10-K

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-K

þ	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1933
	For the fiscal year ended December 31, 2006
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	75261
P.O. Box 612787	(Zip Code)
DFW International Airport, Texas
(Address of principal executive offices)

(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
Series A Preferred Stock Purchase Rights

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 under the Securities Act. Yes o     No þ

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o     No þ

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 þ     No o

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.  o

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

Large accelerated filer o     Accelerated filer o     Non-accelerated filer þ

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes o     No þ

The aggregate market value of voting and non-voting common equity held by non-affiliates of the registrant as of June 30, 2006 (the last business day of the registrant’s most recently completed second fiscal quarter) was approximately $42.7 million. (For purposes of determination of the above stated amount, only directors, executive officers and 10% or greater stockholders have been deemed affiliates).

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 þ     No o

At March 29, 2007, there were 52,925,896 shares of common stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE:

Portions of the definitive Proxy Statement for the Registrant’s Annual Meeting of Stockholders have been incorporated by reference into Part III of this annual report on Form 10-K.

KITTY HAWK, INC.

2006 ANNUAL REPORT ON FORM 10-K

TABLE OF CONTENTS

		Page
PART I
Item 1.	Business		3
Item 1A.	Risk Factors		14
Item 1B.	Unresolved Staff Comments		24
Item 2.	Properties		24
Item 3.	Legal Proceedings		25
Item 4.	Submission of Matters to a Vote of Security Holders		25
Item 4A.	Executive Officers of the Registrant		25
PART II
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities		27
Item 6.	Selected Financial Data		29
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		31
Item 7A.	Quantitative and Qualitative Disclosures about Market Risk		52
Item 8.	Consolidated Financial Statements and Supplementary Data		52
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure		52
Item 9A.	Controls and Procedures		52
Item 9B.	Other Information		53
PART III
Item 10.	Directors, Executive Officers and Corporate Governance		53
Item 11.	Executive Compensation		53
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters		53
Item 13.	Certain Relationships and Related Transactions and Director Independence		53
Item 14.	Principal Accounting Fees and Services		53
PART IV
Item 15.	Exhibits and Financial Statement Schedules		54
Signatures			58
Index to Consolidated Financial Statements and Supplementary Data			F-1
Security Agreement
Warrant Agreement
Registration Rights Agreement
Amendment No. 1 to Rights Agreement
Consent of Grant Thornton LLP
Certification of Principal Executive Officer Pursuant to Section 302
Certification of Principal Financial Officer Pursuant to Section 302
Certification of Principal Executive Officer Pursuant to Section 906

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Glossary of Selected Industry Terms

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

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

“Ad-hoc charter” means providing air transportation service consisting of the aircraft, crew, maintenance and insurance on an on-demand basis and may also include other costs to operate the aircraft, including aircraft fuel and aircraft handling charges.

“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.

“Business center” means a major airport or city served by the Company and the surrounding geographic area typically within a 200 mile radius.

“C-check” means a thorough inspection and overhaul of an airframe and its components to ensure the airframe is airworthy.

“DOT” means Department of Transportation.

“EUV” means exclusive use vehicles for the dedicated transportation of truckload freight for a single customer.

“Expendable part” means an aircraft part that is not repaired and reinstalled on an aircraft.

“FAA” means Federal Aviation Administration.

“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 C-check that includes structural inspections, or with respect to an aircraft engine, a heavy shop visit which includes disassembly, inspection, repair or replacement of worn and life-limited parts, reassembly and testing.

“Logistics” means the coordination of EUVs, pickup and delivery and warehousing activities conducted by the Company.

“LTL” means the transportation of less than a full truckload of freight.

“Owner operator” is an individual or a company that owns as well as operates its own truck. An owner operator is responsible for its own fuel, equipment maintenance, licensing, insurance and taxes.

“Power-by-the-hour” means payment for services or use of assets on a flight hour basis.

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

“Truck” means a powered vehicle intended for pulling a trailer or other piece of equipment which cannot propel itself.

“Yield” means revenue expressed on a per chargeable weight pound carried basis. Revenue includes the price charged for the service plus any fuel or security surcharges.

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PART I

ITEM 1.   BUSINESS

General

Kitty Hawk is a holding company providing corporate planning and administrative services. We operate through our three wholly-owned subsidiaries, Kitty Hawk Cargo, Kitty Hawk Ground and Kitty Hawk Aircargo. During the year ended December 31, 2006, we generated 83.4% of our revenue from our scheduled freight network, 11.5% of our revenue from a network management contract, 2.5% of our revenue from our cargo airline and 2.6% of our revenue from our ground transportation operations.

Kitty Hawk Cargo operates a scheduled freight network that principally provides two products for predominantly heavy weight and oversized freight, an expedited overnight and second-morning air product and a time-definite ground freight product. Our network operates between selected cities in North America, including the continental U.S., Canada and Puerto Rico. We have business alliances that allow us to provide freight services to Alaska, Hawaii and Mexico. As of March 26, 2007, our scheduled freight network offered an expedited overnight and second-morning air freight product to 54 business centers and an expedited time-definite ground freight product to 46 business centers.

Kitty Hawk Ground, our ground transportation services company, provides dedicated ground transportation services for Kitty Hawk Cargo’s scheduled freight network utilizing assets acquired from Air Container Transport, Inc., or ACT, in June 2006 as well as managing owner operators and contracted dedicated trucks. Kitty Hawk Ground also generates revenue by providing dedicated or EUV ground services for a limited number of customers, including international and domestic airlines, and local transportation services not associated with our network.

Kitty Hawk Aircargo, our cargo airline, provides dedicated air transportation services primarily for Kitty Hawk Cargo’s scheduled freight network. In addition, Kitty Hawk Aircargo markets and provides ACMI and ad-hoc charter transportation services to a variety of customers. By providing such operations, Kitty Hawk Aircargo improves the utilization of its aircraft and generates additional revenue when its aircraft would otherwise be idle. As of March 26, 2007, Kitty Hawk Aircargo operated seven Boeing 737-300SF cargo aircraft under operating leases, six owned Boeing 727-200 cargo aircraft and one Boeing 727-200 cargo aircraft available under an aircraft and engine use agreement.

We were incorporated on October 20, 1994, as a Delaware corporation. Kitty Hawk Aircargo was incorporated on January 11, 1989, as a Texas corporation, Kitty Hawk Cargo was incorporated on April 13, 1999, as a Delaware corporation and Kitty Hawk Ground was incorporated on April 3, 2006, 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. Other than providing certain services to our wholly-owned subsidiaries, including strategic planning, treasury and accounting functions, human resource management and legal support, Kitty Hawk, Inc. currently does not have any operations separate and apart from those conducted by its subsidiaries. In addition, we continually evaluate businesses and other opportunities, whether or not related to our current businesses, for investment, acquisition and strategic alliances to enhance stockholder value.

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 are made available free of charge through the Company Information section of our Internet website, http://www.kittyhawkcompanies.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.

Recent Developments

On March 29, 2007, we entered into a Security Agreement and Secured Revolving Note, or the Revolving Facility, with Laurus Master Fund, Ltd., or Laurus. This Revolving Facility replaces our prior credit facility with PNC Bank, National Association, or the PNC Credit Facility. The Revolving Facility provides for

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borrowings up to $25 million, subject to a borrowing base of up to 90% of eligible receivables. The Revolving Facility bears interest at prime plus 1.5%, subject to a floor of 9.0% and a cap of 11.0%. There are no financial performance covenants. The Revolving Facility contains non-financial covenants that restrict our ability to, among other things: engage in mergers, consolidations, or other reorganizations; create or permit liens on assets; dispose of certain assets; incur certain indebtedness; guarantee obligations; pay dividends or other distributions (other than dividends on our Series B Redeemable Preferred Stock); materially change the nature of our business; make certain investments; make certain loans or advances; prepay certain indebtedness (with the exception of Laurus or in the ordinary course of business); change our fiscal year or make changes in accounting treatment or reporting practices except as required by GAAP or the law; enter into certain transactions with affiliates; or form new subsidiaries. The Revolving Facility matures on September 30, 2010. The obligations under the Revolving Facility are secured by substantially all of our assets, including the stock of our subsidiaries. As of March 29, 2007, we had a borrowing base of $14.7 million, outstanding borrowings of $9.3 million and $5.4 million of availability. Our outstanding borrowings include $3.9 million to cash collateralize our outstanding letters of credit.

We also issued to Laurus a five year warrant to purchase up to 8,216,657 shares of our common stock, or the Warrant. The exercise price of the Warrant is $0.91 per share. The exercise price is not subject to adjustment or reset, other than to reflect stock splits, stock dividends and similar transactions. Pursuant to the terms of the Warrant, Laurus will not sell any shares for which it has exercised the Warrant prior to March 29, 2008. Laurus also will not sell shares for which it has exercised the Warrant during a 22 day trading period in a number that exceeds 20% of the aggregate dollar trading volume of our common stock for the 22 day trading period immediately preceding the sales.

In connection with the Warrant, we entered into a registration rights agreement whereby we agreed to file a registration statement with the Securities and Exchange Commission covering the registration of the shares of common stock issuable upon exercise of the Warrant within 90 days of the closing date of the Revolving Facility. We agreed to use our best efforts to have the registration statement declared effective within 180 days of the closing date of the Revolving Facility.

Industry Overview

The U.S. freight transportation industry is extremely large and encompasses a broad range of transportation modes and service levels. Freight is shipped on either an expedited or deferred basis. Expedited freight transit times vary from a few hours to overnight to second morning. In contrast, deferred freight includes freight transit times of up to five days. Both expedited and deferred freight include freight of varying sizes and weights, from small envelopes to heavy weight or oversized freight requiring dedicated aircraft or trucks.

Our expedited air freight product generally competes in the heavy weight and oversized, freight segment of the U.S. freight transportation industry. Our scheduled expedited ground freight product generally competes in the heavy weight and oversized, ground freight segment of the U.S. freight transportation industry. These segments are highly competitive and very fragmented. The ability to effectively compete depends on, among other things, price, frequency of service, cargo capacity, freight tracking ability, extent of geographic coverage and reliability.

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.

The expedited freight market is generally served by:

•  freight carriers that primarily provide airport-to-airport air and ground transportation services to freight forwarders and third party logistic providers;

•  freight carriers including integrated carriers that provide door-to-door air and ground freight transportation and delivery services to shippers, freight forwarders and third party logistic providers;

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•  cargo airlines that provide shippers, freight forwarders, third party logistic providers and other airlines with medium and long-term contracted air freight transportation services; and

•  cargo airlines that provide shippers, freight forwarders and third party logistic providers with charter or on-demand services, as opposed to medium and long-term contracted air freight transportation services.

The deferred freight market is generally served by:

•  ground transportation companies that utilize all-truck networks generally offering door-to-door or city-to-city service on a common-carrier LTL basis;

•  ground transportation companies that utilize trucks on a single-haul truck-load and LTL basis; and

•  integrated package delivery or courier companies that primarily provide door-to-door service.

A number of freight transportation companies, including us, provide a combination of delivery services. Specifically, our scheduled freight network provides regularly scheduled expedited and deferred freight delivery services between various cities, our ground transportation services company on occasion provides EUV ground service and local non-network transportation services and our cargo airline on occasion provides ACMI and ad- hoc charter services to customers needing air lift for a specified period of time.

The demand for 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. In addition, the demand for expedited air freight services is influenced by the cost of aircraft fuel as this affects the price of expedited air freight services, and the demand for deferred freight services is influenced by the cost of diesel fuel as this affects the price of trucking services.

We believe the activity level of the following domestic industries have the most significant impact on demand for our scheduled freight services:

•  electronics;

•  telecom and related infrastructure equipment;

•  apparel;

•  automotive; and

•  other durable goods and equipment.

Scheduled Freight Services

General.  We operate an independent primarily airport-to-airport scheduled freight network that principally provides two products for predominantly heavy weight and oversized freight, an expedited overnight and second-morning air product and a time-definite ground freight product. Our network operates between selected cities in North America, including the continental U.S, Canada and Puerto Rico. Most of our expedited air freight product is transported from its city of origination to our hub and sorting facility in Fort Wayne, Indiana before being routed by aircraft or truck to its destination city. Our scheduled expedited ground freight product is routed directly to its destination city or through regional hubs located in Los Angeles, California; San Francisco, California; Dallas, Texas; Atlanta, Georgia; Newark, New Jersey; Seattle, Washington and Fort Wayne, Indiana. We have business alliances that allow us to provide freight services to Alaska, Hawaii and Mexico. We also seek business alliances to expand our scheduled freight network beyond our current service areas.

Our sorting facility in Fort Wayne, Indiana is a 239,000 square foot facility which serves our scheduled freight network. We believe the sorting facility is capable of handling over 2.0 million pounds of freight on any given operational night, or about two and half times our peak volumes in 2006. We also hold options which expire in July 2009 for 14 acres of land adjacent to our sorting facility which could be used to expand our current operations or to accommodate third party distribution centers.

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Our scheduled air freight service currently transports freight by aircraft to and from airports located in 23 cities and is supported by road feeder truck service to and from airports located in 31 cities. In addition, our scheduled ground freight service currently operates to 46 cities at which we receive and/or deliver freight at scheduled times, most of which are also part of the scheduled air freight network. Our business alliances provide air service to 15 additional cities in Alaska, Hawaii and Mexico. We contract with third parties to provide ground handling, freight handling and storage services and facilities at most of the cities we serve. In seven cities, including our primary hub in Fort Wayne, Indiana, our employees operate the facilities we lease and in two cities, we lease facilities that are operated under contract by third parties. We continually evaluate the cities in our scheduled freight network and add and remove cities as circumstances warrant.

In general, we transport the following types of freight:

•  heavy weight freight that cannot be easily handled by one person;

•  hazardous materials;

•  high value and security sensitive freight;

•  dimensionally oversized freight;

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

•  small packages; and

•  live animals.

Our scheduled freight services cater primarily to freight forwarders, logistics companies and airlines. Our customers typically arrange transportation from the shipper to our cargo facility in the city of origin and from our cargo facility in the city of destination to the recipient. We offer our customers various levels of delivery services, including next morning delivery, second-day morning delivery and three, four and five day deferred delivery to our cargo facility in the city of destination. On a limited basis, for an additional fee, we also offer logistics services, including an airport-to-door delivery option, to our customers utilizing our trucks or contracting with local cartage agents in major metropolitan areas of the continental U.S. Additionally, we occasionally arrange for the initial pick up of freight from shippers as well as the final delivery to recipients for an additional fee. In 2006, we generated $191.6 million of revenue, or 83.4% of our total revenue, from our scheduled freight network.

Customers.  We currently have over 550 active freight forwarder, logistics company and international and domestic airline customers. In 2006, our top 25 customers accounted for more than 59.3% of our scheduled freight revenue, and our top five customers accounted for more than 27.4% of our scheduled freight revenue.

The following table lists each customer that accounted for at least 5% of our scheduled freight revenue in 2006 and the percentage of our scheduled freight revenue derived from those customers in 2006 and 2005.

	2006					2005
			Percentage of					Percentage of
			Scheduled					Scheduled
Customer	Revenue		Freight Revenue			Revenue		Freight Revenue
	(Dollars in thousands)
Pilot Air Freight, Inc.	$	19,719		9.9	%	$	16,970		11.2	%
Eagle Global Logistics, Inc		11,023		5.5			12,862		8.5

We generally maintain a close operating relationship with our customers. We offer our customers special pricing programs based upon, among other things, the volume of freight shipped in our network and timely payment of invoices. Each of our significant customers participates in these special pricing programs. We have no material minimum shipping contracts with our customers, including our most significant customers. Our customers generally book scheduled freight services with us on an as-needed basis.

As part of our forward planning for our scheduled freight network, we regularly meet with our current and potential customers to determine their projected needs for freight services and the geographic areas where

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they need service. We use this information to determine if our service levels, service areas and capacity are adequate to meet the demands of our customers.

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

Network Management

On November 15, 2006, Kitty Hawk Cargo entered into a contract with the United States Postal Service, or the USPS, to manage a daytime air and ground cargo network for the holiday season mail from November 28, 2006 through December 24, 2006, or the C-NET network. The C-NET network operated through our Fort Wayne, Indiana sort facility and was in addition to our own scheduled freight network. The C-NET network included, in addition to seven of our own aircraft, managing 96 trucks procured by us, more than 200 seasonal employees at our Fort Wayne, Indiana sort facility and 32 aircraft contracted for by the USPS. We were also responsible for the ground handling costs at all cities that were part of the C-NET network and the aircraft fuel used in the network.

The contract provided for minimum payments and agreed upon volumes of mail per day. The C-NET network ran six days per week for each of the four weeks. For the year ended December 31, 2006, network management revenue represented 11.5% of our total revenue.

Ground Transportation Services

General.  On June 22, 2006, Kitty Hawk Ground acquired substantially all of the operating assets of privately held ACT to expand our ground transportation services company. These assets included owned and leased trucks and trailers; owner operator agreements; leased facilities; trademarks and intellectual property; and customer and employee lists. At closing, we also assumed contracts relating to ACT’s leased trucks and trailers, leased operating facilities, other equipment leases and contracts with owner operators. We hired approximately 220 former employees of ACT, including management, warehouse employees, drivers and administrative personnel. These assets, along with owner operators and contracted dedicated trucks, are managed by Kitty Hawk Ground and provide dedicated ground transportation services for Kitty Hawk Cargo’s scheduled freight network.

