS
             AGAINST THE DISCLOSURE OF THE PROPRIETARY INFORMATION OF KITTY HAWK
             OR EITHER OF ITS AFFILIATES, OR A COMMITMENT MADE TO BIND KITTY
             HAWK OR EITHER OF ITS AFFILIATES WITHOUT APPARENT OR REAL
             AUTHORITY. NOTHING HEREIN SHALL BE DEEMED A MODIFICATION OF THE
             INDEMNICATION PROVISIONS OF KITTY HAWK'S CERTIFICATE OF
             INCORPORATION, AND IF A CONFLICT ARISES BETWEEN THIS AGREEMENT AND
             THE CERTIFICATE OF INCORPORATION, THE CERTIFICATE OF INCORPORATION
             SHALL GOVERN.

6.0      General Provisions

         6.1 Entire Agreement and Amendments. This agreement is the entire
agreement between Kitty Hawk and Stevens with respect to the subject matter set
forth in this agreement and it merges and supersedes all former agreements,
promises or representations, whether oral or written, express or implied, that
relate to Stevens' employment with Kitty Hawk. To amend this agreement, Kitty
Hawk and Stevens must sign a written amendment that identifies by paragraph
number the provision that it purports to amend. No noncomplying course of
dealing or waiver shall be construed to amend this agreement.

         6.2 Construction. This agreement has been executed and delivered in
Texas, whose substantive law (excluding conflict of laws rules that might apply
the substantive law of another jurisdiction) shall govern its effect and
construction, except that Delaware corporate law shall govern the internal
affairs of Kitty Hawk and other corporate matters where applicable. No rule of
construction resolving ambiguity against a drafting party shall apply. This
agreement binds and benefits the parties and their respective heirs, personal
representatives, successors and assigns. Stevens agrees that his obligations
under this agreement to protect Kitty Hawk's proprietary information are in
addition to Stevens' implied obligations under Texas law, and that all of those
obligations may be enforced by equitable remedies, such as injunction, as well
as by damages resulting from their breach. If any provision of this agreement is
invalid or unenforceable, the remaining provisions shall nevertheless be
enforceable.

         6.3 Notices. All notices hereunder must be in writing. Notices may be
given by mail, fax or other delivery to a party at its notice address, which is
that party's address in P. 1.0 unless that party has designated another notice
address by notice hereunder. A notice given by Federal Express or U.S. Express
Mail, fee prepaid, return receipt requested, addressed to the intended recipient
at its

Employment and Severance Agreement                                        Page 5



notice address, will be deemed given three business days after deposit with
Federal Express or the U.S. Postal Service. Any notice given by other means will
be effective only when received by the addressee.

         6.4 Breach, Notice and Time to Cure. In the event that either party
breaches this agreement, the non-breaching party shall give the breaching party
written notice of such breach and the breaching party shall have the opportunity
for five (5) business days from the date of receipt of such notice to cure the
breach.

         6.5 Binding Agreement to Arbitrate Disputes. Any controversy or claim
arising out of or relating to this agreement, performance under it, or the
arbitrability of any claim between the parties, must be settled exclusively by
arbitration under the Commercial Arbitration Rules of the American Arbitration
Association ("AAA"); except that (i) P. 6.2 must govern applicable law and
construction, (ii) no arbitration demand or action upon a claim arising out of
or relating to this agreement or its performance may be commenced more than two
years after the cause of action accrues, (iii) the locale of any arbitration
must be Dallas, Texas, (iv) the arbitration shall be conducted by a single
arbitrator, which shall be mutually selected by both parties, (v) the language
of the arbitration must be English, (vi) any award must state the arbitrator's
material findings of fact and conclusions of law, (vii) a party may seek
preliminary injunctive or other equitable relief from any court of competent
jurisdiction only to preserve the status quo pending selection of the
arbitrator, (viii) the arbitrator may by interim or final award grant
declarative and injunctive and other equitable relief; and (ix) a prevailing
party in litigation to require arbitration or to obtain preliminary relief
pending selection of an arbitrator, in arbitration, or in litigation to confirm
or enforce an arbitration award will be entitled to recover its reasonable
attorneys' fees and costs. Any suit to require arbitration under this agreement,
or to enforce judgment upon an arbitration award, may be brought in any court of
competent jurisdiction.

                                                  /s/ Clark Stevens
                                                  ------------------------------
                                                  J. Clark Stevens


                                                  Kitty Hawk Aircargo, Inc.

                                                  By: /s/ Robert W. Zoller, Jr.
                                                      --------------------------
                                                      Robert W. Zoller, Jr.,
                                                      Chief Executive Officer

Employment and Severance Agreement                                        Page 6

EX-10.10

                                                                   EXHIBIT 10.10

- --------------------------------------------------------------------------------

                       EMPLOYMENT AND SEVERANCE AGREEMENT

- --------------------------------------------------------------------------------

1.0  Parties and Date

     1.1 Parties. The parties to this modified and restated employment agreement
(this "agreement") are Kitty Hawk Cargo, Inc. ("Kitty Hawk"), with its principal
place of business located at 1515 W. 20/th/ Street, P.O. Box 612787, DFW
International Airport, Texas 75261, with a fax number of (972) 456-2449, and
Toby J. Skaar ("Skaar"), who resides at 102 Monday Haus, Highland Village, Texas
75077.

     1.2 Date. This agreement is dated and effective October 3, 2002.

2.0  Recitations and Acknowledgments

     2.1 Previous Employment Agreements. Skaar has been employed by Kitty Hawk
since on or about July 23, 1990 and there is currently no written employment
agreement effective between Skaar and Kitty Hawk. This agreement supersedes,
modifies and restates all previous employment agreements between Skaar and Kitty
Hawk.

3.0  Terms of Employment

     3.1 Responsibilities. Skaar will be Vice President and General Manager of
Kitty Hawk, and will be subject to the direction of Kitty Hawk's Chief Executive
Officer and board of directors, but he will have authority commensurate with his
responsibilities and shall use his full working time and in fulfillment of his
employee and fiduciary duties will commit his productive time and exert his
efforts to the extent normally and generally expected of a full-time vice
president and general manager of a corporation of the size and complexity of
Kitty Hawk in carrying out those responsibilities. Skaar is expected to continue
to be involved in all of Kitty Hawk's business, and to play a major role in the
success of the entire enterprise. Both Skaar and Kitty Hawk expect Skaar's
responsibility, authority and compensation to be adjusted from time to time as
determined by Kitty Hawk's board of directors.

     3.2 Annual Compensation. Skaar's basic annual compensation ("basic annual
compensation") shall not be less than $160,000.00, payable in equal semi-monthly
installments. His basic annual compensation may otherwise be adjusted from time
to time, and he may be paid other bonus compensation

Employment and Severance Agreement                                        Page 1



from time to time based upon his performance and the success of the Kitty Hawk
enterprise, all as determined by the board of directors.

     3.3  Fringe Benefits. Skaar shall receive the employee fringe benefits that
are generally available to all Kitty Hawk employees, and such other fringe
benefits as may be determined from time to time by the board of directors.

     3.4  Medical Insurance. During his employment under this agreement and as
provided in P. 3.6B below, Kitty Hawk will provide to Skaar at no cost to Skaar
medical and hospitalization insurance coverage at least substantially equivalent
to the coverage that is now provided to Skaar under Kitty Hawk's employee
medical plans.

     3.5  Proprietary information.

     A.   Skaar shall while in Kitty Hawk's employ diligently safeguard Kitty
          Hawk's proprietary information; and when leaving Kitty Hawk's
          employment for whatever reason, shall surrender to Kitty Hawk all
          written or recorded evidence of Kitty Hawk's proprietary information,
          as well as all Kitty Hawk property, in Skaar' actual or constructive
          possession.

     B.   After leaving Kitty Hawk's employment for whatever reason, Skaar shall
          never disclose, disseminate or utilize Kitty Hawk's proprietary
          information unless Kitty Hawk's chief executive officer expressly
          authorizes the disclosure, dissemination or utilization in writing.

     C.   For the purpose of this agreement, the term "proprietary information"
          shall specifically not include: (a) information that is now in or
          hereafter enters the public domain without a breach of this agreement
          by Skaar; (b) information Skaar knew already prior to the time of his
          employment by Kitty Hawk; (c) information that is obtained, after the
          date of Skaar's termination, by Skaar from any third party that is
          lawfully in possession of such information, but only if such
          disclosure of information to Skaar does not violate any contractual or
          legal obligation to Kitty Hawk on the part of such third party or does
          not breach a confidential relationship of such third party to Kitty
          Hawk; and (d) information required or requested to be disclosed by
          court order, subpoena, data request or other legal process or by
          applicable regulatory authorities; provided, however, that Skaar
          provide Kitty Hawk with prompt written notice of any such request or
          requirement so that we may seek a protective order or other
          appropriate remedy.

     3.6  Termination. Both Kitty Hawk and Skaar shall have the right to
terminate this employment agreement with or without cause at any time with
30-days' written notice to the other party.

Employment and Severance Agreement                                        Page 2



     A.   If Skaar terminates the agreement without material breach by Kitty
          Hawk, Skaar shall waive all rights to any compensation under this
          agreement that would otherwise have been payable after the
          termination. If Skaar terminates the agreement without material
          breach, Skaar agrees to deliver to Kitty Hawk a letter of resignation
          related to all positions Skaar holds within Kitty Hawk.

     B.   If Kitty Hawk terminates his employment without material breach by
          Skaar prior to December 31, 2002, Skaar shall be entitled as his
          exclusive remedies to (i) such portion of the basic annual
          compensation he would have received from the date of termination
          through December 31, 2002, payable when it would have been paid in the
          absence of such termination, and (ii) the medical insurance benefits
          provided under P. 3.4 he would have otherwise received through
          December 31, 2002 in the absence of such termination, plus (iii) three
          (3) months worth of his basic annual compensation, payable when it
          would have been paid in the absence of termination and (iv) the
          medical insurance benefits provided under P. 3.4 for a period of three
          (3) months after the date of termination. If Kitty Hawk terminates his
          employment without material breach by Skaar after December 31, 2002,
          Skaar shall be entitled as his exclusive remedies to (i) three (3)
          months worth of his basic annual compensation, payable when it would
          have been paid in the absence of termination and (ii) the medical
          insurance benefits provided under P. 3.4 for a period of three (3)
          months after the date of termination. If Kitty Hawk terminates Skaar'
          employment for cause, he shall not be entitled to the remedies set
          forth in this P. 3.6B. If Kitty Hawk terminates Skaar's employment
          without his material breach either before or after December 31, 2002,
          Skaar agrees to deliver to Kitty Hawk a letter of resignation related
          to all positions Skaar holds within Kitty Hawk, Aircargo and Cargo.

     C.   If because of disability Skaar becomes unable to perform his duties
          under his employment prior to any termination, or if Skaar dies during
          his employment under this agreement prior to any termination, Skaar
          shall rely on the proceeds of insurance policies covering his
          disability or death as maintained by Kitty Hawk as his sole remedy in
          lieu of the compensation set for in P. 3.6B above. If Skaar shall
          become disabled or shall die after termination and during the time the
          severance compensation is being paid, Skaar's estate shall be paid the
          compensation as set forth in P. 3.6B above.

4.0  Hiring of Kitty Hawk Employees After Termination. If Skaar is terminated
     without material breach of this agreement, for a period of three (3) years
     after Skaar's termination, Skaar agrees that he will not attempt to
     knowingly hire, directly or by someone under his direct supervision and

Employment and Severance Agreement                                        Page 3



         at his direction, as an employee, independent contractor or otherwise,
         any of Kitty Hawk's officers or key employees, so long as such officer
         or key employee was not terminated by Kitty Hawk and such officer or
         key employee is still employed by Kitty Hawk.

5.0      RELEASES

         A.  UPON SKAAR'S TERMINATION, IN CONSIDERATION OF THE SEVERANCE
             PROVIDED INP. 3.6B ABOVE AND OTHER GOOD AND VALUABLE CONSIDERATION,
             THE SUFFICIENCY OF WHICH IS HEREBY ACKNOWLEDGED, SKAAR SHALL
             RELEASE, TO THE GREATEST EXTENT ALLOWABLE BY APPLICABLE LAW, ALL
             CLAIMS AGAINST KITTY HAWK, ITS SUBSIDIARIES AND EACH OF THEIR
             RESPECTIVE OFFICERS, DIRECTORS, EMPLOYEES AND AGENTS, RELATED TO
             HIS EMPLOYMENT AND HIS TERMINATION, EXCEPT FOR ANY CLAIM OF WILLFUL
             BREACH. SUBJECT TO THE PRECEDING SENTENCE, THIS FULL, FINAL AND
             UNCONDITIONAL RELEASE SHALL INCLUDE, BUT IS NOT LIMITED TO, ANY AND
             ALL CLAIMS AND CAUSES OF ACTION WHATSOEVER, WHETHER FOUNDED ON
             CONTRACT (EXCEPT FOR THIS AGREEMENT), TORT, STATUTE, REGULATION
             (FEDERAL, STATE OR LOCAL), COMMON LAW, OR ANY OTHER THEORY OR
             GROUNDS, INCLUDING BUT NOT LIMITED TO, ANY ADMINSTRATIVE CLAIMS,
             AND CLAIMS UNDER THE OCCUPATIONAL SAFETY AND HEALTH ACT, THE
             AMERICANS WITH DISABILITIES ACT, TITLE VII OF THE CIVIL RIGHTS ACT
             OF 1964 AND ANY SUBSEQUENT YEARS (INCLUDING, BUT NOT LIMITED TO,
             THE CIVIL RIGHTS ACT OF 1991), THE OLDER WORKERS BENEFIT PROTECTION
             ACT, THE FEDERAL AGE DISCRIMINATION IN EMPLOYMENT ACT, AND ANY
             DISCRIMINATION ON THE BASIS OF NATIONAL ORIGIN, SEX, RACE, AGE,
             HANDICAP, OR MARITAL STATUS, BREACH OF CONTRACT, BREACH OF ANY
             OTHER EMPLOYMENT AGREEMENT OR CONTRACT, PROMISSORY ESTOPPEL,
             HOSTILE WORK ENVIRONMENT, WRONGFUL DISCHARGE, SEXUAL HARASSMENT,
             BREACH OF COVENANT OF GOOD FAITH AND FAIR DEALING, HARASSMENT AND
             OR DISCRIMINATION OF ANY TYPE, INTENTIONAL OR NEGLIGENT INFLICTION
             OF EMOTIONAL DISTRESS, WRONGFUL TERMINATION, FRAUD,
             MISREPRESENTATION, DEFAMATION, INTERFERENCE WITH PROSPECIVE
             ECONOMIC ADVANTAGE, FAILURE TO PAY WAGES OR OTHER MONIES OWED.

         B.  UPON SKAAR'S TERMINATION, KITTY HAWK SHALL RELEASE SKAAR OF ALL
             CLAIMS, KNOWN OR UNKNOWN, AGAINST SKAAR IN CONNECTION WITH HIS
             OBLIGATIONS ARISING OUT OF OR IN CONNECTION WITH THIS AGREEMENT,
             EXCEPT

Employment and Severance Agreement                                        Page 4



                SUCH RELEASE SHALL NOT APPLY TO CLAIMS THAT ARE THE RESULT OF
                SKAAR' WILLFUL MISCONDUCT, INCLUDING BUT NOT LIMITED TO
                UNDISCOVERED INTENTIONAL BREACHES OF PROHIBITIONS AGAINST THE
                DISCLOSURE OF THE PROPRIETARY INFORMATION OF KITTY HAWK OR
                EITHER OF ITS AFFILIATES, OR A COMMITMENT MADE TO BIND KITTY
                HAWK OR EITHER OF ITS AFFILIATES WITHOUT APPARENT OR REAL
                AUTHORITY. NOTHING HEREIN SHALL BE DEEMED A MODIFICATION OF THE
                INDEMNICATION PROVISIONS OF KITTY HAWK'S CERTIFICATE OF
                INCORPORATION, AND IF A CONFLICT ARISES BETWEEN THIS AGREEMENT
                AND THE CERTIFICATE OF INCORPORATION, THE CERTIFICATE OF
                INCORPORATION SHALL GOVERN.