Non-network services.  Kitty Hawk Ground provides EUVs for a limited number of customers, including international and domestic airlines, which are not operated within the Kitty Hawk Cargo scheduled freight network. This contracted service is on an ad-hoc basis. Additionally, we provide local transportation service for movement of freight to cities not included in our network. For the year ended December 31, 2006, the non-network service revenue represented 2.6% of our total revenue. As of March 26, 2007, Kitty Hawk Ground managed 187 owner operators, owned and leased trucks and contracted trucks.

Fleet.  In December 2006, Kitty Hawk Ground entered into a 4-year operating lease agreement for 25 new trucks to replace 25 trucks with expiring leases. The obligations of Kitty Hawk Ground under the operating lease are guaranteed by Kitty Hawk, Inc. These new trucks are grandfathered into the 2006 Environmental Protection Agency, or EPA, emissions regulations, and we expect they will provide reliability and maintenance cost improvements as compared to the 5-year old trucks being replaced. As of March 26, 2007, we have taken delivery of all these trucks and deployed them into our network and returned all of the trucks subject to the expiring leases. Additionally, we operate nine other trucks under various other operating leases.

Air Freight Transportation Services

General.  Currently, Kitty Hawk Aircargo primarily provides air freight transportation services for our expedited scheduled freight business. In addition, Kitty Hawk Aircargo markets and provides ACMI and ad-

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hoc charter transportation services to a variety of customers. By providing ACMI and ad-hoc charter services, we generate additional revenue and are able to improve the utilization of our aircraft fleet. During 2006, we generated $5.7 million in revenue from ACMI contracts.

ACMI Contracts.  Our ACMI contracts with third parties typically require us to provide the aircraft, crew, maintenance and insurance. Other than the above ACMI costs, our customers are typically responsible for substantially all aircraft operating expenses, including aircraft fuel, fuel servicing, airport freight handling, landing and parking fees, ground handling expenses and aircraft push-back costs. Our ACMI contracts generally have a term of 30 days or more and provide for a minimum monthly revenue guarantee. In general, ACMI contracts are terminable upon 30 days’ prior written notice by either party or if we fail to meet certain minimum performance levels.

Ad-hoc Charters.  The terms of our ad-hoc charter contracts vary from an ACMI-type arrangement to us being responsible for substantially all aircraft operating costs, including aircraft fuel, fuel servicing, airport freight handling, landing and parking fees, ground handling expenses and aircraft push-back costs. Our ad-hoc charter arrangements generally have terms of less than 30 days and may provide for a minimum daily revenue guarantee.

Aircraft Fleet

Boeing 737-300SF Cargo Aircraft Leases.  At March 29, 2007, we had seven Boeing 737-300SF cargo aircraft under operating leases with affiliates of GE Capital Aviation Services. The obligations of Kitty Hawk Aircargo under the operating leases are guaranteed by Kitty Hawk, Inc. and Kitty Hawk Cargo. The leases generally are not terminable prior to the expiration of the initial ten year term and impose limits on our ability to sublease the aircraft, but generally do not limit our ability to operate them on behalf of third parties in ACMI service. Each of the leases contains two 30-month extension options exercisable at our discretion. The leases allow us to substitute these aircraft for larger Boeing 737-400 cargo aircraft during the sixth year of the lease if they are available for lease by the lessor and we can agree on terms. In addition, we have a power-by-the hour maintenance agreement with Aviation Services International, LLC, a division of Israel Aircraft Industries’ Bedek Division, or IAI, which covers heavy maintenance for these aircraft.

The Boeing 737-300SF cargo aircraft has higher lease and insurance costs than our Boeing 727-200 cargo aircraft. In addition, the Boeing 737-300SF cargo aircraft has approximately 30% less pallet positions than our Boeing 727-200 cargo aircraft. The Boeing 737-300SF cargo aircraft generally has lower operating costs than our Boeing 727-200 cargo aircraft as a result of significantly lower aircraft fuel consumption rates, lower crew costs from operating with a two person crew instead of three, as well as lower landing fees and reduced maintenance costs over the long-term. In addition, the Boeing 737-300SF cargo aircraft has improved performance capabilities and range over the Boeing 727-200 cargo aircraft. We have deployed the Boeing 737-300SF cargo aircraft in our operations in situations in which we can take advantage of its lower operating cost and improved performance characteristics and for which its capacity is better suited.

Owned Aircraft.  At March 29, 2007, we owned six Boeing 727-200 cargo airframes operating in revenue service. Based on our current fleet composition plan, we expect to retire these airframes at their next scheduled heavy maintenance event at dates ranging from April 30, 2008 to August 31, 2008 because we have determined it is uneconomical to perform the required heavy maintenance.

Second Amended and Restated Aircraft and Engine Use Agreement.  We have an aircraft and engine use agreement with the Kitty Hawk Collateral Liquidating Trust, or the Trust Agreement. As of March 29, 2007, we were operating one Boeing 727-200 cargo airframe and two aircraft engines in revenue service pursuant to this agreement. The Trust Agreement’s terms for the aircraft engines terminate on the earlier of the estimated time of their next scheduled heavy maintenance event or December 31, 2008. The Trust Agreement’s terms for the airframe generally coincide with the approximate date of the expected next heavy maintenance event of the airframe. Based on our estimated monthly usage of the Trust Agreement airframe and engines, we expect the expiration date for the airframe will be December 31, 2008 and the expiration date for the aircraft engines to be July 31, 2007 and November 30, 2008. During 2006, we paid the Trust $2.4 million for the use of airframes and engines under this arrangement.

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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 Trust to manage these airframes and aircraft engines. The beneficiaries of the Trust include Resurgence Asset Management, which beneficially owned greater than 5% of our common stock as of March 29, 2007. As of March 29, 2007, based on filings with the Securities and Exchange Commission, Resurgence Asset Management and its affiliates beneficially owned at least 8.0% of our common stock, consisting of 3,361,120 shares of our outstanding common stock and warrants to purchase 979,645 shares of our common stock.

Future Aircraft Needs.  We currently anticipate that we may require as many as 14 operational aircraft on any operational night in 2007 to meet the projected needs for our expedited scheduled freight service. We believe that the combined pool of owned, Trust Agreement, leased aircraft and aircraft under operational agreements available to us will provide us with enough aircraft to meet our projected aircraft needs in 2007. From time to time, we use financing arrangements, lease contracts or other operational agreements to replace or supplement our air lift capacity.

Flight and Ground 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 air service, it is generally our policy to have available at least one operational spare aircraft. When available, 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 and ad-hoc charter customers with high dispatch reliability.

Our ground operations are coordinated by our personnel in our headquarters at the Dallas/Fort Worth International Airport. Our dispatchers and linehaul management team plan and control our ground operations, including driver scheduling, equipment tracking, on time performance of our shippers product and network design.

Maintenance

We perform line maintenance with our own employees, contract employees and third party contractors. Heavy airframe and aircraft engine maintenance on our aircraft is provided by third party, FAA-approved repair stations. Maintenance performed by third parties is overseen by us. We do not have any long-term maintenance contracts for our Boeing 727-200 airframes or aircraft engines. We have a long-term power-by-the-hour maintenance agreement, or the IAI Maintenance Agreement, for our leased Boeing 737-300SF airframes and aircraft engines, with IAI. The IAI Maintenance Agreement covers the initial term of our Boeing 737-300SF cargo aircraft leases plus any extension options exercised by us. The IAI Maintenance Agreement also allows us to add additional Boeing 737-300SF cargo aircraft if we acquire additional Boeing 737-300SF cargo aircraft.

The IAI Maintenance Agreement covers maintenance of the Boeing 737-300SF cargo aircraft engines, landing gear and certain rotable components and provides us with access to a spare parts pool and dedicated consignment inventory of spare parts. Pursuant to the IAI Maintenance Agreement, on a monthly basis, we pay IAI a fixed rate per aircraft for the landing gear maintenance, a rate per flight hour for access to the spare parts pool and the repair of the rotable components covered under the agreement, and a rate per flight hour for the maintenance on the engines covered under the agreement. In return, IAI performs all required maintenance on the landing gear, engines and rotable components with certain exclusions. The exclusions include repair of aircraft engines due to foreign object damage, or FOD; damage caused by our negligent use of the landing gear, engine or rotable component; repairs necessitated by Airworthiness Directives issued by the FAA; optional Service Bulletins issued by the engine and component manufacturers; and repairs to landing gear, engines or components that are beyond economic repair.

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The rates per flight hour that we pay IAI for the engine and rotable components are subject to certain Boeing 737-300SF cargo aircraft fleet annual flight hour minimums. The rate per flight hour for access to the rotable component spare parts pool and for repair of rotable components covered under the agreement is also scaled based on Boeing 737-300SF cargo aircraft fleet flight hour utilization with the rate per flight hour decreasing with higher annual fleet utilization. The rate per flight hour for engine maintenance is also adjustable annually based upon various operating factors. The fixed monthly rate for the Boeing 737-300SF cargo aircraft landing gear maintenance, the rate per flight hour for maintenance of the engines and the rate per flight hour for access to the rotable component spare parts pool and for repair of the rotable components is subject to a fixed annual escalation.

In addition, as part of the IAI Maintenance Agreement, we pay IAI a monthly fee for access to the dedicated consignment inventory of spare parts equal to a percentage of the value, when purchased by IAI, of the dedicated consignment inventory. After the second year of the IAI Maintenance Agreement and during each successive year thereafter, we have the ability to purchase this dedicated consignment inventory on a predetermined declining residual value.

Pursuant to the IAI Maintenance Agreement, IAI will provide us with spare engines for both scheduled and unscheduled engine maintenance at prevailing market rates. Should the duration of the repair exceed the guarantee provided in the IAI Maintenance Agreement, IAI will be responsible for spare engine lease costs beyond the guaranteed repair time.

Through the IAI Maintenance Agreement, IAI has also assumed financial liability for the landing gear, engine and certain rotable component lease return condition requirements for the Boeing 737-300SF cargo aircraft contained in our aircraft leases.

The IAI Maintenance Agreement may be terminated by IAI upon an event of default including, but not limited to, our failure to pay IAI, our filing for bankruptcy protection or a successful involuntary bankruptcy petition being filed against us.

Pursuant to the Boeing 737-300SF cargo aircraft operating lease agreements, we pay affiliates of GE Capital Aviation Services maintenance reserves for structural airframe inspections and for engine life limited parts. The leases also provide for a cost sharing arrangement between us and the lessor related to any Airworthiness Directives and Service Bulletins issued by the FAA. The amount of costs shared by the parties is based on a formula which considers the length of time remaining on the lease among other things.

All maintenance on our owned and leased trucks is outsourced to third parties on an as needed basis. The truck leases provide for the trucks to meet minimum return conditions upon the expiration of the leases.

Training and Safety

We believe that high quality personnel, intensive training programs, quality assurance and operating at the highest level of safety and regulatory compliance are keys to our success. As a result, we hire experienced flight crews and maintenance personnel and ensure that they receive ongoing training through educational workshops, enhanced training curriculums, on the job training and, in the case of pilots, extensive simulator use. In January 2007, the FAA awarded us a sixth consecutive Certificate of Excellence — Diamond Award because 100% of our eligible mechanics received aviation maintenance technician awards from the FAA for 2006. The Diamond Award is the highest award given to aviation maintenance technicians and airlines 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. Additionally, we have a FAA-designated Director of Safety as well as active safety committees throughout our company. 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.

In addition, we seek to hire experienced drivers with clean driving records. Initial training in Hazmat Driver and Hazmat Security Awareness is given as required under applicable DOT regulations. Ongoing training is provided through quarterly safety training meetings and on the job training. Individual recurrent

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safety training is provided on as needed basis. We have an ongoing safety program which utilizes monthly safety committee meetings at all our locations to identify potential problems. We also subscribe to the Driver’s Alert program (1-800 How Am I Driving) and use these reports to target driver training topics.

Sales and Marketing

Our current marketing focus is on users of 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 and do not engage in mass media advertising. We believe that retaining existing customers is at least as important as generating new customers and is a direct result of customer satisfaction.

We use account managers with geographic sales responsibilities to reach 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 not necessarily best served by multiple regional account managers.

Employees

General.  At March 21, 2007, we employed 849 full-time and part-time employees. Of this total, 106 employees were involved in management, sales, marketing, general and administrative functions, 251 employees were involved in our Fort Wayne, Indiana hub operations, 253 were involved in our ground transportation services, including 93 drivers, and 239 employees were involved in maintenance and flight operations, including 135 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.

Airline Pilots Association International.  The pilots of Kitty Hawk Aircargo are represented by the Airline Pilots Association International, or ALPA, a national union representing airline pilots, and have a Collective Bargaining Agreement with Kitty Hawk Aircargo. The agreement covers all flight crew members of Kitty Hawk Aircargo with respect to compensation, benefits, scheduling, grievances, seniority, and furlough and expires in 2013. The agreement provides that no pilot who was actively employed and on the payroll of Kitty Hawk Aircargo on the date of implementation of the agreement shall be furloughed during the term of the agreement, except in certain limited circumstances. The agreement also provides that in December 2006 and December 2009, Kitty Hawk Aircargo and ALPA each have a right to designate any two sections of the agreement for renegotiation, which may include compensation and benefits. If after 60 days Kitty Hawk Aircargo and ALPA are unsuccessful in their negotiations of these sections, the agreement provides that each party will submit their best and final position to final offer or “baseball-style” binding arbitration. On February 9, 2007, we began renegotiations with ALPA as permitted under the Collective Bargaining Agreement on crew member compensation and our matching contributions to our 401(k) plan.

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” 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

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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.

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 all environmental contamination has been discovered for which we may be held partially or fully 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. 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, or TSA, the Department of Defense and the EPA. The DOT, Department of Homeland Security, TSA 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.

Safety, Training and Maintenance Regulations.  Virtually every aspect of our cargo airline 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.  Several federal agencies, including the FAA and DOT, exercise regulatory jurisdiction over transporting hazardous materials. We frequently transport articles that are subject to these regulations. Shippers of hazardous materials share responsibility with the air and ground 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 improperly ship hazardous materials, we may suffer possible aircraft or truck damage or liability as well as substantial monetary penalties.

Other FAA Regulations.  All of our aircraft are subject to FAA directives which can be issued at any time, including directives issued under the FAA’s “Aging Aircraft” program, or directives issued on an ad hoc

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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, in 2004, we were required to install collision avoidance systems on our aircraft and reinforce our cockpit doors. 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 TSA. By law, the TSA is directed to adopt regulations for the screening of cargo transported on cargo aircraft. Since inception, the TSA implemented various regulations involving the security screening of cargo. At this time, the implementation of these regulations has not materially adversely affected our ability to process cargo or materially increased our operating costs. However, the TSA could adopt additional security and screening requirements that could have an impact on the ability to efficiently process cargo or otherwise materially increase our operating costs.

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 Department of Homeland Security’s oversight of these 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 cargo airline could cease to be eligible to operate as a cargo airline 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 Second 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 incident or accident including damage to the aircraft due to FOD. 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. With respect to our ground transportation services company, we carry liability insurance for our company drivers in amounts that we believe are consistent industry standards. We require third party trucking carriers provide the primary insurance for the trucks they operate in our network. Some owner operators are covered under our insurance policy in exchange for a recovery of the associated premiums. Our policy is 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 scheduled freight network through, among other things, the obtaining of certificates of insurance.

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 revenue service in amounts that we believe are consistent with industry standards. All-risk aircraft hull and war risk insurance is maintained for all aircraft in revenue service. This all-risk hull insurance is subject to substantial deductibles at levels that we believe are common in the industry. We maintain only ground risk insurance on aircraft that are parked and not operating in revenue service. 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 in 2007 at comparable premium rates and with the same levels of coverage as we have experienced in the past.

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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 also maintain business interruption insurance if an aircraft is damaged. Substantial claims resulting from an accident could have a material adverse effect on our business.

ITEM 1A.   RISK FACTORS

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, significant customers or key management personnel;

•  increased competition, including the possible impact of any mergers, alliances or combinations of competitors;

•  increases in the cost and/or decreases in the availability of aircraft fuel and/or diesel fuel and our ability to recapture increases in the cost of such fuel through the use of fuel surcharges and/or price increases;

•  with respect to our scheduled freight network, the continuing high cost of aircraft and diesel fuel leading to a higher total price for our services which impacts the freight purchasing decision for our customers and/or shippers resulting in a shift to less expensive modes of transportation;

•  with respect to our recent expansion of our ground freight transportation network to include scheduled deferred freight transportation services, potential competitive reactions from other carriers;

•  limitations upon financial and operating flexibility due to the terms of our Revolving Facility;

•  changes in our capital resources and liquidity;

•  financial costs and operating limitations imposed by both the current and potential additional future unionization of our workforce;

•  payment defaults by our customers;

•  write-downs of the value of our aircraft parts, airframes or aircraft engines;

•  changes in the cost of Boeing 737-300SF cargo aircraft maintenance outside the scope of our power-by-the-hour maintenance agreement and/or changes in the cost of Boeing 727-200 cargo aircraft maintenance;

•  changes in general economic conditions;

•  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;

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•  changes in government regulation and policies, including regulations affecting maintenance requirements for, and availability of, aircraft and airworthiness directives or service bulletins;

•  foreign political instability and acts of war or terrorism;

•  adverse litigation judgments or awards;

•  the ability to attract and retain customers and freight volumes for our scheduled freight network;

•  findings of environmental contamination and/or the cost of remediation;

•  limitations in our ability to find, acquire and integrate replacement aircraft for our Boeing 727-200 cargo aircraft under terms and conditions that are satisfactory to us; and

•  limitations in our ability to offset income with our future deductible tax attributes.

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.

Risks Relating to Our Business

The as-needed nature of our scheduled freight business and the types of industries we serve subject our business to significant market fluctuations that are beyond our control, and a downward market fluctuation could have a material adverse effect on our results of operations.

Our scheduled freight network relies on customers who need expedited or time-definite delivery on an as-needed basis for air freight and time-definite delivery on an as-needed basis for ground freight. As the freight is shipped on an as-needed basis, we do not have commitments from our customers. Without customer commitments, the overall demand for our freight services is primarily influenced by the health of the U.S. economy, which is cyclical in nature, the seasonality and economic health of the industries generating the freight we transport in our network and the availability, reliability and cost of alternative freight services including services from competitors who are larger than we are, serve more cities than we do and have more financial resources than we do. The amount of freight shipped in our scheduled freight network during any particular time period can fluctuate significantly due to the foregoing factors. A downward fluctuation in demand for our scheduled freight services could have a material adverse effect on our results of operations.

Our inability to execute upon our plans to increase sales of our ground freight product, or to manage or to generate sufficient revenues from that new line of business, could have a material adverse effect on our results of operations.

We operate an independent primarily airport-to-airport scheduled freight network that provides two products for predominantly heavy weight and oversized freight, an expedited overnight and second-morning air product to 54 business centers and a time-definite ground freight product to 46 cities as of March 26, 2007. Our growth plans for our ground freight product will place significant demands on our management and operating personnel. If we are unable to manage the growth of our ground freight product effectively, our business, results of operations and financial condition may be materially adversely affected. Accordingly, our business and future operating results will depend on the ability of our management and operating personnel to expand our ground freight product as well as successfully and fully integrate the operations we acquired from ACT.

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Our inability to attract and retain sufficient business from customers at economical prices for our expedited air and deferred ground freight product could impair our ability to compete and could have a material adverse effect on our results of operations.

The profitability of our network depends on our ability to carry sufficient freight to cover the fixed costs of our network including but not limited to aircraft leases, pilots, maintenance and support infrastructure, facilities and trucking costs, working capital needs associated with operating and expanding our ground freight services and certain recurring fixed costs. If we are unable to attract and retain sufficient business from customers willing to pay rates sufficient to cover our costs and generate a profit, our results of operations may be materially adversely affected.

We derive a significant portion of our revenues from a limited number of customers, and the loss of their business or payment defaults by one or more of them could have a material adverse effect on our results of operations.

We have over 550 active freight forwarder, logistics company and international and domestic airline customers. During the twelve months ended December 31, 2006, our top 25 customers accounted for more than 51.3% of our total revenue and our top five customers accounted for more than 23.7% of our total revenue. During the twelve months ended December 31, 2006, our top three network customers, Pilot Air Freight, Inc., Eagle Global Logistics, Inc. and AIT Freight Systems, Inc., accounted for 8.6%, 4.8% and 4.1% of our total revenue, respectively. Additionally, our contracts with the U.S. Postal Service accounted for more than 14.7% of our total revenue for the year ended December 31, 2006.

We do not have material minimum shipping contracts with our customers, including our most significant customers. The loss of one or more of these customers, or a significant reduction in the use of our services by one or more of these customers, could have a material adverse effect on our results of operations.

In addition, as of December 31, 2006, we had a significant concentration of credit risk because approximately 48.3% of our outstanding accounts receivable were from ten customers and 19.0% of our outstanding accounts receivable were attributable to one customer, the U.S. Postal Service. A payment default by one of these customers could have a material adverse effect on our results of operations.

We have potential liquidity issues and further financing cannot be guaranteed

During 2006, we generated significant losses due to, among other things, the on going startup of our ground freight product, acquiring substantially all of the operating assets of ACT, weakness in demand for our air freight product and high fuel expenses. While we believe we have sufficient available cash and borrowing capacity under the Revolving Facility to fund our working capital needs over the next twelve months, there is no assurance that our forecasts will prove to be accurate. If the demand for our expedited freight services continues to be negatively impacted by rising fuel prices or general industry weakness in 2007, we may need to raise additional funds, supplement our current sources of liquidity during the next twelve months. Substantially all of our assets are encumbered under the Revolving Facility. If we are required to raise additional funds or supplement our existing sources of liquidity and are unable to do so either on economic terms or at all, our business may be materially adversely affected.

The terms of our Revolving Facility could restrict our operations.

Our Revolving Facility contains non-financial covenants that restrict our ability to, among other things: engage in mergers, consolidations, or other reorganizations; create or permit liens on assets; dispose of certain assets; incur certain indebtedness; guarantee obligations; pay dividends or other distributions (other than dividends on our Series B Redeemable Preferred Stock); materially change the nature of our business; make certain investments; make certain loans or advances; prepay certain indebtedness (with the exception of Laurus or in the ordinary course of business); change our fiscal year or make changes in accounting treatment or reporting practices except as required by GAAP or the law; enter into certain transactions with affiliates; or form new subsidiaries. These restrictions may limit our ability to engage in activities which could improve our business, including obtaining future financing, making needed capital expenditures, or taking advantage of

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business opportunities such as strategic acquisitions and dispositions, all of which could have a material adverse effect on our business.

Our failure to comply with certain covenants in the Revolving Facility could result in an event of default that could cause acceleration of the repayment of our indebtedness.

As discussed above, the terms of the Revolving Facility require us to comply with certain non-financial covenants. Our failure to comply with the covenants and requirements contained in the Revolving Facility could cause an event of default. There can be no assurance that Laurus would waive any non-compliance. Further, the occurrence of an event of default (that is uncured or unwaived) could prohibit us from accessing additional borrowings and permit Laurus to declare the amount outstanding under the Revolving Facility to be immediately due and payable. In addition, pursuant to our lockbox arrangement with Laurus, upon an event of default, Laurus could apply all of the payments on our accounts receivable to repay the amount outstanding under the Revolving Facility. In that event, we would not have access to the cash flow generated by our accounts receivable until the amount outstanding under the Revolving Facility is first repaid in full. An event of default under our Revolving Facility, particularly if followed by an acceleration of any outstanding amount, could have a material adverse effect on our business.

At March 29, 2007, we had a borrowing base of $14.7 million and $9.3 million of outstanding borrowings, which includes $3.9 million to cash collateralize our outstanding letters of credit. In the event of an event of default, our assets or cash flow may not be sufficient to repay fully our borrowings under our Revolving Facility, and we may be unable to refinance or restructure the payments on the Revolving Facility on favorable terms or at all.

The U.S. freight transportation industry is highly competitive and, if we cannot successfully compete, our results of operations and profitability may be materially adversely affected.

The U.S. freight transportation industry is extremely large and encompasses a broad range of transportation modes and service levels. Freight is shipped on either an expedited or time-definite basis. Expedited freight transit times vary from a few hours to overnight to second morning. In contrast, time-definite freight includes scheduled freight transit times of up to five days. Both expedited and time-definite freight include freight of varying sizes and weights, from small envelopes to heavy weight or oversized freight requiring dedicated aircraft or trucks.

Our scheduled freight network generally competes in the inter-city, heavy weight and oversized, next morning and second-day expedited and time-definite freight segments of the U.S. freight transportation industry. These segments are highly competitive and very fragmented. The ability to compete effectively depends on price, frequency of service, cargo capacity, ability to track freight, extent of geographic coverage and reliability. We generally compete with regional delivery firms, commercial passenger airlines that provide freight service on their scheduled flights, trucking companies for deliveries of less than 1,000 mile distances, regional and national expedited and less-than-truckload trucking companies and integrated freight transportation companies, such as FedEx and United Parcel Service. Many of our competitors have substantially larger freight networks, serve significantly more cities and have considerably more freight system capacity, capital and financial resources than we do.

Our ability to attract and retain business also is affected by whether, and to what extent, our customers decide to coordinate their own transportation needs. Certain of our current customers maintain transportation departments that could be expanded to manage freight transportation in-house. If we cannot successfully compete against companies providing services similar to, or that are substitutes for, our own or if our customers begin to provide for themselves the services we currently provide to them, our business may be materially adversely affected.

A significant portion of the freight transported in our network relates to the automotive, electronics, telecom and related infrastructure equipment, other durable goods and equipment industries and apparel. The demand for the products produced by these industries and, in turn, the demand for our scheduled freight network services for the transportation of freight from these industries has historically trended in relationship

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to the strength of the U.S. and increasingly, world economies. Furthermore, these industries tend to be seasonal in nature and, as a result, our business is also seasonal with the third and fourth quarters historically having the strongest demand and being the highest revenue quarters. We experienced weak demand during the traditional peak season shipping pattern for 2006 and continue to experience weak demand during the first quarter of 2007. We believe other domestic freight transportation companies may have also experienced similar weaker than historical demand during this period.

ACT has been operated as a private company that is not subject to Sarbanes-Oxley Act regulations and, therefore, may lack the internal controls and procedures of a public company.

The management of ACT was not required to establish and maintain an internal control infrastructure meeting the standards promulgated under the Sarbanes-Oxley Act. As a result, there is no assurance that the business acquired from ACT does not have significant deficiencies or material weaknesses in its internal control over financial reporting. Any significant deficiencies or material weaknesses in the internal control over financial reporting of the acquired business may cause significant deficiencies or material weaknesses in our internal control over financial reporting, which could have a material adverse effect on our business and affect our ability to comply with Section 404 of the Sarbanes-Oxley Act.

Writedowns of the value of our aircraft parts and supplies inventory could have a material adverse effect on our results of operations.

When we emerged from bankruptcy in September 2002, we had a substantial amount of Boeing 727-200 aircraft parts and supplies inventory. The amount of aircraft parts and supplies inventory necessary to operate our Boeing 727-200 fleet is dependent upon the number of Boeing 727-200 cargo aircraft that we operate as well as the number of hours they fly. To the extent we reduce the number of Boeing 727-200 cargo aircraft that we operate in the future either through attrition or replacement with other aircraft types, including the Boeing 737-300SF cargo aircraft, we may need fewer Boeing 727-200 aircraft parts and supplies inventory to maintain our Boeing 727-200 fleet. If we conclude we have aircraft parts and supplies inventory in excess of our current or anticipated future needs and if we determine that the fair market value of our Boeing 727-200 aircraft parts and supplies inventory has declined from our current carrying value, we would writedown the value of our Boeing 727-200 aircraft parts and supplies inventory. We review this inventory periodically and value it at least annually.

In conjunction with a review of our aircraft fleet composition plan and Boeing 727-200 cargo aircraft parts and supplies at the end of 2006, we estimated that the recorded cost of a portion of our active inventory and aircraft supplies exceeded fair market value and recorded a $2.3 million lower of cost or market adjustment. As of December 31, 2006, we maintained a surplus inventory parts and supplies valuation reserve of $0.2 million, which was reduced from $1.7 million at December 31, 2005. The net effect of these adjustments was additional expense of $0.8 million. The carrying value of our inventory, including reserves, was approximately $2.2 million as of December 31, 2006. Any further writedowns could have a material adverse effect on our results of operations.

If we lose access to, or sustain damage to, our Fort Wayne, Indiana facilities, our business would be interrupted, which could materially adversely affect our business and results of operations.

Our Fort Wayne, Indiana facilities act as the hub of our expedited scheduled air freight services. Most of the air freight we transport passes through our Fort Wayne facilities on the way to its final destination. If we are unable to access our Fort Wayne facilities because of security concerns, a natural disaster, a condemnation or otherwise or if these facilities are destroyed or materially damaged, our business would be materially adversely affected.

Furthermore, any damage to our Fort Wayne facilities could damage some or all of the freight in the facilities. If freight is damaged, we may be liable to our customers for such damage and we may lose sales and customers as a result. Any material damages we must pay to customers, or material loss of sales or customers, would have a material adverse effect on our results of operations.

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We have a $10 million business interruption insurance policy to both offset the cost of, and compensate us for, certain events which interrupt our operations. However, the coverage may not be sufficient to compensate us for all potential losses and the conditions to the coverage may preclude us from obtaining reimbursement for some potential losses. While we have attempted to select our level of coverage based upon the most likely potential disasters and events that could interrupt our business, we may not have been able to foresee all the costs and implications of a disaster or other event and, therefore, the coverage may not be sufficient to reimburse us for our losses or the impact the potential loss of business would have on our future operations. Any material losses for which we are unable to obtain reimbursement may have a material adverse effect on our results of operations.

Increases in the cost, or a reduction in the availability, of airframe or aircraft engine maintenance may result in increased costs.

To keep our owned and leased aircraft in airworthy condition, we hire third parties to perform scheduled heavy airframe and aircraft engine maintenance on them. An increase in the cost of airframe or aircraft engine maintenance would increase our maintenance expenses. In addition, a reduction in the availability of airframe or aircraft engine maintenance services could result in delays in getting airframes or aircraft engines serviced and result in increased maintenance expenses and lost revenue. Any increase in maintenance expenses or loss of revenue due to delays in obtaining maintenance services could have a material adverse effect on our results of operations.

Increases in the cost, or decreases in the supply, of aircraft and/or diesel fuel could have a material adverse effect on our results of operations.

One of our most significant and variable costs is aircraft fuel. During the twelve months ended December 31, 2006, our aircraft fuel averaged $2.15 per gallon as compared to $1.86 per gallon for the twelve months ended December 31, 2005, an increase of 15.6%. Aircraft fuel cost per gallon includes the cost of aircraft fuel and the cost of all taxes, fees and surcharges necessary to deliver the aircraft fuel into the aircraft. The amount of aircraft fuel used in our network depends on the mix of aircraft employed in our network, the amount, origin and destination of freight shipped and the number of days the network is operated during each month. A change in aircraft fuel price will affect our total aircraft fuel expense as these factors fluctuate. During the twelve months ended December 31, 2006, we used between 1.8 million and 2.4 million gallons of aircraft fuel per month in our scheduled freight network as compared to between 2.1 million and 2.8 million gallons for the twelve months ended December 31, 2005. At current levels of operations in our scheduled freight network, each $0.01 change in the price per gallon of aircraft fuel results in a change in our annual fuel cost of approximately $250,000.

We purchase aircraft fuel from various suppliers at current market prices. We do not currently have any long-term contracts for aircraft fuel, nor do we currently have any agreements to hedge against increases in the price of aircraft fuel. On a regular basis, we review the price and availability of aircraft fuel. If we have the opportunity and ability to execute individual purchases at favorable prices or terms, enter into long-term supply contracts for aircraft fuel or make arrangements to hedge against changes in aircraft fuel prices, we may enter into such agreements or arrangements.

With respect to our ground freight services, we operate through a combination of owner operators, company drivers and truck load carriers from whom we contract dedicated trucks. The owner operators and truck load carriers from whom we contract dedicated trucks pass the increased cost of diesel fuel to us through the use of fuel surcharges.

We periodically increase our prices or implement fuel surcharges. Our goal is to offset all of our increased fuel costs, as our scheduled freight network bears the cost of increases in aircraft and diesel fuel prices. If we are unable due to competitive pressures or other reasons to raise our fuel surcharges or prices, we may be forced to absorb increases in aircraft and/or diesel fuel costs, which could have a material adverse effect on our results of operations. In addition, as we attempt to recapture the increase in aircraft and/or diesel fuel costs through increasing our prices to our customers and/or through temporary fuel surcharges, our

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customers may seek lower cost freight transportation alternatives to our scheduled freight network, which could negatively affect our results of operation.

A rise in the cost of aircraft fuel increases our working capital requirements because we pay for fuel in advance of providing air freight transportation services and typically do not collect payment for our services until 30 to 45 days after the services are performed.

Additionally, if we were unable to acquire sufficient quantities of aircraft fuel at a price we deem appropriate to fly our aircraft, we would be required to curtail our operations which could have a material adverse effect on our business.

Increases in the cost, or decreases in the supply, of ground handling and storage services could significantly disrupt our business.

We contract with third parties to provide ground handling and storage services at all of the cities we serve, with the exception of Fort Wayne, Indiana; Los Angeles and San Francisco, California; Seattle, Washington; Denver, Colorado; and Salt Lake City, Utah, which are operated by our employees. We also contract with third parties to provide ground transportation at other cities at which we receive and deliver freight at scheduled times. The impact of an increase in the cost or the decrease in the availability of ground handling and storage services could have a material adverse effect on our business.

The unavailability of aircraft due to unscheduled maintenance, accidents and other events may result in the loss of revenue and customers.

Our revenues depend on having aircraft available for revenue service. From time to time, we may experience unscheduled maintenance due to equipment failures and accidental damage that makes our aircraft unavailable for revenue service. These problems can be compounded by the fact that spare or replacement parts and components as well as third party maintenance contractors may not be readily available in the marketplace. Failure to obtain necessary parts or components in a timely manner or at favorable prices could ground some of our fleet and result in significantly lower revenues. In the event one or more of our aircraft are out of service for an extended period of time, whether due to unscheduled maintenance, accidents or otherwise, we may be forced to lease replacement aircraft and may be unable to fully operate our business. Further, suitable replacement aircraft may not be available on acceptable terms or at all. Loss of revenue from any business interruption or costs to replace airlift could have a material adverse effect on our results of operations.

The unavailability of trucks, drivers and owner operators, or increases in the cost of trucking services, may materially adversely affect our results of operations.

Our ground freight services depend on having trucks available for service. We own some of the trucks used to provide our ground freight services. We also have agreements with owner operators and contract for dedicated freight hauling capacity under agreements that are terminable on 30 days notice by either party. Failure to have sufficient owner operators or dedicated freight hauling capacity, at contractually determined prices, could result in significantly lower revenues and could make it difficult for us to offer our ground freight product.