6.0      General Provisions

         6.1    Entire Agreement and Amendments. This agreement is the entire
agreement between Kitty Hawk and Skaar with respect to the subject matter set
forth in this agreement and it merges and supersedes all former agreements,
promises or representations, whether oral or written, express or implied, that
relate to Skaar's employment with Kitty Hawk. To amend this agreement, Kitty
Hawk and Skaar must sign a written amendment that identifies by paragraph number
the provision that it purports to amend. No noncomplying course of dealing or
waiver shall be construed to amend this agreement.

         6.2    Construction. This agreement has been executed and delivered in
Texas, whose substantive law (excluding conflict of laws rules that might apply
the substantive law of another jurisdiction) shall govern its effect and
construction, except that Delaware corporate law shall govern the internal
affairs of Kitty Hawk and other corporate matters where applicable. No rule of
construction resolving ambiguity against a drafting party shall apply. This
agreement binds and benefits the parties and their respective heirs, personal
representatives, successors and assigns. Skaar agrees that his obligations under
this agreement to protect Kitty Hawk's proprietary information are in addition
to Skaar's implied obligations under Texas law, and that all of those
obligations may be enforced by equitable remedies, such as injunction, as well
as by damages resulting from their breach. If any provision of this agreement is
invalid or unenforceable, the remaining provisions shall nevertheless be
enforceable.

         6.3    Notices. All notices hereunder must be in writing. Notices may
be given by mail, fax or other delivery to a party at its notice address, which
is that party's address in P. 1.0 unless that party has designated another
notice address by notice hereunder. A notice given by Federal Express or U.S.
Express Mail, fee prepaid, return receipt requested, addressed to the intended
recipient at its notice address, will be deemed given three business days after
deposit with

Employment and Severance Agreement                                        Page 5



Federal Express or the U.S. Postal Service. Any notice given by other means will
be effective only when received by the addressee.

         6.4    Breach, Notice and Time to Cure. In the event that either party
breaches this agreement, the non-breaching party shall give the breaching party
written notice of such breach and the breaching party shall have the opportunity
for five (5) business days from the date of receipt of such notice to cure the
breach.

         6.5    Binding Agreement to Arbitrate Disputes. Any controversy or
claim arising out of or relating to this agreement, performance under it, or the
arbitrability of any claim between the parties, must be settled exclusively by
arbitration under the Commercial Arbitration Rules of the American Arbitration
Association ("AAA"); except that (i) P. 6.2 must govern applicable law and
construction, (ii) no arbitration demand or action upon a claim arising out of
or relating to this agreement or its performance may be commenced more than two
years after the cause of action accrues, (iii) the locale of any arbitration
must be Dallas, Texas, (iv) the arbitration shall be conducted by a single
arbitrator, which shall be mutually selected by both parties, (v) the language
of the arbitration must be English, (vi) any award must state the arbitrator's
material findings of fact and conclusions of law, (vii) a party may seek
preliminary injunctive or other equitable relief from any court of competent
jurisdiction only to preserve the status quo pending selection of the
arbitrator, (viii) the arbitrator may by interim or final award grant
declarative and injunctive and other equitable relief; and (ix) a prevailing
party in litigation to require arbitration or to obtain preliminary relief
pending selection of an arbitrator, in arbitration, or in litigation to confirm
or enforce an arbitration award will be entitled to recover its reasonable
attorneys' fees and costs. Any suit to require arbitration under this agreement,
or to enforce judgment upon an arbitration award, may be brought in any court of
competent jurisdiction.

                               /s/ Toby J. Skaar
                               --------------------------------------------
                               TOBY J. SKAAR


                               KITTY HAWK CARGO, INC.


                               By: /s/ Robert W. Zoller, Jr.
                                   ----------------------------------------
                                   Robert W. Zoller, Jr.,
                                   President and Chief Executive Officer

Employment and Severance Agreement                                        Page 6

EX-10.11

                                                                   EXHIBIT 10.11

- --------------------------------------------------------------------------------

                  Salary Continuation and Consulting Agreement

- --------------------------------------------------------------------------------

1.0  Parties and Date

     1.1 Parties. The parties to this salary continuation and consulting
agreement (this "agreement") are Kitty Hawk, Inc. ("Kitty Hawk"), with its
principal place of business located at 1515 W. 20/th/ Street, P.O. Box 612787,
DFW International Airport, Texas 75261, and Tilmon J. Reeves ("Reeves"), who
resides at 316 Lakeland Drive, Highland Village, Texas 75077, with a fax number
of (972) 456-2296.

     1.2 Date. This agreement is dated and effective November 4, 2002.

2.0  Recitations and Acknowledgments

     2.1 Previous Employment. Reeves was the Chairman and Chief Executive
Officer of Kitty Hawk and voluntarily resigned on November 4, 2002. Reeves has
considerable knowledge and experience related to the business of Kitty Hawk as a
result of his prior affiliation with Kitty Hawk as an employee; and Kitty Hawk
desires to recognize the valuable and meritorious services performed for Kitty
Hawk by Reeves during the many years in which he served Kitty Hawk. This
agreement supersedes, modifies and restates all previous agreements between
Reeves and Kitty Hawk.

3.0  Terms of Consultation

     3.1 Term. This agreement shall have an effective date of November 4, 2002
and shall terminate on December 31, 2003, unless earlier terminated or extended
pursuant to the terms contained herein. At the option of Kitty Hawk, this
agreement may be extended for a period of one additional year through December
31, 2004, and if such option is exercised, the non-competition provisions of P.
3.6 shall survive through December 31, 2005. Notwithstanding any other provision
of this agreement, at any time during the Term, Reeves' engagement hereunder
shall terminate upon his death; provided, however, that if Reeves shall die
during the term, his heirs or estate (as the case may be) shall be entitled to
retain all payments previously made hereunder.

     3.2 Responsibilities. Reeves will be a consultant to Kitty Hawk, and will
take on such projects as shall be assigned by Kitty Hawk's Chief Executive
Officer, including but not limited to making an expressed effort to obtain new
relationships for Kitty Hawk within the freight forwarding industry and assist
Kitty

Salary Continuation and Consulting Agreement                              Page 1



Hawk in analyzing and establishing new sources of revenue. Reeves agrees to
perform his work in a prompt, efficient and professional manner, but at
something less than his full working time. Notwithstanding the foregoing, if
Kitty Hawk's Chief Executive Officer attempts to assign a project to Reeves and
Reeves is completely unavailable for such an assignment for a period in excess
two weeks, the payments contemplated hereunder shall cease until such time as
Reeves is again available and begins to perform the project assigned by Kitty
Hawk's Chief Executive Officer. Additionally, Reeves shall comply with those
covenants set forth in to those P. 3.4 and P. 3.5.

     3.3 Compensation. In consideration for the consulting services to be
rendered by Reeves, and in consideration of the covenants of Reeves set forth in
P. 3.4 and P. 3.5, Reeves shall receive basic annual compensation ("basic annual
compensation") of $300,000.00, payable in equal semi-monthly installments, it
being understood that Kitty Hawk shall have the right to deduct therefrom, if
required or deemed advisable, all taxes which may be required to be deducted and
withheld under any provision of applicable law (including but not limited to
social security payments, federal income tax withholding and any other required
deductions).

     3.4 Medical Insurance. During his engagement as a consultant under this
agreement, Kitty Hawk shall use reasonable efforts to cause Reeves to be covered
under Kitty Hawk's medical and hospitalization insurance coverage, at no cost to
Reeves, and such coverage shall be at least substantially equivalent to the
coverage that is was provided to Reeves under Kitty Hawk's employee medical
plans during the immediate past year of his employment with Kitty Hawk. The
insurance described in this paragraph shall be provided only if coverage is
permitted by the terms of Kitty Hawk's medical and hospitalization insurance
policy as in effect at any applicable time hereunder. If it is determined that
Reeves is not eligible to be covered by Kitty Hawk's medical and hospitalization
insurance policy, Kitty Hawk agrees to pay Reeves' COBRA premiums for as long as
he otherwise would be entitled to the insurance coverage provided in this P.
3.4.

     3.5 Confidential information.

     A.  Reeves acknowledges, understands and agrees that all Confidential
         Information (defined below), whether developed by Kitty Hawk or others
         or whether developed by Reeves while carrying out the terms and
         provisions of this Agreement (or previously while employed by Kitty
         Hawk), shall be the exclusive and confidential property of Kitty Hawk
         and shall be regarded, treated and protected as such. Reeves shall
         diligently safeguard and not use, copy or transfer Confidential
         Information other than as is necessary in carrying out his duties
         pursuant to this agreement or in preserving, defending or pursuing his
         rights or remedies under this agreement or any other agreement or
         relationship between

Salary Continuation and Consulting Agreement                              Page 2



         Reeves and Kitty Hawk. Reeves shall also make available to Kitty Hawk
         any and all information of which he had knowledge and that is relevant
         to the business of Kitty Hawk and shall make all suggestions and
         recommendations that he feels will benefit Kitty Hawk.

     B.  "Confidential Information" shall mean information which is used in
         Kitty Hawk's business and (i) is proprietary to, about or created by
         Kitty Hawk; (ii) gives Kitty Hawk some competitive advantage, the
         opportunity of obtaining such advantage, or the disclosure of which
         could be detrimental to the interests of Kitty Hawk; (iii) is not
         typically disclosed to non-employees by Kitty Hawk; or (iv) is
         designated as Confidential Information by Kitty Hawk, or from all the
         relevant circumstances should reasonably be assumed by Reeves to be
         confidential to Kitty Hawk. For the purposes of this P. 3.4, the term
         "Kitty Hawk" shall be construed to include any and all subsidiaries of
         Kitty Hawk.

     B.  "Confidential Information" shall not include information publicly known
         (other than as a result of a disclosure by Reeves). The phrase
         "publicly known" shall mean readily accessible to the public in a
         written publication, shall not include information that is only
         available by a substantial searching of the published literature or
         information the substance of which must be pieced together from a
         number of different publications and sources, or by focused searches of
         literature guided by Confidential Information. The burden of proving
         that information or skills and experience are not Confidential
         Information shall be on the party asserting such exclusion.
         Additionally, "Confidential Information" shall specifically not
         include: (a) information Reeves knew already prior to the time of his
         employment by Kitty Hawk; (b) information that is obtained, after the
         termination of this agreement, by Reeves from any third party that is
         lawfully in possession of such information, but only if such disclosure
         of information to Reeves does not violate any contractual or legal
         obligation to Kitty Hawk on the part of such third party or does not
         breach a confidential relationship of such third party to Kitty Hawk;
         and (c) information required or requested to be disclosed by court
         order, subpoena, data request or other legal process or by applicable
         regulatory authorities; provided, however, that Reeves provide Kitty
         Hawk with prompt written notice of any such request or requirement so
         that we may seek a protective order or other appropriate remedy.
         Notwithstanding any of the foregoing, for the purposes hereof,
         "Confidential Information" shall be deemed to include the trade
         secrets, designs, concepts, and recipes, and all rights thereto, owned
         or used by, Kitty Hawk, and it is hereby stipulated by the parties
         hereto that such information is not generally known or otherwise
         available to the public.

Salary Continuation and Consulting Agreement                              Page 3



     C.  The covenants and agreements of Reeves set forth in this P. 3.4 are of
         a continuing nature and shall survive the expiration, termination or
         cancellation of this agreement regardless of the reason therefor.

3.5  Prohibited Activities.

     A.  In consideration for the disclosure of Confidential Information
         described in P. 3.4 of this agreement and the compensation set forth in
         P. 3.3, during the term of this agreement and for a period from its
         termination through December 31, 2004 (unless extended pursuant to the
         terms of P. 3.1 above), Reeves shall not:

             (1)  directly or indirectly, engage or invest in, own, manage,
                  operate, control or participate in the ownership, management,
                  operation or control of, be employed by, associated or in any
                  manner connected with, or render services or advice to, any
                  Competing Business (defined below); provided, however, that
                  the Reeves may invest in the securities of any enterprise (but
                  without otherwise participating in the activities of such
                  enterprise) if such securities are listed on any national or
                  regional securities exchange or have been registered under
                  Section 12(g) of the Securities Exchange Act of 1934;

             (2)  directly or indirectly, either as principal, agent,
                  independent contractor, Reeves, director, officer, employee,
                  employer, advisor (whether paid or unpaid), stockholder,
                  partner or in any other individual or representative capacity
                  whatsoever, either for his own benefit or for the benefit of
                  any other person or entity, divert or take away any customers
                  or clients of Kitty Hawk; or

             (3)  directly or indirectly, either as principal, agent,
                  independent contractor, Reeves, director, officer, employee,
                  employer, advisor (whether paid or unpaid), stockholder,
                  partner or in any other individual or representative capacity
                  whatsoever, either for his own benefit or for the benefit of
                  any other person or entity, either (i) hire, attempt to hire,
                  contact or solicit with respect to hiring, any employee of
                  Kitty Hawk, (ii) induce or otherwise counsel, advise or
                  encourage any employee of Kitty Hawk to leave the employment
                  of Kitty Hawk, or (iii) induce any representative or agent of
                  Kitty Hawk to terminate or modify its relationship with Kitty
                  Hawk.

             (4)  "Competing Business" shall mean any individual, business,
                  firm, company, partnership, joint venture, organization, or

Salary Continuation and Consulting Agreement                              Page 4



                  other entity whose products or services compete, in whole or
                  in part, at any time during the term with the products or
                  services of Kitty Hawk or any of its subsidiaries in any
                  market area in the United States of America.

     B.  Reeves agrees that if a court of competent jurisdiction determines that
         the length of time or any other restriction, or portion thereof, set
         forth in this P. 3.5 is overly restrictive and unenforceable, the court
         may reduce or modify such restrictions to those which it deems
         reasonable and enforceable under the circumstances, and as so reduced
         or modified, the parties hereto agree that the restrictions of this P.
         3.5 shall remain in full force and effect. Reeves further agrees that
         if a court of competent jurisdiction determines that any provision of
         this P. 3.5 is invalid or against public policy, the remaining
         provisions of this P. 3.5 and the remainder of this agreement shall not
         be affected thereby, and shall remain in full force and effect.

     C.  In the event that Reeves would like to provide consultation services to
         one of Kitty Hawk's customers or another company that may potentially
         be considered a Competing Business, Reeves may seek the written consent
         of Kitty Hawk's Chief Executive Officer to provide such consulting
         services, which shall not be unreasonably withheld.

     D.  Nothing herein shall prohibit Reeves from engaging at any time in any
         manner in any business other than a Competing Business, the customers
         of which may include customers of Kitty Hawk.

     E.  Because of the unique nature of the Confidential Information, Reeves
         acknowledges, understands and agrees that Kitty Hawk will suffer
         immediate and irreparable harm if Reeves fails to comply with any of
         his obligations under P. 3.4 and P. 3.5 of this agreement, and that
         monetary damages will be inadequate to compensate Kitty Hawk for such
         breach. Accordingly, Reeves agrees that Kitty Hawk shall, in addition
         to any other remedies available to it at law or in equity, be entitled
         to temporary, preliminary, and permanent injunctive relief to enforce
         the terms of P. 3.4 and P. 3.5 without the necessity of proving
         inadequacy of legal remedies or irreparable harm.

3.6  Independent Contractor. While serving as a consultant, Reeves shall at all
     times be an independent contractor rather than a co-venturer, agent,
     employee or representative of Kitty Hawk.