Financial costs and operating limitations imposed by the unionization of our workforce could create material labor problems for our business.

The pilots of our cargo airline are represented by ALPA, a national union representing airline pilots. We have a Collective Bargaining Agreement with ALPA. The agreement covers all flight crew members of our cargo airline with respect to compensation, benefits, scheduling, grievances, seniority, and furlough and expires December 1, 2013. On February 9, 2007, we began renegotiations with ALPA as permitted under the Collective Bargaining Agreement on crew member compensation and our matching contributions to our 401(k) plan. If a settlement is not reached by April 9, 2007, both parties will be required to submit their best and

20

final position to a final offer, or “baseball” style arbitration. We cannot determine if the outcome of the renegotiations will have a material adverse effect on its costs or operations.

Although our Collective Bargaining Agreement with our flight crew members prohibits strikes, labor disputes with them could still result in a material adverse effect on our operations. Further, if additional segments of our workforce become unionized, we may be subject to work interruptions or stoppages, which could have a material adverse effect on our business.

A failure of our computer systems could significantly disrupt our business.

We utilize a number of computer systems to schedule flights and personnel, track aircraft and freight, bill customers, pay expenses and monitor a variety of our activities, ranging from maintenance and safety compliance to financial performance. The failure of the hardware or software that support these computer systems, or the loss of data contained in any of them, could significantly disrupt our operations.

Aircraft or truck accidents and the resulting repercussions could have a material adverse effect on our business.

We are vulnerable to potential losses that may be incurred in the event of an aircraft or truck accident. Any such accident could involve not only repair or replacement of a damaged aircraft or truck 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 Department of Transportation, or DOT, to carry liability insurance on each of our aircraft and trucks. Although we believe our current insurance coverage is adequate and consistent with current industry practice, including our substantial deductibles, we cannot be assured that our coverage or premiums will not be changed or that we will not suffer substantial losses and lost revenues from accidents. Moreover, any aircraft accident, even if fully insured, could result in Federal Aviation Administration, or FAA, directives or investigations or could cause a perception that some of our aircraft are less safe or reliable than other aircraft, which could result in costly compliance requirements, the grounding of some of our fleet and the loss of customers. Any accident and the repercussion thereof could have a material adverse effect on our business.

Risks Relating to Government Regulation

If we lose our authority to conduct flight operations, we will be unable to run our air freight business.

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, or the EPA. In order to maintain authority to conduct flight operations, we must comply with statutes, rules and regulations pertaining to the airline industry, including any new rules and regulations that may be adopted in the future. Without the necessary authority to conduct flight operations, we will be unable to run our air freight business.

FAA safety, training and maintenance regulations may hinder our ability to conduct operations or may result in fines or increased costs.

Virtually every aspect of our cargo airline 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

21

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.

In addition, 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, engines and components and to make modifications to them to address or prevent problems of corrosion, structural fatigue or additional maintenance requirements. In addition, the FAA may mandate installation of additional equipment on our aircraft, the cost of which may be substantial. 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. This extensive regulatory framework, coupled with federal, state and local environmental laws, imposes significant compliance burdens and risks that substantially affect our costs.

Our trucking operations are highly regulated, and increased direct and indirect costs of compliance with, or liability for violation of, existing or future regulations could have a material adverse effect on our business.

The DOT and various state, local and quasi governmental agencies exercise broad powers over our trucking operations, generally governing matters including authorization to engage in motor carrier service, equipment operation and safety reporting. We expect periodic audits by the DOT to ensure that we are in compliance with various safety, hours-of-service and other rules and regulations. In addition, our drivers must comply with the safety and fitness regulations of the DOT, including those relating to drug and alcohol testing and hours-of-service. If we are found to be out of compliance with those rules or regulations, the DOT could restrict or otherwise negatively impact our operations. We also may become subject to new or more restrictive regulations relating to fuel emissions, drivers’ hours-of-service, ergonomics and other matters affecting safety or operating methods. Any fines, remedial actions or compliance costs could have a material adverse effect on our business.

Effective October 1, 2002, the EPA required that most newly manufactured heavy-duty truck engines comply with certain new emission standards. We are operating 34 trucks with these 2002 rule-compliant engines. In addition to higher initial purchase prices, these trucks also generally have lower fuel efficiency. Effective with model-year 2007 trucks, the EPA has mandated even lower emission standards for newly manufactured heavy-duty truck engines, which may increase the cost and reduce the fuel efficiency of new engines. The increased cost of complying with such regulations could have a material adverse effect on our results of operations.

If we improperly ship hazardous materials or contraband, we could incur substantial fines or damages.

Several federal agencies, including the FAA and DOT, exercise regulatory jurisdiction over transporting hazardous materials and contraband. We frequently transport articles that are subject to these regulations. Shippers of hazardous materials share responsibility with the air and ground carrier for compliance with these regulations and are primarily responsible for proper packaging and labeling. Although required to do so, customers may fail to inform us about hazardous or illegal cargo. If we fail to discover any undisclosed weapons, explosives, illegal drugs or other hazardous or illegal cargo or mislabel or otherwise improperly ship hazardous materials, we may suffer possible aircraft or truck damage or liability, as well as fines, penalties or flight bans, which could have a material adverse effect on our business.

Our operations are subject to various environmental laws and regulations, the violation of which could result in substantial fines or penalties.

We are subject to various environmental laws and regulations dealing with, among other things, the hauling and handling of hazardous materials, air emissions from our aircraft, vehicles and facilities and noise pollution. Our operations involve the risks of fuel spillage or seepage, environmental damage, and hazardous waste disposal, among others. We may be liable whether or not we are aware of or caused the release of hazardous or toxic substances. In part because of the highly industrialized nature of many of the locations at which we operate, there can be no assurance that we have discovered environmental contamination for which

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we may be responsible. The costs of defending against claims of liability or remediating contaminated property and the cost of complying with environmental laws could have a material adverse effect on our results of operations.

If we are involved in a spill or other accident involving hazardous substances, if there are releases of hazardous substances we transport, or if we are found to be in violation of applicable laws or regulations, we could be subject to liabilities that could have a material adverse effect on our business and our results of operations. If we should fail to comply with applicable environmental regulations, we could be subject to substantial fines or penalties and to civil and criminal liability.

Department of Homeland Security and Transportation Security Administration regulations may result in unanticipated costs.

As a result of the passage of the Aviation and Transportation Security Act, the U.S. 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. The TSA has implemented various regulations involving the security screening of cargo. At this time, the implementation of these regulations has not materially adversely affected our ability to process cargo or materially increased our operating costs.

However, the TSA could adopt additional security and screening requirements that could have an impact on the ability to efficiently process cargo or otherwise materially increase our operating costs. 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 Department of Homeland Security’s management of these combined operations and functions may affect us in ways that cannot be predicted at this time.

The interests of our principal stockholders may be inconsistent with the interests of our other equity holders and may have an adverse effect on our stock price.

As of December 31, 2006, our 5% or greater stockholders and their affiliates beneficially owned more than 70.0% of our common stock. These stockholders and their affiliates have substantial influence on and may control the outcome of corporate actions requiring stockholder approval, including the election of directors, any merger, consolidation or sale of all or substantially all of our assets or any other significant corporate transactions. These stockholders and their affiliates may also delay or prevent a change of control of our company, even if such a change of control would benefit our other stockholders. In addition, the significant concentration of stock ownership may adversely affect the trading price of our common stock.

Stock ownership by non-U.S. citizens could prevent us from operating our business.

We believe that some of our stockholders are non-U.S. citizens. Under current federal law, our cargo airline could cease to be eligible to operate as a cargo airline 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, as amended, or the Certificate, 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 second amended and restated bylaws, or the Bylaws, do not permit non-U.S. citizens to serve as directors or officers.

Risks Related to Our Common Stock

The market price for our common stock may be volatile.

The market price of our common stock could fluctuate substantially in the future in response to a number of factors, including, among others:

•  our performance and prospects;

•  the performance and prospects of our major customers;

•  the limited depth and liquidity of the market for our common stock;

•  investor perception of us and the industry in which we operate;

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•  general financial and other market conditions;

•  the cost and supply of fuel; and

•  domestic and international economic conditions.

In recent years, the public stock markets have experienced price and trading volume volatility. This volatility has had a significant effect on the market prices of securities issued by many companies for reasons that may or may not be related to their operating performance. If the public stock markets continue to experience price and trading volume volatility in the future, the market price of our common stock could be adversely affected. In addition, although our common stock is traded on the American Stock Exchange, small changes in the price per share could result in a large percentage change in the price per share.

Other companies may have difficulty acquiring us, even if doing so would benefit our stockholders.

Provisions in our Certificate, Bylaws, the Delaware General Corporation Law and the terms of our stockholder rights plan and Revolving Facility could make it more difficult for other companies to acquire us, even if doing so would benefit our stockholders. Our Certificate and Bylaws contain the following provisions, among others, which may discourage or prevent another company from acquiring us:

•  a limitation on who may call stockholder meetings;

•  a prohibition on stockholder action by written consent; and

•  advance notification procedures for matters to be brought before stockholder meetings.

In addition, we are subject to provisions of the Delaware General Corporation Law that prohibit us from engaging in a business combination with any “interested stockholder.” These provisions generally mean that a stockholder who owns more than 15% of our voting stock cannot acquire us for a period of three years from the date that the stockholder became an “interested stockholder,” unless various conditions are met, such as approval of the transaction by our board of directors. In addition, the terms of our Revolving Facility contain provisions that restrict our ability to merge or consolidate with a potential acquirer. Finally, we have a stockholder rights plan that limits the ability of a person to acquire 15% or more of our outstanding common stock without the prior approval of our board of directors, except that the beneficial ownership threshold applicable under the stockholder rights plan to Lloyd I. Miller III and his affiliates is 23.5%. Any of the foregoing could impede a merger, takeover or other business combination involving us or discourage a potential acquirer from making a tender offer to acquire our common stock, which, under certain circumstances, could adversely affect the market price of our common stock.

We do not anticipate paying cash dividends to our common stockholders in the foreseeable future.

We intend to retain our earnings for use in our business and do not anticipate paying cash dividends on our shares of common stock in the foreseeable future. Further, covenants contained in our Revolving Facility restrict our ability to pay cash dividends on our shares of common stock and in some cases on our shares of our Series B Redeemable Preferred Stock.

ITEM 1B.   UNRESOLVED STAFF COMMENTS

None.

ITEM 2.   PROPERTIES

Our facilities generally consist of office space, crew lounge, hangars, sorting facilities, maintenance facilities and warehouse and storage space. Except for our Atlanta, Georgia facility, all of our major 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 airport facilities, but may also include leases or licenses to use ramp areas and hangar and maintenance space. In addition, at March 29, 2007, we owned six Boeing 727-200 cargo aircraft, various aircraft engines and various ground handling and sorting equipment.

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The following is a summary of our major operating facilities:

				Owned/
Location	Use of Space	Square Feet		Leased
Dallas/Fort Worth International Airport, Texas	Company headquarters and maintenance facility		43,400	Leased(1)
Dallas/Fort Worth International Airport, Texas	Offices and warehouse		48,000	Leased
Fort Wayne, Indiana	Office and sorting facilities		239,000	Leased
Atlanta, Georgia	Warehouse and sorting facility		72,000	Leased
South San Francisco, California	Warehouse, office and sorting facility		56,534	Leased
Los Angeles, California	Warehouse, office and sorting facility		50,000	Leased
Hawthorne, California	Warehouse, office and sorting facility		45,790	Leased
Aurora, Colorado	Warehouse, office and sorting facility		23,200	Leased
West Valley, Utah	Warehouse, office and sorting facility		18,000	Leased
Seattle, Washington	Warehouse, office and sorting facility		17,500	Leased
Boise, Idaho	Warehouse, office and sorting facility		12,400	Leased
El Paso, Texas	Warehouse, office and sorting facility		10,800	Leased

(1) The operating lease expires in December 2007. The lease agreement provides us two five-year extension options at market rates.

ITEM 3.   LEGAL PROCEEDINGS

We are also subject to various legal proceedings and other claims which have arisen in the ordinary course of business. While the outcome of such legal proceedings and other claims cannot be predicted with certainty, our management does not believe that the outcome of any of these matters will have a material adverse effect on our business.

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

We did not submit any matter to a vote of our stockholders during the fourth quarter of 2006.

ITEM 4A.   EXECUTIVE OFFICERS OF THE REGISTRANT

Our executive officers are as follows:

Name	Age		Position(s)
Robert W. Zoller, Jr.		60	Chief Executive Officer, President and Director
Robert Barron		56	Vice President and Chief Operating Officer of Kitty Hawk Aircargo, Inc.
Gary Jensen		53	Vice President and Chief Operating Officer of Kitty Hawk Ground, Inc.
James R. Kupferschmid		48	Vice President and Chief Financial Officer
Steven E. Markhoff		40	Senior Vice President and Chief Operating Officer of Kitty Hawk Cargo, Inc.; Corporate Secretary
Jessica L. Wilson		38	Chief Accounting Officer and Treasurer

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. From April 2002 until November 2002, Mr. Zoller was a founder and active principal 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., a commercial, passenger airline, from December 1999 to April 2002. In March 2003, Hawaiian Airlines filed for Chapter 11 protection under the U.S. bankruptcy code. 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

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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.

Robert Barron has been the Vice President and Chief Operating Officer of Kitty Hawk Aircargo since June 2005. From May 2004 until June 2005, Mr. Barron served as our Vice President of Maintenance and Engineering, overseeing all maintenance and engineering operations. From November 2000 to May 2004, Mr. Barron served as Chief Inspector for US Airways Group, Inc. Mr. Barron served as Managing Director for heavy maintenance provider, TIMCO Aviation Services, Inc. from October 1998 to November 2000. From June 1996 to October 1998, Mr. Barron served as Director of Quality Assurance and Heavy Maintenance for AirTran Airways, Inc. Mr. Barron’s 20-plus years in commercial and military aviation has also included management, quality assurance and maintenance responsibilities with Delta Air Lines and the United States Air Force.

Gary Jensen has been the Vice President and Chief Operating Officer of Kitty Hawk Ground, Inc. since April 2006. From 2003-2006, Mr. Jensen served as Vice President Operations for current Yellow Roadway subsidiary USF Bestway in Phoenix, Arizona and USF Red Star in Auburn, New York, each a transportation and logistics company. He had leadership responsibilities in each position for approximately 2,000 staff, operations, claims, industrial engineering, maintenance, safety, risk and process management. From 2001-2003, Mr. Jensen served as General Manager for Logistics Insights Corporation, a transportation and logistics company serving the automotive manufacturing industry from Warren, Michigan. From 1975-2001, Mr. Jensen had numerous increasing division, sales and operations management responsibilities with Consolidated Freightways, a supplier of transportation and logistics services.

James R. Kupferschmid has been our Vice President and Chief Financial Officer since July 2005. From April 2004 until July 2005, Mr. Kupferschmid was a partner with Tatum Partners, LLP, an interim Chief Financial Officer and financial consultancy practice. From July 2002 to April 2004, Mr. Kupferschmid was a principal of Airline Management, LLC, an airline consulting practice. Mr. Kupferschmid served as Vice President and Chief Financial Officer of Simdesk, Inc. from May 2001 to July 2002, Director of Business Development of Northwest Airlines Corp. from July 2000 to May 2001, Vice President and Chief Financial Officer of Kickstart.com, Inc. from December 1999 to June 2000, consultant on an airline acquisition to a major U.S.-based private equity firm from July 1999 to December 1999, and as Vice President and Chief Financial Officer of MD Network, LLC from March 1998 to July 1999. Mr. Kupferschmid served in various positions with Continental Micronesia, Inc., the Asia-Pacific subsidiary of Continental Airlines, Inc., from October 1994 to September 1997 including Vice President and Chief Financial Officer. Mr. Kupferschmid is a certified public accountant licensed in the State of Texas.

Steven E. Markhoff has been our Senior Vice President and Chief Operating Officer of Kitty Hawk Cargo, Inc. since June 1, 2006 and serves as our Corporate Secretary. Mr. Markhoff was elected Corporate Secretary in March 2003. From July 2003 until June 2006, Mr. Markhoff served as our Vice President Strategic Planning and General Counsel. Prior to joining us as an employee, from April 2002 until July 2003, Mr. Markhoff was a founder and active principal of International Management Solutions, LLC, a strategic planning and corporate turn-around consulting practice. From November 1999 to March 2002, Mr. Markhoff served as Vice President Acquisitions for Hawaiian Airlines, Inc. a commercial, passenger airline. In March 2003, Hawaiian Airlines filed for Chapter 11 protection under the U.S. bankruptcy code. Mr. Markhoff served as General Counsel and Corporate Secretary of Mesa Air Group, Inc. from July 1998 to October 1999. Mr. Markhoff served in various positions at Kiwi International Airlines, Inc. from February 1997 to July 1998 including General Counsel, Corporate Secretary and Director of Safety. From April 1995 to January 1997, Mr. Markhoff served as General Counsel of ValuJet Airlines, Inc.

Jessica L. Wilson has been our Treasurer since July 2004 and our Chief Accounting Officer since August 2000. From August 1997 to July 2000, Ms. Wilson served as our Corporate Controller. From October 1990 to August 1997, Ms. Wilson was an auditor with Ernst & Young LLP. Ms. Wilson is a certified public accountant licensed in the State of Texas.

Generally, our executive officers are elected annually by our board of directors. Our executive officers may be removed at any time by our board of directors.

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PART II

ITEM 5.   MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Market for Our Common Stock.  Our common stock trades on the American Stock Exchange, or AMEX, under the symbol “KHK.” The closing price for our common stock on AMEX as of March 26, 2007 was $0.84. At March 14, 2007, there were approximately 1,590 holders of record and beneficial owners of our common stock.

The following table sets forth the high and low sales prices for our common stock on AMEX from January 1, 2005 through December 31, 2006.

	2006
Quarter Ended	High		Low
March 31	$	1.25	$	0.80
June 30		1.10		0.77
September 30		0.84		0.40
December 31		0.71		0.47

	2005
Quarter Ended	High		Low
March 31	$	1.62	$	1.33
June 30		1.44		1.08
September 30		1.20		0.90
December 31		1.13		0.72

We have not paid any cash dividends on our common stock. We intend to retain our earnings for use in our business and do not anticipate paying cash dividends to our common stockholders in the foreseeable future. Further, covenants contained in our Revolving Facility restrict our ability to pay cash dividends to common stockholders.

Equity Compensation Plan Information.  The following table sets forth information as of December 31, 2006 with respect to compensation plans under which shares of our common stock may be issued:

					Number of
					Securities
					Remaining
					Available
					for Future
					Issuance
					Under Equity
					Compensation
					Plans
	Number of Securities				(Excluding
	to Be Issued Upon		Weighted-Average		Securities
	Exercise of		Exercise Price of		Reflected
	Outstanding Options,		Outstanding Options,		in the First
Plan Category	Warrants and Rights		Warrants and Rights		Column)
Equity compensation plans approved by security holders		5,022,353	$	0.55		1,501,035
Equity compensation plans not approved by security holders		—		—		—
Total		5,022,353	$	0.55		1,501,035

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Stock Performance Graph.  In connection with our plan of reorganization, all of our common stock and securities exercisable for shares of our common stock issued prior to September 30, 2002 were cancelled without consideration. On September 30, 2002, we emerged from Chapter 11 reorganization and thereafter issued 37,744,655 shares of our common stock. Between the initial issuance of our common stock after our emergence from bankruptcy and September 23, 2003, public trades of our common stock were infrequent, subject to large price volatility and in small volumes. Accordingly, our management does not believe that including a stock performance graph with respect to that time period would provide our stockholders with any meaningful information. The following graph compares the cumulative stockholder return on a share of our common stock versus the cumulative total return on the Russell 2000 Index and the Hemscott Air Delivery/Freight Services Index. We have selected and included the Hemscott Air Delivery/ Freight Services Index because we are included within this index. The Hemscott Air Delivery/ Freight Services Index is the same index as the Coredata Air Delivery/ Freight Services Index, which was the index we used for comparison in 2004. Coredata Air Delivery/ Freight Services Index has changed its name to Hemscott Air Delivery/ Freight Services Index. The comparison assumes $100 was invested as of September 23, 2003 and all dividends were reinvested.

COMPARISON OF CUMULATIVE TOTAL RETURN
AMONG KITTY HAWK, INC.,
RUSSELL 2000 INDEX AND HEMSCOTT GROUP INDEX

ASSUMES $100 INVESTED ON SEPTEMBER 23, 2003
ASSUMES DIVIDEND REINVESTED
FISCAL YEAR ENDING DECEMBER 31, 2006

The chart above was plotted using the following data:

Company/Index	September 23, 2003		December 31, 2003		December 31, 2004		December 30, 2005		December 29, 2006
Kitty Hawk, Inc.	$	100.00	$	380.00	$	513.33	$	353.33	$	180.00
Hemscott Group Index	$	100.00	$	113.37	$	145.48	$	149.17	$	163.34
Russell 2000 Index	$	100.00	$	114.20	$	134.17	$	138.63	$	162.30

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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 estimated 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 presentation, 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, aircraft fuel — average cost per gallon and revenue block hours flown.

																Successor			Predecessor
	Successor															Three Months			Nine Months
	Year Ended			Year Ended			Year Ended			Year Ended			Year Ended			Ended			Ended
	December 31,			December 31,			December 31,			December 31,			December 31,			December 31,			September 30,
	2006			2005			2004			2003			2002			2002			2002
Results of Operations
Revenue:
Scheduled freight	$	191,579		$	151,910		$	154,016		$	127,412		$	116,279		$	31,482		$	84,797
Other(1)		38,063			4,727			4,481			4,992			5,524			2,994			2,530
Total revenue		229,642			156,637			158,497			132,404			121,803			34,476			87,327
Cost of revenue		234,290			157,764			137,017			122,209			117,401			29,658			87,743
Gross profit (loss)		(4,648	)		(1,127	)		21,480			10,195			4,402			4,818			(416	)
General and administrative expenses		9,904			8,052			11,073			9,220			7,836			2,065			5,771
Operating profit (loss) from continuing operations		(14,552	)		(9,179	)		10,407			975			(3,434	)		2,753			(6,187	)
Other (income) expense:
Interest expense		559			287			333			423			2,287			154			2,133
Reorganization expenses		—			—			—			—			39,629			—			39,629
Other income(2)		(678	)		(956	)		(426	)		(3,589	)		(30,473	)		(64	)		(30,409	)
Total interest and other (income) expense		(119	)		(669	)		(93	)		(3,166	)		(11,443	)		90			(11,353	)
Income (loss) from continuing operations before income taxes		(14,433	)		(8,510	)		10,500			4,141			(14,877	)		2,663			(17,540	)
Income tax expense		—			—			3,970			1,511			—			—			—
Income (loss) from continuing operations		(14,433	)		(8,510	)		6,530			2,630			(14,877	)		2,663			(17,540	)
Loss from discontinued operations(3)		—			—			—			—			(40,831	)		—			(40,831	)
Net income (loss) before extraordinary item		(14,433	)		(8,510	)		6,530			2,630			(55,708	)		2,663			(58,371	)
Extraordinary item(4)		—			—			—			—			378,068			—			378,068
Net income (loss)	$	(14,433	)	$	(8,510	)	$	6,530		$	2,630		$	322,360		$	2,663		$	319,697
Preferred stock dividends(5)		1,172			313			—			—			—			—			—
Net income (loss) allocable to common stockholders(5)	$	(15,605	)	$	(8,823	)	$	6,530		$	2,630		$	322,360		$	2,663		$	319,697

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													Successor		Predecessor
	Successor												Three Months		Nine Months
	Year Ended			Year Ended			Year Ended		Year Ended		Year Ended		Ended		Ended
	December 31,			December 31,			December 31,		December 31,		December 31,		December 31,		September 30,
	2006			2005			2004		2003		2002		2002		2002
Earnings (Loss) Per Share Data
Continuing operations(5)(6)	$	(0.30	)	$	(0.17	)	$	0.13	$	0.05	$	—	$	0.05	$	(1.02	)
Discontinued operations(3)(6)	$	—		$	—		$	—	$	—	$	—	$	—	$	(2.39	)
Extraordinary item(4)(5)	$	—		$	—		$	—	$	—	$	—	$	—	$	22.07
Net earnings (loss) per share(5)(6)	$	(0.30	)	$	(0.17	)	$	0.13	$	0.05	$	—	$	0.05	$	18.66
Weighted average common stock outstanding(6)		52,854			51,448			50,779		50,136		—		50,000		17,133
Operating Data
Chargeable weight — pounds moved(7)		462,989			159,598			174,727		152,756		149,588		38,992		110,596
Average yield per chargeable weight — pounds moved(8)	$	0.4266		$	0.9449		$	0.8815	$	0.8341	$	0.7773	$	0.8074	$	0.7667
Aircraft fuel — average cost per gallon(9)	$	2.1465		$	1.8633		$	1.3604	$	1.0325	$	0.8977	$	0.9946	$	0.8653
Revenue block hours flown(10)		23,563			23,991			24,376		20,882		22,674		6,221		16,453
Financial Condition (At End of Period)
Cash and cash equivalents	$	9,589		$	26,650		$	16,284	$	15,729	$	10,353	$	10,353	$	4,610
Total assets		53,823			56,934			49,070		47,110		47,259		47,259		47,354
Notes payable and long- term obligations		392			2,304			2,755		3,689		4,978		4,978		5,819
Series B Redeemable Preferred Stock		12,142			12,350			—		—		—		—		—
Stockholders’ equity	$	14,898		$	27,407		$	34,116	$	23,604	$	19,263	$	19,263	$	16,600

(1)	Other revenue is primarily generated by Kitty Hawk Aircargo for services provided through ACMI and ad-hoc charters, air freight services and, beginning in 2006, by Kitty Hawk Ground for services provided by operating trucks on full-truckload basis and local, non network ground transportation services. In 2006, other revenue includes the management of the C-NET network. Additionally, revenue generated from freight handling services provided to third parties is included as other revenue.
(2)	Other (income) expense is mainly generated through interest income and other settlements. In 2003, other income also included $3.0 million related to a customer arbitration award. In 2002, other income also included $29.4 million related to a settlement of claims against the U.S. Postal Service.
(3)	Loss from discontinued operations is the net operating results of operations that ceased or were disposed of during our bankruptcy proceedings and include the operations of our former wide-body cargo airline, the non-continental U.S. operations of our expedited scheduled freight network, our former air logistics service provider, our former small aircraft maintenance operation and our former subsidiary which developed an aircraft maintenance inventory and records software system.
(4)	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.
(5)	The preferred stock dividends consist of dividends on the Series B Redeemable Preferred Stock from the date of issuance to December 31, 2006 and the recognition of the beneficial conversion feature. On November 14, 2005, the fair value of the common stock issuable upon conversion of the Series B Redeemable Preferred Stock was greater than the conversion price of the Series B Redeemable Preferred Stock which resulted in a beneficial conversion feature of $0.2 million. Since the shares of Series B

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	Redeemable Preferred Stock are immediately convertible, the beneficial conversion feature was recorded as a preferred stock dividend on November 14, 2005.
(6)	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 this reason, these two periods may not be combined and used for year-over-year earnings per share comparisons. In 2002, the 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, the weighted average common stock outstanding for the successor period reflects the shares of common stock and warrants to acquire common stock issued under our plan of reorganization, which were deemed to be issued and outstanding as of October 1, 2002 for purposes of this calculation. In addition, because the warrants issued under our plan of reorganization had a nominal exercise price, the shares of common stock underlying these warrants were also deemed to be outstanding for the presentation of the weighted average common stock outstanding for the successor period.
(7)	Chargeable weight — pounds moved is the greater of the actual weight or the minimum deemed weight based on the dimensions of the items transported in our scheduled freight network. Beginning in November 2005, chargeable weight includes our ground product.
(8)	Average yield per chargeable weight — pounds moved is a calculation of our scheduled freight revenue and non-network ground transportation revenue divided by the chargeable weight — pounds moved. Beginning in November 2005, average yield includes revenue generated from our ground product and beginning in June 2006, average yield includes revenue generated by our non-network ground transportation services.
(9)	Aircraft fuel — average cost per gallon is the average cost per gallon of delivering aircraft fuel into the aircraft operated in our network, including the cost per gallon of the aircraft fuel, transportation fees to get the aircraft fuel to the airport, taxes, airport fees and costs associated with fueling the aircraft.
(10)	Revenue block hours flown are the block hours flown by Kitty Hawk Aircargo for the scheduled freight network and for customers on an ACMI or ad-hoc charter basis. Revenue block hours does not include any block hours flown by a third party in our scheduled freight network or the C-NET network we managed.

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

Executive Overview

Kitty Hawk is a holding company providing corporate planning and administrative services. We operate through our three wholly-owned subsidiaries, Kitty Hawk Cargo, Kitty Hawk Ground and Kitty Hawk Aircargo.

Scheduled Freight Network.  We operate an independent primarily airport-to-airport scheduled freight network that provides two products for predominantly heavy weight and oversized freight, an expedited overnight and second-morning air product and a time-definite ground freight product. Our network operates between selected cities in North America, including the continental U.S., Alaska, Hawaii, Canada and Puerto Rico. Most of our expedited air freight product is transported from its city of origination to our hub and sorting facility in Fort Wayne, Indiana before being routed by aircraft or truck to its destination city. Our scheduled expedited ground freight product is routed directly to its destination city or through regional hubs located in Los Angeles, California; San Francisco, California; Seattle, Washington; Dallas, Texas; Atlanta, Georgia; Newark, New Jersey and Fort Wayne, Indiana. As of March 26, 2007, our scheduled freight network offered an expedited overnight and second-morning air freight product to 54 business centers and an expedited time-definite ground freight product to 46 business centers. We have business alliances that allow us to provide freight services to Alaska, Hawaii and Mexico.

Our scheduled freight network business relies on customers who need expedited delivery on an as-needed basis for air or ground delivery. We generally do not have long-term commitments from our customers.

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Without customer commitments, the overall demand for our freight services is primarily influenced by the health of the U.S. economy, which is cyclical in nature, the seasonality and economic health of the industries generating the freight we transport in our network and the availability, reliability and cost of alternative freight services. The amount of freight shipped in our scheduled freight network during any particular time period can fluctuate significantly due to the foregoing factors, among other things.

A significant portion of the freight transported in our network relates to the electronics, telecom and related infrastructure equipment, automotive, other durable goods and equipment industries and apparel. The demand for the products produced by these industries and, in turn, the demand for our scheduled freight network services for the transportation of freight from these industries has historically trended in relationship to the strength of the U.S. and increasingly, world economies. Furthermore, these industries tend to be seasonal in nature and, as a result, our business is also seasonal with the third and fourth quarters historically having the strongest demand and, as such, typically being the highest revenue quarters.

In addition, the demand for our expedited air and ground freight products is impacted by the availability, reliability and cost of other freight transportation alternatives including services provided by passenger airlines, integrated freight carriers and trucking networks. In general, our competitors are impacted by the same economic cyclicality and seasonality trends we experience in our scheduled freight network. As a result, we believe we experience similar demand and supply relationships as our competitors. To the extent our customers can secure acceptable freight services at a lower cost than the freight services provided by our scheduled freight network, the demand for our scheduled freight network can be materially adversely affected.

For the twelve months ended December 31, 2006, our net loss was a result of, among other things, (i) the introduction and growth of an expedited ground freight product, (ii) the investment in our ground transportation services company, including the June 2006 acquisition of substantially all of the operating assets of Air Container Transport, Inc., or ACT, under an asset purchase agreement, and (iii) reduced demand for our expedited air freight services due to higher fuel prices during 2006 as compared to 2005, including significantly weakened demand during the traditional third and fourth quarter peak season shipping months. We believe other domestic freight transportation companies are also experiencing similar weaker than historical demand during this period. In response to these developments, we are rationalizing our air and ground transportation schedules to better match capacity to demand and reducing our infrastructure costs, including staffing. We continued to experience weak demand for our air and ground products during the first quarter of 2007 and we expect to report a loss in the first quarter of 2007 that will likely exceed the loss reported in the first quarter of 2006.

Network Management.  In 2006, Kitty Hawk Cargo was awarded a contract by the USPS to manage the C-NET network during the 2006 year end holiday period. We were responsible for the complete management of the C-NET network, including managing 96 trucks contracted for by us, over 200 seasonal employees at our Fort Wayne sort facility and 32 cargo aircraft contracted for by the USPS, including seven of our own aircraft.

Ground Transportation.  With the June 2006 acquisition of the ACT assets, we expanded our ground transportation services company. These assets, along with owner operators and contracted dedicated trucks, are managed by Kitty Hawk Ground and provide dedicated ground transportation services for Kitty Hawk Cargo’s scheduled freight network. Kitty Hawk Ground provides EUVs for a limited number of customers, including international and domestic airlines, which are not operated within the Kitty Hawk Cargo scheduled freight network. Additionally, we provide local transportation service for movement of freight to cities not included in our network. For the year ended December 31, 2006, ground transportation service revenue was 2.6% of our total revenue. As of March 26, 2007, Kitty Hawk Ground managed 187 owner operators, owned and leased trucks and contracted trucks.

Cargo Airline.  Kitty Hawk Aircargo, our all-cargo airline, provides dedicated air transportation services for Kitty Hawk Cargo’s scheduled freight network. During the twelve months ended December 31, 2006, Kitty Hawk Aircargo flew 94.6% of its block hours in Kitty Hawk Cargo’s scheduled freight network. As of March 29, 2007, Kitty Hawk Aircargo operated seven Boeing 737-300SF cargo aircraft under operating leases, six owned Boeing 727-200 cargo aircraft and one Boeing 727-200 cargo aircraft available under an aircraft

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and engine use agreement. Kitty Hawk Aircargo also generates revenue from external customers through ACMI and ad-hoc charter arrangements. For the twelve months ended December 31, 2006, approximately 2.5% of our revenue was from ACMI arrangements.

Fuel Costs.  One of our most significant and variable costs is fuel. Our scheduled freight network bears all aircraft and diesel fuel costs for aircraft and trucks operated in the network. Fuel for ground transportation is either paid as part of the cost for purchased transportation, including owner operators, and included in transportation expense or at the point of sale for owned trucks and included in fuel expense.

We seek to recapture the increase in aircraft and diesel fuel costs from our customers through increasing our prices and/or through fuel surcharges. We include these fuel surcharges in our scheduled freight revenue. Historically, we have been able to largely offset the rising costs of fuel through these fuel surcharges and/or price increases. However, if due to competitive pressures or other reasons, we are unable to raise our fuel surcharge and/or our prices, we may be forced to absorb increases in fuel costs. As we attempt to recapture the increase in fuel costs, our customers may seek lower cost freight transportation alternatives to our expedited scheduled freight network. If aircraft and diesel fuel prices remain at historically high levels for an extended period or increase from current prices and we are unable to continue to maintain or raise our fuel surcharge and/or our prices sufficiently and/or customers seek lower cost freight transportation alternatives, our financial condition and results of operations could be materially adversely affected.