4.0  Hiring of Kitty Hawk Employees. In addition to the provisions of P. 3.5,
     for a period of three (3) years after the effective date of this agreement,
     Reeves agrees that he will not attempt to knowingly hire, directly or by
     someone under his direct supervision and at his direction, as an employee,
     independent contractor or otherwise, any of Kitty Hawk's officers or key
     employees, so long as such officer or key employee was

Salary Continuation and Consulting Agreement                              Page 5



     not terminated by Kitty Hawk and such officer or key employee is still
     employed by Kitty Hawk.

5.0  Releases

     A.  In consideration of the compensation provided in P. 3.3 above and other
         good and valuable consideration, the sufficiency of which is hereby
         acknowledged, Reeves hereby releases, to the greatest extent allowable
         by applicable law, all claims against Kitty Hawk, its subsidiaries and
         each of their respective officers, directors, employees and agents,
         related to his employment and his termination, except for any claim of
         willful breach. Subject to the preceding sentence, this full, final and
         unconditional release shall include, but is not limited to, any and all
         claims and causes of action whatsoever, whether founded on contract
         (except for this agreement), tort, statute, regulation (federal, state
         or local), common law, or any other theory or grounds, including but
         not limited to, any adminstrative claims, and claims under the
         Occupational Safety and Health Act, the Americans with Disabilities
         Act, title vii of the civil Rights Act of 1964 and any subsequent years
         (including, but not limited to, the civil rights act of 1991), the
         Older Workers Benefit Protection Act, the federal Age Discrimination in
         Employment Act, and any discrimination on the basis of national origin,
         sex, race, age, handicap, or marital status, breach of contract, breach
         of any other employment agreement or contract, promissory estoppel,
         hostile work environment, wrongful discharge, sexual harassment, breach
         of covenant of good faith and fair dealing, harassment and or
         discrimination of any type, intentional or negligent infliction of
         emotional distress, wrongful termination, fraud, misrepresentation,
         defamation, interference with prospecive economic advantage, failure to
         pay wages or other monies owed.

     B.  Kitty Hawk hereby releases Reeves of all claims, known or unknown,
         against Reeves in connection with his obligations arising out of or in
         connection with this agreement, except such release shall not apply to
         claims that are the result of Reeves' willful misconduct, including but
         not limited to

Salary Continuation and Consulting Agreement                              Page 6



         undiscovered intentional breaches of prohibitions against the
         disclosure of the confidential information of Kitty Hawk or either of
         its affiliates, or a commitment made to bind Kitty Hawk or either of
         its affiliates without apparent or real authority. nothing herein shall
         be deemed a modification of the indemnication provisions of Kitty
         Hawk's Certificate of Incorporation, and if a conflict arises between
         this agreement and the certificate of Incorporation, the Certificate of
         Incorporation shall govern.

6.0  General Provisions

     6.1 Entire Agreement and Amendments. This agreement is the entire agreement
between Kitty Hawk and Reeves with respect to the subject matter set forth in
this agreement and it merges and supersedes all former agreements, promises or
representations, whether oral or written, express or implied, that relate to
Reeves' employment with Kitty Hawk. To amend this agreement, Kitty Hawk and
Reeves must sign a written amendment that identifies by paragraph number the
provision that it purports to amend. No noncomplying course of dealing or waiver
shall be construed to amend this agreement.

     6.2 Construction. This agreement has been executed and delivered in Texas,
whose substantive law (excluding conflict of laws rules that might apply the
substantive law of another jurisdiction) shall govern its effect and
construction, except that Delaware corporate law shall govern the internal
affairs of Kitty Hawk and other corporate matters where applicable. No rule of
construction resolving ambiguity against a drafting party shall apply. This
agreement binds and benefits the parties and their respective heirs, personal
representatives, successors and assigns. Reeves agrees that his obligations
under this agreement to protect Kitty Hawk's proprietary information are in
addition to Reeves' implied obligations under Texas law, and that all of those
obligations may be enforced by equitable remedies, such as injunction, as well
as by damages resulting from their breach. If any provision of this agreement is
invalid or unenforceable, the remaining provisions shall nevertheless be
enforceable.

     6.3 Notices. All notices hereunder must be in writing. Notices may be given
by mail, fax or other delivery to a party at its notice address, which is that
party's address in P. 1.0 unless that party has designated another notice
address by notice hereunder. A notice given by Federal Express or U.S. Express
Mail, fee prepaid, return receipt requested, addressed to the intended recipient
at its notice address, will be deemed given three business days after deposit
with Federal Express or the U.S. Postal Service. Any notice given by other means
will be effective only when received by the addressee.

Salary Continuation and Consulting Agreement                              Page 7



     6.4 Breach, Notice and Time to Cure. In the event that either party
breaches this agreement, the non-breaching party shall give the breaching party
written notice of such breach and the breaching party shall have the opportunity
for five (5) business days from the date of receipt of such notice to cure the
breach.

     6.5 Binding Agreement to Arbitrate Disputes. Any controversy or claim
arising out of or relating to this agreement, performance under it, or the
arbitrability of any claim between the parties, must be settled exclusively by
arbitration under the Commercial Arbitration Rules of the American Arbitration
Association ("AAA"); except that (i) P. 6.2 must govern applicable law and
construction, (ii) no arbitration demand or action upon a claim arising out of
or relating to this agreement or its performance may be commenced more than two
years after the cause of action accrues, (iii) the locale of any arbitration
must be Dallas, Texas, (iv) the arbitration shall be conducted by a single
arbitrator, which shall be mutually selected by both parties, (v) the language
of the arbitration must be English, (vi) any award must state the arbitrator's
material findings of fact and conclusions of law, (vii) a party may seek
preliminary injunctive or other equitable relief from any court of competent
jurisdiction only to preserve the status quo pending selection of the
arbitrator, (viii) the arbitrator may by interim or final award grant
declarative and injunctive and other equitable relief; and (ix) a prevailing
party in litigation to require arbitration or to obtain preliminary relief
pending selection of an arbitrator, in arbitration, or in litigation to confirm
or enforce an arbitration award will be entitled to recover its reasonable
attorneys' fees and costs. Any suit to require arbitration under this agreement,
or to enforce judgment upon an arbitration award, may be brought in any court of
competent jurisdiction.

                                      Consultant


                                      /s/ Tilmon J. Reeves
                                      ------------------------------------------
                                      Tilmon J. Reeves


                                      Kitty Hawk, Inc.


                                      By: /s/ Robert W. Zoller, Jr.
                                          --------------------------------------
                                          Robert W. Zoller, Jr.,
                                          President and Chief Executive Officer

Salary Continuation and Consulting Agreement                              Page 8

EX-10.12

                                                                   Exhibit 10.12

                 -----------------------------------------------

                   SALARY CONTINUATION AND SEVERANCE AGREEMENT

                 -----------------------------------------------

1.0  PARTIES AND DATE

     1.1 Parties. The parties to this salary continuation and consulting
agreement (this "agreement") are Kitty Hawk, Inc. ("Kitty Hawk"), with its
principal place of business located at 1515 W. 20th Street, P.O. Box 612787, DFW
International Airport, Texas 75261, with a fax number of (972) 456-2449, and
James R. Craig ("Craig"), who resides at 6000 Highland Hills Lane, Colleyville,
Texas 76034.

     1.2 Date. This agreement is dated and effective November 4, 2002.

2.0  RECITATIONS AND ACKNOWLEDGMENTS

     2.1 Previous Employment. Craig was the Vice President and General Counsel
of Kitty Hawk, and a member of its Board of Directors, and voluntarily resigned
all of his offices on November 4, 2002. Craig has considerable knowledge and
experience related to the business of Kitty Hawk as a result of his prior
affiliation with Kitty Hawk as an employee; and Kitty Hawk desires to recognize
the valuable and meritorious services performed for Kitty Hawk by Craig during
the many years in which he served Kitty Hawk. This agreement supersedes,
modifies and restates all previous agreements between Craig and Kitty Hawk.