Increases in the cost of aircraft fuel increases our working capital requirements because we pay for aircraft fuel in advance of providing air freight transportation services and typically do not collect payment for our services until 30 to 45 days after the services are performed. We purchase aircraft fuel from various suppliers at current market prices. We do not currently have any long-term contracts for aircraft fuel, nor do we currently have any agreements to hedge against increases in the price of aircraft fuel. On a regular basis, we review the price and availability of aircraft fuel. If we have the opportunity and ability to execute individual purchases at favorable prices or terms, enter into long-term supply contracts for aircraft fuel or make arrangements to hedge against changes in aircraft fuel prices, we may enter into such agreements or arrangements.

During the twelve months ended December 31, 2006, our aircraft fuel averaged $2.15 per gallon as compared to $1.86 per gallon for the twelve months ended December 31, 2005, an increase of 15.6%. Aircraft fuel cost per gallon includes the cost of aircraft fuel and the cost of all taxes, fees and surcharges necessary to deliver the aircraft fuel into the aircraft. The amount of aircraft fuel used in our network depends on the mix of aircraft employed in our network, the amount, origin and destination of freight shipped and the number of days the network is operated during each month. A change in aircraft fuel price will affect our total aircraft fuel expense as these factors fluctuate. During the twelve months ended December 31, 2006, we used between 1.8 million and 2.4 million gallons of aircraft fuel per month as compared to between 2.1 million and 2.8 million gallons for the twelve months ended December 31, 2005 in the scheduled freight network. At current levels of operations in our scheduled freight network, each $0.01 change in the price per gallon of aircraft fuel results in a change in our annual fuel cost of approximately $250,000.

	Total Cost of				Aircraft Fuel Expense as a
	Aircraft Fuel in				Percentage of Scheduled
	the Scheduled				Freight Operating
Year	Freight Network		Average Cost		Expenses
	(In millions)		(Per gallon)
2006	$	53.5	$	2.15		24.9	%
2005		54.7		1.86		35.7
2004		45.8		1.36		32.9

During 2006, aircraft fuel expense as a percentage of our scheduled freight network operating expenses has decreased from prior years despite the increase in the year over year cost per gallon of aircraft fuel due to the additional costs required to offer our ground freight product partially offset by the savings from operating the fuel efficient Boeing 737-300SF cargo aircraft in our network.

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Seasonality.  Our business is seasonal in nature. In a typical year, demand for our freight service is highest in the third and fourth quarters of the year and weakest in the first and second quarters. Generally, we believe that the demand for expedited air service is susceptible to greater seasonal fluctuations than demand for the expedited, time-definite ground services.

During 2005 and 2006, we believe our expedited air freight product has been negatively impacted by the rapidly changing and high cost of aircraft fuel which has resulted in us charging our customers higher total prices as we increased the existing fuel surcharge and raised our prices to offset these costs. We believe this continues to contribute to lower customer demand for our expedited air freight product. Should the record high prices for fuel continue for an extended period of time, we believe our customers could continue to be cautious, selectively purchase, or in some cases, limit their reliance on expedited freight services.

Fixed Costs.  We have significant fixed costs which cannot be materially reduced in the short term. Operating the scheduled freight network requires the operation of network hubs and a certain minimum amount of aircraft and trucking operations for each day that we operate. Once chargeable weight and corresponding revenue reaches the break-even point, each additional dollar of revenue contributes a relatively high percentage to operating income. However, if chargeable weight and corresponding revenue do not reach the break-even point, the operations will sustain losses which could be significant depending on the amount of the deficit. Therefore, we typically have seasonal working capital needs in the second and third quarters of the year to the extent that our cash and collections of accounts receivable do not allow us to cover our costs. Since our scheduled freight business is both seasonal and tied to the economic trends of the U.S. economy, we may also incur additional working capital needs during the first and fourth quarters of the year.

Capital Requirements, Capital Resources and Liquidity

Capital Requirements.  In addition to our normal working capital requirements, we believe our cash requirements for the next twelve months include, but are not limited to, projected capital expenditures of less than $2.0 million, including investments in information technology. Our working capital is also affected by the rising cost of aircraft fuel because we pay for fuel in advance of providing air freight transportation services and typically do not recover these increases through our fuel surcharge or higher prices charged to our customers until the billing for the air freight transportation service is collected, which is usually between 30 to 45 days after the service is performed. Further, our working capital requirements for the year ended December 31, 2006 were higher than normal due to initially funding the purchase price and the working capital needed to operate the assets acquired from ACT because we did not acquire any of the cash or accounts receivable generated prior to the acquisition.

Capital Resources.  At December 31, 2006, our net working capital was $16.9 million as compared to $32.5 million at December 31, 2005. The decrease in net working capital was primarily due to funding the estimated $16.1 million of losses related to expanding our scheduled freight network to include our expedited ground product during the twelve months ended December 31, 2006 and the continued high aircraft fuel costs along with seasonal losses from our expedited air service. Our net working capital was also affected by $3.2 million spent related to the acquisition of substantially all of the operating assets of ACT and funding $4.8 million for the operation of these assets as we did not acquire any of the cash or accounts receivable generated prior to their acquisition and $1.8 million of capital expenditures for the scheduled freight network and the cargo airline. Additionally, during the twelve months ended December 31, 2006, we paid $0.4 million in dividends related to our Series B Redeemable Preferred Stock.

New Revolving Facility.  On March 29, 2007, we entered into the Revolving Facility, with Laurus. This Revolving Facility replaces the PNC Credit Facility. The Revolving Facility provides for borrowings up to $25 million, subject to a borrowing base of up to 90% of eligible receivables. The Revolving Facility bears interest at prime plus 1.5%, subject to a floor of 9.0% and a cap of 11.0%. There are no financial performance covenants. The Revolving Facility contains non-financial covenants that restrict our ability to, among other things: engage in mergers, consolidations, or other reorganizations; create or permit liens on assets; dispose of certain assets; incur certain indebtedness; guarantee obligations; pay dividends or other distributions (other than dividends on our Series B Redeemable Preferred Stock); materially change the nature of our business;

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make certain investments; make certain loans or advances; prepay certain indebtedness (with the exception of Laurus or in the ordinary course of business); change our fiscal year or make changes in accounting treatment or reporting practices except as required by GAAP or the law; enter into certain transactions with affiliates; or form new subsidiaries. The Revolving Facility matures on September 30, 2010. The obligations under the Revolving Facility are secured by substantially all of our assets, including the stock of our subsidiaries. As of March 29, 2007, we had a borrowing base of $14.7 million, outstanding borrowings of $9.3 million and $5.4 million of availability. Our outstanding borrowings include $3.9 million to cash collateralize our outstanding letters of credit. We paid a placement fee of $250,000 to B. Riley & Co., Inc., an affiliate of one of our greater than 5% stockholders, in connection with the Revolving Facility.

We also issued to Laurus a five year warrant to purchase up to 8,216,657 shares of our common stock, or the Warrant. The exercise price of the Warrant is $0.91 per share. The exercise price is not subject to adjustment or reset, other than to reflect stock splits, stock dividends and similar transactions. Pursuant to the terms of the Warrant, Laurus will not sell any shares for which it has exercised the Warrant prior to March 29, 2008. Laurus also will not sell shares for which it has exercised the Warrant during a 22 day trading period in a number that exceeds 20% of the aggregate dollar trading volume of our common stock for the 22 day trading period immediately preceding the sales.

In connection with the Warrant, we entered into a registration rights agreement whereby we agreed to file a registration statement with the Securities and Exchange Commission covering the registration of the shares of common stock issuable upon exercise of the Warrant within 90 days of the closing date of the Revolving Facility. We agreed to use our best efforts to have the registration statement declared effective within 180 days of the closing date of the Revolving Facility.

Liquidity.  Our primary source of liquidity is our cash and cash equivalents and cash flow from operations. In addition, we supplement our liquidity by utilizing our Revolving Facility.

At December 31, 2006, cash and cash equivalents were $9.6 million as compared to $26.6 million at December 31, 2005, and we had $13.6 million of unused availability under the PNC Bank Credit Facility, including a $2.0 million liquidity reserve, compared to $6.7 million of unused availability under the Wells Fargo Bank credit facility at December 31, 2005. The decrease in cash and cash equivalents of $17.1 million is a result of using $9.8 million to fund our operations including operating the assets acquired from ACT, spending $3.9 million in investing activities and spending $3.4 million in financing activities. Our investing activities included $3.2 million for the acquisition of substantially all of the operating assets of ACT and $1.8 million for the acquisition of other operating assets offset by $1.1 million of proceeds from the sale of our surplus assets. Our financing activities included a net paydown of $1.9 million on the Wells Fargo Bank credit facility, payment of $0.4 million of preferred stock dividends and $1.1 million of payments on current debt which was offset by generating $0.1 million from the exercise of outstanding stock options to acquire stock during 2006. For the quarters ended September 30, 2006 and December 31, 2006, we decided to cumulate, rather than pay currently, the $0.4 million of preferred stock dividends due for each period. These cumulated dividends will bear interest at a rate of 8.0% per annum until declared and paid. At March 29, 2007, we had $4.2 million of cash on hand and $5.4 million of unused availability under our Revolving Facility with Laurus.

We believe we may have been unable to comply with the covenants and liquidity reserves under the PNC Credit Facility during 2007. Therefore, we recently replaced the PNC Credit Facility with the Revolving Facility with Laurus that contains no financial performance covenants or liquidity reserves. At March 31, 2007, based on current forecasts, we believe we have sufficient available cash and borrowing capacity under the Revolving Facility to fund our working capital needs over the next twelve months. However, there is no assurance that our forecasts will prove to be accurate, including our forecast that, because of our performance managing the 2006 C-NET network, we will be awarded the management of the 2007 C-NET network in the event that the USPS decides to operate it. If the demand for our expedited freight services continues to be negatively impacted by rising fuel prices or general weakness in demand for our air and ground freight products in 2007, or if our forecasts prove to materially inaccurate, we may need to raise additional funds, supplement our current sources of liquidity during the next twelve months and/or seek material modifications

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to our Revolving Facility. Substantially all of our assets are encumbered under the Revolving Facility. If we are required to raise additional funds, supplement our existing sources of liquidity or make modifications to our Revolving Facility and are unable to do so either on economic terms or at all, our business may be materially adversely affected.

Explanation of Statement of Operations Items

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

•  Scheduled freight revenue, which is generated from our expedited air and ground freight products provided by our scheduled freight network. We consider expedited freight service as freight transported on our air product on an overnight or second-morning basis or on our ground product on a time-definite basis as determined by the customer. It also includes revenue generated from our fuel and security surcharges. The fuel surcharge seeks to mitigate the increases in our fuel expense resulting from higher fuel prices. The security surcharge seeks to mitigate the increased costs of security measures that have been implemented as a result of regulations adopted by the Transportation Security Administration;

•  Network management revenue, which is generated from the management of the C-NET network during 2006;

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

•  Miscellaneous revenue, which is generated from ad-hoc charters provided by our cargo airline, maintenance revenue, freight handling services provided for third parties, providing EUV, contracted service to third parties and local transportation trucking services.

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

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

•  flight crew member wages, benefits, training and travel;

•  leased aircraft and engines operated and flown by Kitty Hawk Aircargo;

•  insurance costs related to aircraft operated and flown by Kitty Hawk Aircargo; and

•  flight operations and airline management costs, including associated wages and benefits.

•  Transportation Expense, which consists of costs related to the physical movement of freight within our network 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 the cost of deicing aircraft;

•  leased trucks operated by Kitty Hawk Ground and leased trailers;

•  driver wages and benefits;

•  contracted trucking expenses between cities in our scheduled network, including owner-operator costs and surcharges for diesel fuel not purchased by us, and

•  pickup and/or final delivery expenses as directed by customers.

•  Fuel Expense, which consists of the all-inclusive cost of all aircraft fuel consumed in our expedited scheduled air network and on ad-hoc charters that include aircraft fuel in the charter service, the cost of all taxes, fees and surcharges necessary to deliver the aircraft fuel into the aircraft and the cost of diesel fuel and all related taxes, fees and surcharges for trucks operated by our employees.

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•  Maintenance Expense, which consists of costs to maintain airframes and aircraft engines operated by our cargo airline and trucks operated by our ground transportation company, including:

•  payments related to the Boeing 737-300SF cargo aircraft power-by-the-hour maintenance contract;

•  wages and benefits for maintenance, records and maintenance management personnel;

•  costs for third party maintenance;

•  costs of aircraft and truck parts and supplies; and

•  accruals for maintenance of airframes and aircraft engines prior to December 31, 2004.

•  Freight Handling Expense, which consists of the costs of loading and unloading freight on aircraft and trucks operating within our 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 and trucks principally at outstation cargo facilities; and

•  wages and benefits for our regional hub personnel, other company operated outstations and field operations managers.

•  Depreciation and Amortization, which consists of depreciation and amortization expenses for our owned airframes and aircraft engines, trucks, trailers, freight-handling equipment and capitalized software as well as the amortization of certain intangible assets associated with the acquisition of the operating assets of ACT.

•  Operating Overhead Expense, which consists of direct overhead costs related to operating our scheduled freight network, ground transportation company and cargo airline, including:

•  wages and benefits for operational managers, sales representatives and customer service personnel of Kitty Hawk Cargo and Kitty Hawk Ground;

•  scheduled freight network sales and marketing expenses;

•  rent and utilities;

•  bad debt expense;

•  general operational office expenses; and

•  induction costs related to the Boeing 737-300SF cargo aircraft during 2004 and 2005.

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

Critical Accounting Policies and Estimates

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 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:

•  airframe and aircraft engine heavy maintenance and aircraft lease return provisions;

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•  allowance for doubtful accounts;

•  purchase price accounting;

•  accounting for aircraft parts inventory; and

•  our valuation allowance related to deferred taxes.

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.

Airframe and Aircraft Engine Heavy Maintenance and Aircraft Lease Return Provisions.

Boeing 737-300SF Cargo Aircraft.  On May 4, 2004, we entered into operating leases for seven Boeing 737-300SF cargo aircraft. Heavy maintenance on the airframes and aircraft engines must be performed in order to keep our Boeing 737-300SF cargo aircraft in airworthy condition. On March 7, 2005, we contracted with IAI to perform the heavy maintenance on the Boeing 737-300SF engines, certain rotable components and landing gear. For the C-checks, we have elected to place our Boeing 737-300SF airframes on an FAA-approved maintenance program that allows us to complete the C-checks in phases, or a phased C-check, during routine monthly maintenance of the aircraft which typically occurs during the weekend period when the aircraft is not used in revenue service. We believe that the phased C-check is a more efficient means of maintaining our Boeing 737-300SF airframes. During the term of the lease, we will perform the phased C-check using our employees and will expense the cost as it is incurred and any other component costs not covered by the IAI Maintenance Agreement in performing the phased C-checks.

In addition to the phased C-checks, our Boeing 737-300SF cargo aircraft airframes must also undergo periodic heavy structural C-checks, or structural C-checks, every 48 months. We have entered into an agreement with the lessor under which we pay a daily rate of $117.62 per airframe to cover these costs. If the cost to perform the structural C-check exceeds the amounts paid to the lessor, we will pay the difference. These costs will be capitalized when incurred and will be amortized over the period of time until the next structural C-check. No separate reserves are maintained for structural C-checks.

Our Boeing 737-300SF cargo aircraft lease return conditions require each Boeing 737-300SF cargo aircraft airframe to have undergone its next sequential C-check at the time of return to the lessor. The cost of the lease return C-check is covered in the daily rate being paid to the lessor for the structural C-check. Through the IAI Maintenance Agreement, IAI has assumed the financial liability for lease return conditions requirements for landing gear, engine and rotable components covered under the IAI Maintenance Agreement. Currently, these aircraft are scheduled to be returned to the lessor in 2015.

Boeing 727-200 Cargo Aircraft — General.  To keep our Boeing 727-200 cargo aircraft in airworthy condition, the airframes and aircraft engines must undergo heavy maintenance. For our Boeing 727-200 airframes, this includes a light C-check which is performed every 3,000 to 4,000 flight hours or a heavy C-check which is performed every 14,000 flight hours and includes a light C-check. For our aircraft engines, this includes a heavy shop visit which includes disassembly, inspection, repair or replacement of worn and life-limited parts, reassembly and testing. Accounting standards allow us to spread the cost of this heavy maintenance over the period of time that elapses between these maintenance events by capitalizing the cost of the maintenance event and amortizing the capitalized cost over the use of the airframe or engine prior to its next scheduled heavy maintenance event or the estimated useful life of the asset, whichever is shorter.

Owned Boeing 727-200 Cargo Aircraft.  Prior to December 31, 2004, we maintained airframe and aircraft engine maintenance reserves on selected Boeing 727-200 airframes and Pratt & Whitney JT8D-9A aircraft engines which were in revenue service at September 30, 2002 or which we had the intention as of September 30, 2002 to reintroduce into revenue service. At the end of 2004, we reviewed our aircraft fleet composition plan and concluded that we would not perform heavy maintenance on these Boeing 727-200 airframes or Pratt & Whitney JT8D-9A aircraft engines. As a result of this review and changes in our

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estimates for Boeing 727-200 airframe and Pratt & Whitney JT8D-9A aircraft engines maintenance reserve requirements, we reversed the accrued Boeing 727-200 airframe maintenance reserve of $0.8 million and the accrued Pratt & Whitney JT8D-9A aircraft engine maintenance reserve of $3.9 million as of December 31, 2004.

In the event that we determine that we do not have enough Pratt & Whitney JT8D-9A aircraft engines to support our fleet composition plans, we will either seek to lease Pratt & Whitney JT8D-9A aircraft engines, or capitalize and amortize the cost of heavy maintenance on our owned Pratt & Whitney JT8D-9A aircraft engines if heavy maintenance is required. In the event that we perform heavy maintenance on our owned airframes, we will capitalize and amortize the cost of the heavy maintenance event. During 2005, we capitalized $1.3 million for heavy maintenance on two of our owned airframes which were acquired after September 30, 2002. During 2006, we did not capitalize any heavy maintenance for aircraft engines or airframes.

We capitalize and amortize the actual cost of mandated, life-extending airframe and aircraft engine FAA Airworthiness Directive maintenance for our owned Boeing 727-200 cargo aircraft over the expected remaining life until their next heavy airframe or aircraft engine maintenance event. We base our estimate of the expected life of the airframe or aircraft engine until the next heavy maintenance event on our historical experience. During 2006 and 2005, we capitalized life-extending, FAA-mandated Airworthiness Directives of $0.3 million and $0.1 million, respectively.

Trust Agreement Boeing 727-200 Cargo Aircraft.  The Trust Agreement does not require us to pay any heavy maintenance or lease return reserves to the Trust for the Boeing 727-200 cargo aircraft we operate pursuant to the Trust Agreement. The Trust bears the cost of substantially all heavy maintenance. As to any heavy maintenance performed on the Boeing 727-200 cargo aircraft that is not funded by the Trust, we capitalize and amortize the cost of the heavy maintenance event over the remaining term of the lease. In addition, we capitalize and amortize over the remaining term of the lease the costs of any FAA-mandated Airworthiness Directive maintenance not funded by the Trust. During 2006 and 2005, we capitalized heavy maintenance and life-extending, FAA-mandated Airworthiness Directives of zero and $0.2 million, respectively.

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

•  the amount of credit requested relative to the existing or anticipated amount of customer revenue;

•  the customer’s financial condition (when we obtain it); and

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

In some cases, we extend open credit to customers that refuse to make financial disclosure to us, but who 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 as an offset to our customer accounts receivable when it is probable a customer’s receivable balance cannot be collected. If we determine that a customer’s receivable balance cannot be collected, we write-off the customer receivable balance against the allowance for doubtful accounts reserve. Once a customer account is written-off, the customer is typically not allowed to have any open credit with us. During 2006, we charged off less than $0.1 million in uncollectible accounts.

Our allowance for doubtful accounts is based on an analysis that estimates the amount of our total customer receivable balance that is not collectable. This analysis includes a review of customer aged receivables and payment trends. At December 31, 2005 and 2006, our allowance for doubtful accounts was $0.1 million and $0.5 million, respectively. At December 31, 2006, we had a significant concentration of credit risk because approximately 48.3% of our outstanding accounts receivable were from ten customers and 19.0% of our outstanding accounts receivable was attributable to one customer. A payment default by one of these customers could significantly exceed our allowance for doubtful accounts reserve which would have a material adverse effect on our results of operations.

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Purchase Price Accounting.  On June 22, 2006, we acquired substantially all of the operating assets of ACT, including: owned and leased trucks and trailers; owner operator agreements; leased facilities; trademarks and intellectual property; and customer and employee lists. At closing, we also assumed contracts relating to ACT’s leased trucks and trailers, leased operating facilities, other equipment leases and contracts with owner operators. We did not assume any pre-closing liabilities of ACT, except for limited liabilities expressly set forth in the asset purchase agreement.

The purchase price of $5.0 million was funded through a combination of $2.75 million of cash paid at closing, the issuance of 1,773,818 shares of unregistered Kitty Hawk common stock based on a 10-day volume weighted average price and deferred payments of $0.25 million and $0.5 million with interest, due six months and one year after closing, respectively.

Approximately $3.2 million of the purchase price was allocated to the acquired intangible assets, including customer lists of $1.7 million (ten year life), non-compete agreements of $1.1 million (three year life), the ACT trade name of $0.2 million (three year life) and $0.2 million of goodwill. Approximately $1.9 million was allocated to the tangible assets including trucks and trailers of $1.8 million and $0.1 million of freight handling equipment and office furniture and fixtures. The lives of the intangible assets were based on a combination of factors, including management’s estimate of the benefits expected to be derived from the specific intangible asset. The book value of the intangible assets will be evaluated on an annual basis, or more periodically, if any factors, events or circumstances occur that would more-likely-than-not reduce the fair value of the intangible below its carrying amount. Such a review was conducted as of December 31, 2006, and management concluded no adjustments to book value of the intangible assets were needed.

Aircraft Parts Inventory Accounting.  We have separate aircraft parts inventory accounting procedures for our Boeing 737-300SF cargo aircraft and our Boeing 727-200 cargo aircraft.

Boeing 737-300SF Cargo Aircraft.  Under the terms of the IAI Maintenance Agreement, IAI provides access to rotable component spare parts through an inventory pool of rotable components for which we pay IAI a monthly fixed rate per flight hour and through a dedicated consignment rotable component inventory for which we pay IAI a monthly fee equal to a percentage of the purchased value of the dedicated consignment rotable component inventory. After the second year of the IAI Maintenance Agreement and during each successive year thereafter, we have the ability to purchase the dedicated consignment rotable component inventory from IAI on a predetermined declining balance. The rate per flight hour we pay IAI for access to a rotable component spare parts pool includes the repair costs for both the rotable components spare parts pool and the consignment rotable component inventory. The amounts paid to IAI for access to the rotable component spare parts are expensed as incurred. See “— IAI Maintenance Agreement” for more information about this maintenance agreement.

In addition to the rotable component spare parts provided through IAI, we maintain a stock of expendable spare parts inventory that we use to perform certain maintenance on our Boeing 737-300SF cargo aircraft. At December 31, 2006, we maintained $0.4 million of incremental expendable spare parts to support our Boeing 737-300SF cargo aircraft. Expendable spare parts are expensed when installed on the aircraft.

Boeing 727-200 Cargo Aircraft.  We have a stock of aircraft parts and supplies that we use to perform certain maintenance on our fleet of owned and leased Boeing 727-200 cargo aircraft. At December 31, 2006, the balance of our aircraft parts and supplies inventory was $1.8 million net of established valuation reserves. This balance is based upon the sum of the estimated fair values of the aircraft parts and supplies inventory established during our fresh start accounting adjustments at September 30, 2002 upon our emergence from Chapter 11 bankruptcy, the average cost of the items acquired or repaired since September 30, 2002, and the value of items added to inventory from retired aircraft since September 30, 2002, less the average cost of parts and supplies removed from inventory to be used in aircraft maintenance, lower of cost or market adjustments and a valuation reserve established for those identified aircraft parts and supplies which have book value and have been deemed surplus at December 31, 2006.

We currently treat all owned Boeing 727-200 cargo aircraft parts as inventory, rather than as property and equipment, and thus we do not use the rotable parts pooling concept for treatment of parts as fixed assets. We

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do this because prior to December 31, 2006, approximately half of our Boeing 727-200 cargo aircraft fleet was operated under the Trust Agreement. The Trust Agreement generally requires us to maintain the aircraft in an airworthy condition, which requires us to periodically install parts and supplies on the airframe or aircraft engines. Because the parts and supplies become a permanent fixture on the Trust airframe or aircraft engine, installing the part effectively transfers ownership of the part from us to the aircraft owner.

As a part of our fresh start accounting adjustments, we estimated the opening value of these Boeing 727-200 cargo aircraft parts and supplies based on then recent purchases of similar parts and supplies, quotes from vendors or then recent costs incurred to repair similar parts. At September 30, 2002, we established an opening value of aircraft parts and supplies of $5.8 million. Subsequent to September 30, 2002, we added parts and supplies to inventory at the cost incurred to purchase or the cost incurred to repair some removed parts that we chose to repair. In addition, subsequent to September 30, 2002, we removed some economically viable parts and supplies from our retired aircraft and assigned a pro-rata share of the net book value of the retired aircraft to the parts added to inventory.

Because parts can be added to inventory at either the cost to repair such a part or the pro-rata share of the net book value of the retired aircraft, the cost of parts added to inventory may be less than fair market value. Because we have limited availability of some aircraft parts and supplies, we may need to acquire additional parts in the future at then market values which could result in an increase in maintenance expense in the future which, in turn, could have a material adverse affect on our financial results. We review our inventory periodically to ensure we are carrying these parts at the lower of cost or fair market value. At December 31, 2005 and 2006, we estimated that the recorded cost of a portion of our active inventory and aircraft supplies exceeded fair market value and recorded lower of cost or market writedowns of $1.3 million and $2.3 million, respectively, to reduce the carrying value to fair market value.

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 or heavy C-check or an engine heavy maintenance event, the average cost of the part or supply item is capitalized.

Upon emerging from bankruptcy on September 30, 2002, we did not separately identify the portion of our aircraft parts and supplies required to continue to operate our fleet of Boeing 727-200 cargo aircraft and the amount which could be deemed excess. Furthermore, the amount of aircraft parts and supplies necessary to operate our Boeing 727-200 fleet is dependent upon the number of Boeing 727-200 cargo aircraft that we continue to operate and the number of hours the aircraft are operated.

In conjunction with a review of our aircraft fleet composition plan and a limited review of our Boeing 727-200 cargo aircraft parts and supplies at the end of 2004, we determined that we had certain aircraft parts and supplies with a book value of approximately $1.3 million that were surplus and that the realizable sales value of these surplus aircraft parts and supplies was approximately $0.7 million. As such, we established a general valuation reserve of $0.6 million against these identified surplus aircraft parts and supplies as of December 31, 2004. As our fleet composition changed during 2005, we identified additional surplus inventory parts and supplies and increased the valuation reserve by $1.1 million as of December 31, 2005. As of December 31, 2006, we identified surplus inventory and aircraft supplies with a carrying value of $0.8 million. The book value of these items were compared to their fair value using an orderly liquidation valuation because we expect to sell these items. As a result of this analysis, the general valuation reserve was reduced from $1.7 million to $0.2 million as of December 31, 2006.

To the extent our aircraft fleet composition plans change in the future which results in a reduction in the number of Boeing 727-200 cargo aircraft that we operate, this modification to our fleet composition plan could result in a reduction in the amount of aircraft parts and supplies we need to maintain our current fleet of this aircraft type. If we conclude we have excess aircraft parts and supplies excess to our current or anticipated future needs, we may be required to write-down the value of our aircraft parts and supplies. Any such write-down could have a material adverse effect on our financial results.

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Valuation Allowance Related to Deferred Taxes.  Upon our emergence from bankruptcy in 2002, the tax basis of our assets and liabilities exceeded our book basis, resulting in $48.2 million in future deductible amounts for which no deferred tax asset was recorded. Due to historical operating losses and the potential for future limitations on the utilization of these deductions, we have recorded a full valuation allowance because it is unclear how much, if any, tax benefit we will realize. Therefore, no net asset value for these deductions is currently reflected in our current consolidated financial statements. At December 31, 2006, we evaluated whether it was more likely than not that we would be able to utilize these tax deductions. Based on our projections, we concluded that our deferred tax asset should remain fully reserved.

As we realize these deductible amounts existing at December 31, 2002 through the reduction of taxable income, we record tax expense and an increase in additional paid in capital. If we determine that the realization of our remaining pre-bankruptcy tax deductions is more likely than not, we will eliminate the valuation allowance associated with these amounts and recognize a corresponding increase in additional paid in capital. During 2003 and 2004, we realized $4.1 million and $10.2 million, respectively, of these deductible amounts resulting in tax expense of $1.5 million and $3.7 million, respectively, with a corresponding increase in additional paid in capital.

Upon our emergence from bankruptcy, our shares of common stock and warrants were distributed to a small group of holders. As these holders have disposed of their shares through transfers of our stock and warrants and since our issuance of the Series B Redeemable Preferred Stock, there have been changes in the composition and concentration of our stockholder base. These changes in stock ownership resulted in a change in control of our greater than 5% stockholders as defined in Section 382 of the Internal Revenue Code during September 2005. Therefore, our ability to utilize our current net operating losses and other deductions to offset any future taxable income which may be generated will be subject to an annual limitation of $1.9 million. Further, any future changes in control as defined by the Internal Revenue Code may result in additional limitations on the use of these deductions in a particular tax year.

Recent Accounting Pronouncements

In July 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes — an Interpretation of FASB Statement 109 (“FIN 48”), which clarifies the accounting for uncertainty in tax positions taken or expected to be taken in a tax return, including issues relating to financial statement recognition and measurement. FIN 48 provides that the tax effects from an uncertain tax position can be recognized in the financial statements only if the position is “more-likely-than-not” of being sustained if the position were to be challenged by a taxing authority. The assessment of the tax position is based solely on the technical merits of the position, without regard to the likelihood that the tax position may be challenged. If an uncertain tax position meets the “more-likely-than-not” threshold, the largest amount of tax benefit that is greater than 50 percent likely of being recognized upon ultimate settlement with the taxing authority, is recorded. The provisions of FIN 48 are effective for fiscal years beginning after December 15, 2006, with the cumulative effect of the change in accounting principle recorded as an adjustment to opening retained earnings. We are currently evaluating the impact of adopting FIN 48 on our financial statements but do not expect the adoption to have a material effect on our financial position.

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.” SFAS No. 157 defines fair value, establishes a framework for measuring fair value under Generally Accepted Accounting Principles and requires enhanced disclosures about fair value measurements. It does not require any new fair value measurements. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. SFAS No. 157 will not have a material impact on our financial statements.

In February 2007, the FASB issued FASB Statement No. 159, The Fair Value Option for Financial Assets and Financial Liabilities — Including an Amendment of FASB Statement No. 115 (“SFAS 159”). The fair value option established by SFAS 159 permits all entities to choose to measure eligible items at fair value at specified election dates. A business entity will report unrealized gains and losses on items for which the fair value option has been elected in earnings (or another performance indicator if the business entity does not

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report earnings) at each subsequent reporting date. The fair value option: (a) may be applied instrument by instrument, with a few exceptions, such as investments otherwise accounted for by the equity method; (b) is irrevocable (unless a new election date occurs); and (c) is applied only to entire instruments and not to portions of instruments. FASB No. 159 is effective as of the beginning of fiscal years beginning after November 15, 2007. The adoption of SFAS 159 is not expected to be material to our financial statements.

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,
	2006			2005			2004
Revenue:
Scheduled freight		83.4	%		97.0	%		97.2	%
Network management		11.5			—			—
Other		5.1			3.0			2.8
Total revenue		100.0			100.0			100.0
Cost of revenue		102.0			100.7			86.5
Gross profit (loss)		(2.0	)		(0.7	)		13.5
General and administrative expenses		4.3			5.1			7.0
Operating income (loss) from continuing operations		(6.3	)		(5.8	)		6.5
Other (income) expense:
Interest expense		0.3			0.2			0.2
Other income		(0.3	)		(0.6	)		(0.3	)
Total interest and other (income) expense		—			(0.4	)		(0.1	)
Income (loss) from continuing operations before income taxes		(6.3	)		(5.4	)		6.6
Income tax expense		—			—			2.5
Net income (loss)		(6.3	)%		(5.4	)%		4.1	%

Year ended December 31, 2006 compared to the year ended December 31, 2005

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

	2006					2005					Percentage
			Percentage					Percentage			Change
			of Total					of Total			from 2005
	Revenue		Revenue			Revenue		Revenue			to 2006
			(Dollars in thousands)
Scheduled freight	$	191,579		83.4	%	$	151,910		97.0	%		26.1	%
Network management		26,442		11.5			—		—			100.0
Other:
ACMI		5,713		2.5			2,431		1.5			135.0
Miscellaneous		5,908		2.6			2,296		1.5			157.3
Total revenue	$	229,642		100.0	%	$	156,637		100.0	%		46.6	%

Scheduled Freight Network.  For the year ended December 31, 2006, the $39.7 million increase in our scheduled freight network revenue was due to a 190.1% increase in our chargeable weight offset by a 54.9% decrease in our average yield as compared to the year ended December 31, 2005. Approximately $3.7 million of the increase in revenue was attributable to our expedited air freight product and $36.0 million of the

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increase was attributable to our expedited ground freight product. Our chargeable weight increase was due to providing an expedited ground freight product within our scheduled freight network beginning in the fourth quarter of 2005 and the expansion of our network through the acquisition of substantially all of the operating assets of ACT in June 2006. Our average yield decrease was primarily due to a change in the mix of our products as the expedited ground freight product has substantially higher volumes at lower yields than our expedited air freight product. The decrease in yield was partially offset by a higher fuel surcharge on our air freight product as we sought to recover the increases in our aircraft fuel costs.

Network Management.  For the year ended December 31, 2006, our network management revenue was from the management of the C-NET network for the USPS from November 28 to December 24.

ACMI.  For the year ended December 31, 2006, our ACMI revenue was due to operating seven aircraft under ACMI contracts with the USPS as part of the C-NET network and two other ACMI contracts during 2006 as compared to an ACMI contract for one aircraft during 2005.

Miscellaneous.  For the year ended December 31, 2006, our miscellaneous revenue was primarily related to EUVs and contracted service to our customers outside of our network. For the year ended December 31, 2005, our miscellaneous revenue resulted from flying ad-hoc charter services for several customers.