3.0  TERMS OF SALARY CONTINUATION

     3.1 Compensation. As severance compensation, Kitty Hawk will pay Craig six
(6) months worth of what was Craig's basic annual compensation at time of his
resignation, which was $225,000.00. This severance shall be payable in equal
semi-monthly installments, the first being payable November 15, 2002, and the
last being payable April 30, 2003, it being understood that Kitty Hawk shall
have the right to deduct therefrom, if required or deemed advisable, all taxes
which may be required to be deducted and withheld under any provision of
applicable law (including but not limited to social security payments, federal
income tax withholding and any other required deductions).


Salary Continuation and Severance Agreement                               Page 1



     3.2 Medical Insurance. For a period of six (6) months ending April 30,
2003, Kitty Hawk shall exert reasonable efforts to cause Craig to be covered
under Kitty Hawk's medical and hospitalization insurance coverage, at no cost to
Craig, and such coverage shall be at least substantially equivalent to the
coverage that is was provided to Craig under Kitty Hawk's employee medical plans
at the time of his resignation. The insurance described in this paragraph shall
be provided only if coverage is permitted by the terms of Kitty Hawk's medical
and hospitalization insurance policy as in effect at any applicable time
hereunder. If it is determined that Craig is not eligible to be covered by Kitty
Hawk's medical and hospitalization insurance policy, Kitty Hawk agrees to pay
Craig's COBRA premiums for as long as he otherwise would be entitled to the
insurance coverage provided in this P. 3.2.

     3.3 Transitional Obligations and Office Access. Craig agrees to use his
reasonable efforts to assist Kitty Hawk in a successful and smooth transition of
the oversight of the legal, human resources and security functions of Kitty Hawk
to those individuals as designated by Kitty Hawk's Chief Executive Officer.
Craig shall be allowed to maintain his office at Kitty Hawk through December 3,
2002, and during such period shall have the same access to Kitty Hawk's systems,
information and files that was available to him before his resignation.
Thereafter, Craig shall have, with the consent of Kitty Hawk's Chief Executive
Officer or such person as he shall designate (which shall not be unreasonably
withheld), access to Kitty Hawk's files, documents and other records, regardless
of format, that he determines to be reasonably related to (i) Craig's work done
on behalf of Kitty Hawk and (ii) the defense of the lawsuit filed against him by
M. Tom Christopher.

     3.4  Proprietary information.

     A.   Craig shall diligently safeguard Kitty Hawk's proprietary information
          and shall surrender to Kitty Hawk or destroy all written or recorded
          evidence of Kitty Hawk's proprietary information, and shall return any
          Kitty Hawk property in Craig's possession, once the Christopher
          litigation has concluded.

     B.   Craig shall never disclose, disseminate or utilize Kitty Hawk's
          proprietary information unless Kitty Hawk's chief executive officer
          expressly authorizes the disclosure, dissemination or utilization in
          writing, except to the extent reasonably necessary for his defense of
          the Christopher litigation, and then only consistently with the
          applicable rules of procedure governing the litigation and with the
          Delaware General Corporation Law and Kitty Hawk's certificate of
          incorporation.

     C.   For the purpose of this agreement, the term "proprietary information"
          shall specifically not include: (a) information that is now in or
          hereafter enters


Salary Continuation and Severance Agreement                               Page 2




          the public domain without a breach of this agreement by Craig; (b)
          information Craig knew already prior to the time of his employment by
          Kitty Hawk; (c) information that is obtained, after the date of
          Craig's departure from Kitty Hawk, by Craig from any third party that
          is lawfully in possession of such information, but only if such
          disclosure of information to Craig does not violate any contractual or
          legal obligation to Kitty Hawk on the part of such third party or does
          not breach a confidential relationship of such third party to Kitty
          Hawk; and (d) information required or requested to be disclosed by
          court order, subpoena, data request or other legal process or by
          applicable regulatory authorities; provided, however, that Craig
          provide Kitty Hawk with prompt written notice of any such request or
          requirement so that Kitty Hawk may seek a protective order or other
          appropriate remedy.

     D.   The covenants and agreements of Craig set forth in this P. 3.4 are of
          a continuing nature and shall survive the expiration, termination or
          cancellation of this agreement regardless of the reason therefor.

     E.   Because of the unique nature of the Confidential Information, Craig
          acknowledges, understands and agrees that Kitty Hawk will suffer
          immediate and irreparable harm if Craig fails to comply with any of
          his obligations under this P. 3.4 of this agreement, and that monetary
          damages will be inadequate to compensate Kitty Hawk for such breach.
          Accordingly, Craig agrees that Kitty Hawk shall, in addition to any
          other remedies available to it at law or in equity, be entitled to
          temporary, preliminary, and permanent injunctive relief to enforce the
          terms of P. 3.4 without the necessity of proving inadequacy of legal
          remedies or irreparable harm.

4.0  RELEASES

     A.   IN CONSIDERATION OF THE COMPENSATION PROVIDED IN P. 3.1 ABOVE AND
          OTHER GOOD AND VALUABLE CONSIDERATION, THE SUFFICIENCY OF WHICH IS
          HEREBY ACKNOWLEDGED, CRAIG HEREBY RELEASES, TO THE GREATEST EXTENT
          ALLOWABLE BY APPLICABLE LAW, ALL CLAIMS, KNOWN OR UNKNOWN, BASED UPON
          ACTIONS, INACTIONS OR BREACHES THROUGH NOVEMBER 4, 2002 AGAINST KITTY
          HAWK, ITS SUBSIDIARIES AND EACH OF THEIR RESPECTIVE OFFICERS,
          DIRECTORS, EMPLOYEES AND AGENTS, RELATED TO HIS EMPLOYMENT AND HIS
          RESIGNATION, EXCEPT FOR (I) ANY CLAIM OF WILLFUL BREACH, (II) CLAIMS
          OF ANY KIND AGAINST M. TOM


Salary Continuation and Severance Agreement                               Page 3




          CHRISTOPHER UPON WHICH CHRISTOPHER IS NOT ACTUALLY INDEMNIFIED BY
          KITTY HAWK AS POST-PETITION CLAIMS, AND (III) THE INDEMNIFICATION
          OBLIGATIONS FOR COSTS OF DEFENSE THAT MAY ARISE AS A RESULT OF ANY
          CLAIMS OF ANY KIND ASSERTED BY M. TOM CHRISTOPHER AGAINST CRAIG FOR
          ACTIONS TAKEN IN CRAIG'S NORMAL COURSE AND SCOPE OF HIS EMPLOYMENT
          WITH KITTY HAWK. SUBJECT TO THE PRECEDING SENTENCE, THIS FULL, FINAL
          AND UNCONDITIONAL RELEASE SHALL INCLUDE, BUT IS NOT LIMITED TO, ANY
          AND ALL CLAIMS AND CAUSES OF ACTION WHATSOEVER, WHETHER FOUNDED ON
          CONTRACT (EXCEPT FOR THIS AGREEMENT), TORT, STATUTE, REGULATION
          (FEDERAL, STATE OR LOCAL), COMMON LAW, OR ANY OTHER THEORY OR GROUNDS,
          INCLUDING BUT NOT LIMITED TO, ANY ADMINSTRATIVE CLAIMS, AND CLAIMS
          UNDER THE OCCUPATIONAL SAFETY AND HEALTH ACT, THE AMERICANS WITH
          DISABILITIES ACT, TITLE VII OF THE CIVIL RIGHTS ACT OF 1964 AND ANY
          SUBSEQUENT YEARS (INCLUDING, BUT NOT LIMITED TO, THE CIVIL RIGHTS ACT
          OF 1991), THE OLDER WORKERS BENEFIT PROTECTION ACT, THE FEDERAL AGE
          DISCRIMINATION IN EMPLOYMENT ACT, AND ANY DISCRIMINATION ON THE BASIS
          OF NATIONAL ORIGIN, SEX, RACE, AGE, HANDICAP, OR MARITAL STATUS,
          BREACH OF CONTRACT, BREACH OF ANY OTHER EMPLOYMENT AGREEMENT OR
          CONTRACT, PROMISSORY ESTOPPEL, HOSTILE WORK ENVIRONMENT, WRONGFUL
          DISCHARGE, SEXUAL HARASSMENT, BREACH OF COVENANT OF GOOD FAITH AND
          FAIR DEALING, HARASSMENT AND OR DISCRIMINATION OF ANY TYPE,
          INTENTIONAL OR NEGLIGENT INFLICTION OF EMOTIONAL DISTRESS, WRONGFUL
          TERMINATION, FRAUD, MISREPRESENTATION, DEFAMATION, INTERFERENCE WITH
          PROSPECIVE ECONOMIC ADVANTAGE, FAILURE TO PAY WAGES OR OTHER MONIES
          OWED. ADDITIONALLY, CRAIG HEREBY RELEASES AND WAIVES ANY CLAIM FOR
          INDEMNIFICATION AGAINST KITTY HAWK OF ANY DAMAGES AWARDED TO M. TOM
          CHRISTOPHER IN A FINAL, NON-APPEALABLE JUDGEMENT ARISING OUT OF THAT
          CERTAIN ADVERSARIAL PROCEEDING NO. 0204164, STYLED M. TOM CHRISTOPHER
          V. JAMES R. CRAIG, PENDING IN THE UNITED STATES BANKRUPTCY COURT FOR
          THE NORTHERN DISTRICT OF TEXAS, FORT WORTH DIVISION, IN KITTY HAWK'S
          CHAPTER 11


Salary Continuation and Severance Agreement                               Page 4



          PROCEEDING BEING JOINTLY ADMINISTERED UNDER CASE NO. 400-42141-BJH-11.

     B.   KITTY HAWK HEREBY RELEASES CRAIG OF ALL CLAIMS, KNOWN OR UNKNOWN,
          BASED UPON ACTIONS, INACTIONS OR BREACHES THROUGH NOVEMBER 4, 2002,
          AGAINST CRAIG IN CONNECTION WITH HIS OBLIGATIONS ARISING OUT OF OR IN
          CONNECTION WITH THIS HIS EMPLOYMENT BY KITTY HAWK, EXCEPT SUCH RELEASE
          SHALL NOT APPLY TO CLAIMS THAT ARE THE RESULT OF CRAIG'S WILLFUL
          MISCONDUCT, INCLUDING BUT NOT LIMITED TO UNDISCOVERED INTENTIONAL
          BREACHES OF PROHIBITIONS AGAINST THE DISCLOSURE OF THE CONFIDENTIAL
          INFORMATION OF KITTY HAWK OR EITHER OF ITS AFFILIATES, OR A COMMITMENT
          MADE TO BIND KITTY HAWK OR EITHER OF ITS AFFILIATES WITHOUT APPARENT
          OR REAL AUTHORITY. NOTHING HEREIN SHALL BE DEEMED A MODIFICATION OF
          THE INDEMNICATION PROVISIONS OF KITTY HAWK'S CERTIFICATE OF
          INCORPORATION, AND IF A CONFLICT ARISES BETWEEN THIS AGREEMENT AND THE
          CERTIFICATE OF INCORPORATION, THE CERTIFICATE OF INCORPORATION SHALL
          GOVERN.

5.0  GENERAL PROVISIONS

     5.1 Entire Agreement and Amendments. This agreement is the entire agreement
between Kitty Hawk and Craig with respect to the subject matter set forth in
this agreement and it merges and supersedes all former agreements, promises or
representations, whether oral or written, express or implied, that relate to
Craig's employment with Kitty Hawk, except that it is not intended to modify any
obligation of M. Tom Christopher to Craig under or with respect to any such
agreement. To amend this agreement, Kitty Hawk and Craig must sign a written
amendment that identifies by paragraph number the provision that it purports to
amend. No noncomplying course of dealing or waiver shall be construed to amend
this agreement.

     5.2 Construction. This agreement has been executed and delivered in Texas,
whose substantive law (excluding conflict of laws rules that might apply the
substantive law of another jurisdiction) shall govern its effect and
construction, except that Delaware corporate law shall govern the internal
affairs of Kitty Hawk and other corporate matters where applicable. No rule of
construction resolving ambiguity against a drafting party shall apply. This
agreement binds and benefits the parties and their respective heirs, personal
representatives, successors and assigns. Craig agrees that his obligations under
this agreement to protect Kitty Hawk's proprietary information are in addition
to Craig's


Salary Continuation and Severance Agreement                               Page 5




implied obligations under Texas law, and that all of those obligations may be
enforced by equitable remedies, such as injunction, as well as by damages
resulting from their breach. If any provision of this agreement is invalid or
unenforceable, the remaining provisions shall nevertheless be enforceable.

     5.3 Notices. All notices hereunder must be in writing. Notices may be given
by mail, fax or other delivery to a party at its notice address, which is that
party's address in P. 1.0 unless that party has designated another notice
address by notice hereunder. A notice given by Federal Express or U.S. Express
Mail, fee prepaid, return receipt requested, addressed to the intended recipient
at its notice address, will be deemed given three business days after deposit
with Federal Express or the U.S. Postal Service. Any notice given by other means
will be effective only when received by the addressee.

     5.4 Breach, Notice and Time to Cure. In the event that either party
breaches this agreement, the non-breaching party shall give the breaching party
written notice of such breach and the breaching party shall have the opportunity
for five (5) business days from the date of receipt of such notice to cure the
breach.

     5.5 Binding Agreement to Arbitrate Disputes. Any controversy or claim
arising out of or relating to this agreement, performance under it, or the
arbitrability of any claim between the parties, must be settled exclusively by
arbitration under the Commercial Arbitration Rules of the American Arbitration
Association ("AAA"); except that (i) P. 5.2 must govern applicable law and
construction, (ii) no arbitration demand or action upon a claim arising out of
or relating to this agreement or its performance may be commenced more than two
years after the cause of action accrues, (iii) the locale of any arbitration
must be Dallas, Texas, (iv) the arbitration shall be conducted by a single
arbitrator, (v) the language of the arbitration must be English, (vi) any award
must state the arbitrator's material findings of fact and conclusions of law,
(vii) a party may seek preliminary injunctive or other equitable relief from any
court of competent jurisdiction only to preserve the status quo pending
selection of the arbitrator, (viii) the arbitrator may by interim or final award
grant declarative and injunctive and other equitable relief; and (ix) a
prevailing party in litigation to require arbitration or to obtain preliminary
relief pending selection of an arbitrator, in arbitration, or in litigation to
confirm or enforce an arbitration award will be entitled to recover its
reasonable attorneys' fees and costs. Any suit to require arbitration under this
agreement, or to enforce judgment upon an arbitration award, may be brought in
any court of competent jurisdiction.

                                    /S/ JAMES R. CRAIG
                                    --------------------------------------------
                                    JAMES R. CRAIG


Salary Continuation and Severance Agreement                               Page 6




                                     KITTY HAWK, INC.

                                     By: /S/ ROBERT W. ZOLLER, JR.
                                         ---------------------------------------
                                         Robert W. Zoller, Jr.,
                                         President and Chief Executive Officer


Salary Continuation and Severance Agreement Page                          Page 7

EX-10.14

                                                                   Exhibit 10.14

[SpencerStuart Logo]                                      TERM SHEET - continued
                                                                Robert W. Zoller
                                             President & Chief Executive Officer

                                   Term Sheet
                                Robert W. Zoller

                       President & Chief Executive Officer
                                Kitty Hawk, Inc.

                                October 29, 2002

   Position:                            President & Chief Executive Officer & A
                                        Member of The Board.

   Responsibilities:                    As outlined in the Position and
                                        Candidate Specifications document
                                        provided to you earlier in this search
                                        process.

   Commitment:                          The role of President & Chief Executive
                                        Officer is a full-time one and requires
                                        the best efforts and total professional
                                        commitment of its incumbent. You will be
                                        expected to apply yourself to this role
                                        on a dedicated business, without
                                        interference from other professional
                                        activities. This implies that you
                                        should:

                                        o   Complete any outstanding commitments
                                            outside Kitty Hawk you may have as
                                            soon as possible and advise the
                                            board of what those are; and

                                        o   Not take on any new commitments
                                            outside Kitty Hawk without the prior
                                            approval of the Board.

   Reporting to:                        Board of Directors.

                                        A Non-Executive Chairman will be
                                        appointed in the near- term. You will
                                        also be appointed a director of the
                                        company.

   Management changes:                  We confirm that, as the President &
                                        Chief Executive Officer, you will have
                                        ultimate authority to recruit,
                                        reappoint, or terminate executive staff
                                        at Kitty Hawk.

   Location:                            Dallas, Texas
                                        You will play a lead role in
                                        recommending to the Board the most
                                        appropriate corporate headquarters for
                                        the company. If the board decides to
                                        change the corporate headquarters, Kitty
                                        Hawk will arrange for you to relocate to
                                        that location.



[SpencerStuart Logo]                                      TERM SHEET - continued
                                                                Robert W. Zoller
                                             President & Chief Executive Officer

   Term & Termination:                  Your term as President & Chief Executive
                                        Officer will be for a three year period.
                                        Should you be terminated involuntarily
                                        without cause or "constructively
                                        terminated", you would be provided a
                                        severance equal to twelve months' base
                                        salary and benefits for twelve months.
                                        "Constructively terminated" shall mean
                                        for these purposes involuntary removal
                                        from the President, CEO or Board Member
                                        capacity.

   Base Salary:                         $300,000, subject to review on an annual
                                        basis.

   Incentive Compensation               Kitty Hawk will be introducing a new
   (Cash and Equity)                    incentive compensation program for its
                                        top leadership team. As the CEO, you
                                        will participate in a process over the
                                        near-term, with help of professional
                                        compensation consultants, to develop and
                                        secure Board approval for the new
                                        incentive compensation program. Your own
                                        incentive compensation will be governed
                                        by this new program. You have our
                                        assurance that the Board wants this
                                        program and your participation to be
                                        similar to those in place at comparable
                                        public companies.

   Temporary Living:                    Kitty Hawk will cover the reasonable
                                        cost of a rented apartment (including
                                        utilities) in the Dallas area and the
                                        reasonable cost of a rental car until
                                        the earlier of:

                                        o   The sale of your Hawaii condominium
                                            and the relocation of your goods to
                                            Dallas; or
                                        o   The relocation of the Kitty Hawk
                                            corporate headquarters to a new
                                            location.

                                            Should the decision be taken to keep
                                            the corporate headquarters in
                                            Dallas, then you will be expected to
                                            relocate on a permanent basis within
                                            90 days of that decision.

   Travel Expenses:                     Until such a time as you relocate
                                        permanently, Kitty Hawk will cover your
                                        travel expenses to/from Hawaii to attend
                                        to personal matters (e.g., transferring
                                        basic living necessities such as
                                        clothing, selling your property,
                                        completing your participation on the
                                        University of Hawaii Advisory Board and
                                        the Dean Search Committee). Such travel
                                        should not be excessive and should be
                                        undertaken at lowest possible cost. To
                                        the extent that other airline - airline
                                        travel privileges are available to



[SpencerStuart Logo]                                      TERM SHEET - continued
                                                                Robert W. Zoller
                                             President & Chief Executive Officer

                                        Kitty Hawk executives, you will be
                                        entitled to those and expected to use
                                        them.

   Employment Benefits:                 Standard Kitty Hawk Inc. executive level
                                        benefits.

   Start Date:                          No later than November 11, 2002

   Conditions:                          Subject to approval and election by the
                                        Board Satisfactory background check and
                                        educational verification Satisfactory
                                        medical examination or recent medical
                                        report Maintaining this agreement in
                                        confidence until mutually agreed upon to
                                        communicate it more broadly. Acceptance
                                        of offer by October 31, 2002.

/s/ Myron Kaplan
as Chairman of
the Kitty Hawk Search
Committee

/s/ Robert W. Zoller, Jr.

EX-12.1

                                                                    Exhibit 12.1

                                Kitty Hawk, Inc.

                Calculation of Ratio of Earnings to Fixed Charges

                             (dollars in thousands)



                                                       Successor                            Predecessor
                                                   ------------------    -------------------------------------------------
                                                   Three months ended    Nine months ended       Year ended December 31,
                                                                                               ---------------------------
                                                    December 31, 2002    September 30, 2002       2001             2001
                                                   ------------------    ------------------    -----------      ----------
                                                                                                    
Earnings:
  Income (loss) from continuing operations
     before income taxes ........................       $   2,663            $ (17,540)         $(147,749)      $ (34,850)
  Add: Fixed charges ............................           1,411                6,071             13,125          20,332
                                                        ---------            ---------          ---------       ---------
     Total ......................................       $   4,074            $ (11,469)         $(134,624)      $ (14,518)
                                                        =========            =========          =========       =========

Fixed Charges:
  Interest Expense ..............................       $     154            $   2,133          $   7,051       $  12,751
  Add: Interest factor of operating leases ......           1,257                3,938              6,074           7,581
  Add: Capitalized interest .....................              --                   --                 --              --
                                                        ---------            ---------          ---------       ---------
     Total ......................................       $   1,411            $   6,071          $  13,125       $  20,332
                                                        =========            =========          =========       =========

Ratio of earnings to fixed charges ..............           2.89X              (1.89)X           (10.26)X         (0.71)X

EX-21.1

                                                                    EXHIBIT 21.1

                        SUBSIDIARIES OF KITTY HAWK, INC.

                                                         STATE OR
                                                        COUNTRY OF
   SUBSIDIARY                                          ORGANIZATION
   ----------                                          ------------
   Kitty Hawk Aircargo, Inc.                              Texas

   Kitty Hawk Cargo, Inc.                                 Delaware

EX-99.1

                                                                    EXHIBIT 99.1

                            CERTIFICATION PURSUANT TO
                             18 U.S.C. SECTION 1350,
                             AS ADOPTED PURSUANT TO
                  SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of Kitty Hawk, Inc. (the "Company") on Form
10-K for the year ended December 31, 2002, as filed with the Securities and
Exchange Commission on the date hereof (the "Report"), I, Robert W. Zoller, Jr.,
Chief Executive Officer and President of the Company, certify, pursuant to 18
U.S.C. ss. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, that to my knowledge:

  (1)  The Report fully complies with the requirements of Section 13(a) or 15(d)
       of the Securities Exchange Act of 1934, as amended; and

  (2)  The information contained in the Report fairly presents, in all material
       respects, the financial condition and results of operations of the
       Company.

March 28, 2003                        By: /s/ ROBERT W. ZOLLER, JR.
                                          --------------------------------------
                                          Robert W. Zoller, Jr.
                                          Chief Executive Officer and President

A signed original of this written statement required by Section 906 has been
provided to the Company and will be retained by the Company and furnished to the
Securities and Exchange Commission or its staff upon request.

EX-99.2

                                                                    EXHIBIT 99.2

                            CERTIFICATION PURSUANT TO
                             18 U.S.C. SECTION 1350,
                             AS ADOPTED PURSUANT TO
                  SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of Kitty Hawk, Inc. (the "Company") on Form
10-K for the year ended December 31, 2002, as filed with the Securities and
Exchange Commission on the date hereof (the "Report"), I, Drew Keith, Chief
Financial Officer of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my
knowledge:

  (1)  The Report fully complies with the requirements of Section 13(a) or 15(d)
       of the Securities Exchange Act of 1934, as amended; and

  (2)  The information contained in the Report fairly presents, in all material
       respects, the financial condition and results of operations of the
       Company.

March 28, 2003                        By: /s/ DREW KEITH
                                          --------------------------------------
                                          Drew Keith
                                          Chief Financial Officer

A signed original of this written statement required by Section 906 has been
provided to the Company and will be retained by the Company and furnished to the
Securities and Exchange Commission or its staff upon request.