Cost of Revenue

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

	2006					2005					Percentage
			Percentage					Percentage of			Change
	Cost of		of Total			Cost of		Total			from 2005
	Revenue		Revenue			Revenue		Revenue			to 2006
	(Dollars in thousands)
Flight expense	$	33,653		14.7	%	$	30,241		19.3	%		11.3	%
Transportation expense		56,543		24.6			17,106		10.9			230.5
Fuel expense		61,530		26.8			54,656		34.9			12.6
Maintenance expense		16,817		7.3			14,207		9.1			18.4
Freight handling expense		46,191		20.1			26,715		17.1			72.9
Depreciation and amortization		3,468		1.5			3,693		2.3			(6.1	)
Operating overhead expense		16,088		7.0			11,146		7.1			44.3
Total cost of revenue	$	234,290		102.0	%	$	157,764		100.7	%		48.5

Flight Expense.  For the year ended December 31, 2006, flight expense increased $3.4 million, or 11.3%, compared to the year ended December 31, 2005. This increase was primarily a result of higher aircraft lease expense, crew costs and aircraft insurance expense.

Our aircraft lease expense increased $2.4 million due to the lease expense associated with the operation of the Boeing 737-300SF cargo aircraft for the full year of 2006 after being delivered and put into service during 2005 partially offset by lower utilization on the Boeing 727-200 cargo airframes and aircraft engines operated under an aircraft and engine use agreement. Our aircraft flew a total of 2.7%, or 622, less revenue block hours in the scheduled freight network for the year ended December 31, 2006 as compared to the year ended December 31, 2005 due primarily to changes in routing of aircraft for operating efficiencies. Our aircraft flew a total of 18.0%, or 194, more revenue hours related to our ACMI and ad-hoc charter transportation services for the year ended December 31, 2006 as compared to the year ended December 31, 2005. Crew costs increased $0.5 million due in part to longevity pay increases for crew members and higher travel and training costs. Our aircraft insurance expense increased $0.4 million due to full year impact of the addition of the Boeing 737-300SF cargo aircraft which were phased in between March 2005 and September 2005.

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Transportation Expense.  For the year ended December 31, 2006, transportation expense increased $39.4 million, or 230.5%, from the year ended December 31, 2005. This increase is primarily due to an increase in our network trucking expense, including purchased transportation costs and owner operator expenses, due to providing our expedited ground freight product beginning October 31, 2005, significant expansion to the network in 2006, including the acquisition of substantially all of the operating assets of ACT, and the costs associated with sourcing trucks utilized in the management of the C-NET network. Additionally, chartered aircraft expense increased $2.5 million due to 59.7%, or 665, more hours from a chartered aircraft operating in the scheduled freight network during 2006 as compared to 2005.

Fuel Expense.  Fuel expense is comprised of aircraft fuel used in our owned and leased aircraft and aircraft chartered into the scheduled freight network and diesel fuel used in our owned and leased trucks operated in our scheduled freight network. Additionally, in 2006, fuel expense included the cost of aircraft fuel used to support the C-NET network. For the year ended December 31, 2006, fuel expense increased $6.9 million, or 12.6%, as compared to the year ended December 31, 2005.

Aircraft fuel expense increased approximately $5.3 million resulting from an increase in the average cost of aircraft fuel amounting to a $7.8 million increase in fuel expense which was partially offset by a $2.5 million decrease in fuel consumption. Our average cost per gallon of aircraft fuel increased $0.29, or 15.6%, for the year ended December 31, 2006 as compared to the year ended December 31, 2005. The number of gallons used in our scheduled freight network decreased by approximately 3.8 million gallons, or 13.1%, for the year ended December 31, 2006 as compared to the year ended December 31, 2005. The decrease in fuel consumption is primarily due to the full effect of the substitution of seven fuel efficient Boeing 737-300SF cargo aircraft into the scheduled freight network, our fuel conservation efforts and less revenue hours flown in the network.

Operating the trucks acquired from ACT in our network during 2006 contributed $1.6 million to the total increase in fuel expense.

Maintenance Expense.  For the year ended December 31, 2006, maintenance expense increased $2.6 million, or 12.6%, as compared to the year ended December 31, 2005. Of this increase, $2.9 million is due to maintenance expense related to the Boeing 737-300SF cargo aircraft under a third-party maintenance agreement, which provides for “power-by-the-hour” payments and fixed monthly costs, subject to annual escalations, $1.3 million of maintenance expense related to our owned and leased trucks since their acquisition in June 2006 and a $0.8 million net adjustment for our aircraft parts and supplies related to a $2.3 million lower of cost or market adjustment offset by a $1.5 million reversal of a valuation reserve on our held for sale aircraft parts and supplies. Additionally, our internal and external labor costs to maintain the aircraft fleet increased $0.5 million and we incurred $0.3 million more in administrative maintenance program costs. These increases were offset by $2.7 million of lower parts issuance costs for the Boeing 727-200 cargo aircraft due to a reduction in the number of aircraft flying as well as lower expense related to the lower of cost or market adjustment that was recorded in 2005.

Freight Handling Expense.  For the year ended December 31, 2006, freight handling expense increased $19.5 million, or 72.9%, as compared to the year ended December 31, 2005. The increase in freight handling expense was attributable to managing the C-NET network and a 190.1% increase in chargeable weight. Freight handling expense per pound of chargeable weight decreased 40.4% for the year ended December 31, 2006 as compared to the year ended December 31, 2005 due to volume discounts available under our freight handling contracts due to the significant increase in chargeable weights resulting from the establishment and expansion of the ground freight network, further enhanced by handling an increased percentage of the system chargeable weight by our own employees at some of our regional hubs and outstations.

Depreciation and Amortization.  For the year ended December 31, 2006, depreciation and amortization expense decreased $0.2 million, or 6.1%, as compared to the year ended December 31, 2005. This decrease is primarily due to some assets becoming fully depreciated prior to December 31, 2006 without incurring a significant amount of capital expenditures to replace or extend the life of these assets. This decrease was offset by depreciating the operating assets acquired from ACT and amortizing the intangible assets associated with the ACT transaction.

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Operating Overhead Expense.  For the year ended December 31, 2006, operating overhead increased $4.9 million, or 44.3%, as compared to the year ended December 31, 2005. We incurred increases in our ground transportation services company and cargo administrative wages and increased travel expense as we marketed our new expedited ground freight product and continued to integrate the operating assets acquired from ACT into our network. We also incurred increased outstation lease expense related to our new regional hubs as well as additional contract labor costs and advertising costs to support the new expedited ground freight product. During 2006, we increased our allowance for doubtful accounts by $0.4 million compared to the 2005 benefit of $0.6 million for bad debt expense due to the recovery of a previously reserved receivable and a $0.5 million reduction in our allowance for doubtful accounts. Offsetting these increases was a reduction of $2.6 million of expenses related to the induction of the Boeing 737- 300SF cargo aircraft for the year ended December 31, 2006 as compared to December 31, 2005 as no induction costs were incurred during the year ended December 31, 2006 as all the Boeing 737-300SF cargo aircraft were in service at December 31, 2005.

Gross Loss

As a result of the foregoing, for the year ended December 31, 2006, we recognized a gross loss of $4.6 million compared to $1.1 million for the year ended December 31, 2005.

General and Administrative Expense

General and administrative expense increased $1.9 million, or 23.0%, for the year ended December 31, 2006 as compared to the year ended December 31, 2005. The increase was primarily due to incurring $0.7 million in higher compensation expense related to the accounting for stock options under SFAS 123R, $0.5 million of higher professional fees related to our outsourced internal audit function and work towards Sarbanes-Oxley Section 404 compliance and $0.2 million of fees related to terminating our bank agreement with Wells Fargo when it was replaced by an agreement with PNC Bank, National Association. Additionally, general and administrative expense for the year ended December 31, 2006 was further increased by $0.1 million of fewer gains from the sale of assets compared to the year ended December 31, 2005.

Interest Expense

Interest expense increased $0.3 million for the year ended December 31, 2006 as compared to the year ended December 31, 2005 primarily due to carrying a higher average outstanding balance on our revolving credit facility.

Income Taxes

For the year ended December 31, 2006, we recognized no tax benefit associated with our operating losses because we continue to provide a full valuation allowance on our deferred tax assets.

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Year ended December 31, 2005 compared to the year ended December 31, 2004

Revenue

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

	2005					2004					Percentage
			Percentage					Percentage			Change
			of Total					of Total			from 2004
	Revenue		Revenue			Revenue		Revenue			to 2005
			(Dollars in thousands)
Scheduled freight	$	151,910		97.0	%	$	154,016		97.2	%		(1.4	)%
Other:
ACMI		2,431		1.5			3,486		2.2			(30.2	)
Miscellaneous		2,296		1.5			995		0.6			130.8
Total revenue	$	156,637		100.0	%	$	158,497		100.0	%		(1.2	)%

Scheduled Freight.  For the year ended December 31, 2005, the $2.1 million decrease in our scheduled freight revenue was due to an 8.7% decrease in our chargeable weight offset by an increase of 8.0% in our average yield as compared to the year ended December 31, 2004.

Our yield increase was due to an increase in the fuel surcharge, the implementation of a security surcharge and a revised pricing structure implemented at the beginning of 2005. The gross yield increase was offset by competitive pricing pressures and a higher proportion of our chargeable weights from lower yielding markets and lower yielding services.

Our chargeable weight decrease was due to reduced demand during the year ended December 31, 2005 as compared to the year ended December 31, 2004. We believe the decrease in demand experienced during the year ended December 31, 2005 as compared to the year ended December 31, 2004 was primarily due to the high cost of aircraft fuel which resulted in us charging our customers higher total prices as we increased the existing fuel surcharge and/or prices to offset these costs. We believe these increased prices may have contributed to a shift to less expensive, deferred modes of transportation by our customers. We also believe that continued economic weakness in the industries which produce the type of freight transported in our scheduled freight network contributed to a decrease in the demand for our expedited freight services. This decrease in demand was partially offset by an increase in chargeable weight resulting from our second quarter 2004 expansion into San Juan, Puerto Rico and our new expedited ground product.

ACMI.  For the year ended December 31, 2005, we generated $2.4 million of ACMI revenue. For the year ended December 31, 2004, we generated $3.5 million of ACMI revenue.

Miscellaneous.  For the year ended December 31, 2005, our miscellaneous revenue included $2.3 million from flying ad-hoc charter services. Our miscellaneous revenue for the year ended December 31, 2004 included $1.0 million from flying ad-hoc charter services.

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Cost of Revenue

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

	2005					2004					Percentage
			Percentage					Percentage			Change
	Cost of		of Total			Cost of		of Total			from 2004
	Revenue		Revenue			Revenue		Revenue			to 2005
			(Dollars in thousands)
Flight expense	$	30,241		19.3	%	$	27,924		17.6	%		8.3	%
Transportation expense		17,106		10.9			14,603		9.2			17.1
Aircraft fuel expense		54,656		34.9			45,838		28.9			19.2
Aircraft maintenance expense		14,207		9.1			7,047		4.4			101.6
Freight handling expense		26,715		17.1			27,705		17.5			(3.6	)
Depreciation and amortization		3,693		2.3			3,091		2.0			19.5
Operating overhead expense		11,146		7.1			10,809		6.9			3.1
Total cost of revenue	$	157,764		100.7	%	$	137,017		86.5	%		15.1	%

Flight Expense.  For the year ended December 31, 2005, flight expense increased $2.3 million, or 8.3%, compared to the year ended December 31, 2004. This increase was primarily a result of higher aircraft lease expense, higher crew costs and other flight operations personnel costs and higher aircraft insurance expense.

Our aircraft lease expense increased $0.9 million due to $4.6 million of lease expense associated with the operation of the Boeing 737-300SF cargo aircraft for the time period each aircraft was in service offset by a decrease of $1.8 million related to the expiration of four Boeing 727-200 cargo aircraft leases during 2004 and lower utilization on the Boeing 727-200 cargo airframes and aircraft engines operated under the Trust Agreement. Our aircraft flew a total of 1.6%, or 385, fewer revenue block hours for the year ended December 31, 2005 as compared to the year ended December 31, 2004 due to fewer ACMI and ad-hoc charter flights. Crew costs increased $1.0 million due in part to higher travel expenses, longevity pay increases, and slightly higher paid versus flown hours. Flight operations personnel costs increased $0.2 million due to additional management support staff requirements related to the integration of the Boeing 737-300SF cargo aircraft. Our aircraft insurance expense increased $0.1 million due to the addition of the Boeing 737-300SF cargo aircraft which were phased in between March 2005 and September 2005 which was offset by the expiration of four Boeing 727-200 cargo aircraft leases during 2004.

Transportation Expense.  For the year ended December 31, 2005, transportation expense increased $2.5 million, or 17.1%, from the year ended December 31, 2004. This increase is comprised of $3.0 million related to our third party trucking expense for our air and ground network due to increased trucking operations and higher fuel surcharges assessed by the truck carriers. These increases were offset by $0.1 million resulting from fewer chartered hours from an Airbus A-300 operating in the scheduled freight network during the year ended December 31, 2005 as compared to the year ended December 31, 2004 and a $0.5 million decrease in aircraft ground operating costs due to reduced landing expenses resulting from the transition of three cities which were serviced by aircraft to being serviced by trucks during July 2004, November 2004 and June 2005.

Aircraft Fuel Expense.  For the year ended December 31, 2005, aircraft fuel expense increased $8.8 million, or 19.2%, as compared to the year ended December 31, 2004. Aircraft fuel expense is comprised of two elements: our average cost per gallon and the number of gallons consumed. Our average cost per gallon of aircraft fuel increased $0.50, or 36.8%, for the year ended December 31, 2005 as compared to the year ended December 31, 2004. The number of gallons used for the year ended December 31, 2005 decreased by approximately 4.4 million gallons, or 13.3%, as compared to the year ended December 31, 2004. The decrease in fuel consumption is primarily due to increased usage of aircraft which consume less fuel per block hour flown, fewer block hours flown and our fuel conservation efforts.

Aircraft Maintenance Expense.  For the year ended December 31, 2005, maintenance expense increased $7.2 million, or 101.6%, as compared to the year ended December 31, 2004. Included in maintenance expense for the year ended December 31, 2004 are $5.2 million in reductions to maintenance expense including a

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$4.7 million reversal of the accrued maintenance reserves at December 31, 2004 for one Boeing 727-200 airframe and 44 Pratt & Whitney JT8D-9A aircraft engines resulting from a change in maintenance reserve estimates at December 31, 2004 and a $0.5 million reversal of excess airframe maintenance reserves at March 31, 2004 on one Boeing 727-200 cargo airframe that completed a heavy maintenance event in March 2004.

Also included in maintenance expense for the year ended December 31, 2004 are $2.3 million of additions to maintenance expense including a $1.2 million charge to maintenance expense at March 31, 2004 and $0.5 million charge to maintenance expense at June 30, 2004 to meet the estimated additional lease return obligations on four Boeing 727-200 cargo aircraft, and a $0.6 million charge to maintenance expense at December 31, 2004 to establish a valuation reserve for identified Boeing 727-200 cargo aircraft parts and supplies which have book value and have been deemed surplus at December 31, 2004. See “— Critical Accounting Policies and Estimates — Aircraft Parts Inventory Accounting”.

Excluding the net $2.9 million decrease from the items listed above, maintenance expense would have increased $4.3 million, or 42.8%, for the year ended December 31, 2005 as compared to the year ended December 31, 2004. Of this increase, $2.8 million is due to maintenance expense related to the Boeing 737-300SF cargo aircraft under a third-party maintenance agreement, which provide for power-by-the-hour payments and fixed monthly costs, subject to annual escalations, $1.1 million due to additional valuation reserves related to surplus Boeing 727-200 inventory parts and supplies and $1.3 million for lower of cost or market adjustments related to our Boeing 727-200 inventory parts and supplies. These increases were offset by $1.1 million of decreased maintenance costs on the Boeing 727-200 cargo aircraft due to 25.8% less block hours flown.

Freight Handling Expense.  For the year ended December 31, 2005, freight handling expense decreased $1.0 million, or 3.6%, as compared to the year ended December 31, 2004. The decrease in freight handling expense was due to an 8.7% decrease in chargeable weight. Freight handling expense increased 5.0% on a chargeable weight basis for the year ended December 31, 2005 as compared to the year ended December 31, 2004 due to the fixed cost components of our aircraft and freight handling contracts.

Depreciation and Amortization.  For the year ended December 31, 2005, depreciation and amortization expense increased $0.6 million, or 19.5%, as compared to the year ended December 31, 2004. This increase is due to capitalized airframe maintenance events and airworthiness directives for our fleet of Boeing 727-200 cargo aircraft during 2004 and 2005 which are being depreciated over the remaining useful life of these aircraft as well as purchases of equipment during 2005 to support the integration of the Boeing 737-300SF cargo aircraft operations.

Operating Overhead Expense.  For the year ended December 31, 2005, operating overhead increased $0.3 million, or 3.1%, as compared to the year ended December 31, 2004. During the year ended December 31, 2005, we incurred $2.5 million of expenses related to the induction of the Boeing 737- 300SF cargo aircraft as compared to $1.2 million for the year ended December 31, 2004. This increase was offset by a $0.6 million reduction in our bad debt expense due to the collection of a previously reserved receivable, a $0.5 million reduction in our allowance for doubtful accounts as compared to December 31, 2004 based on our estimate of uncollectible accounts receivable and $0.2 million refund from a 2004 workers compensation policy which was collected during 2005. In addition, we incurred increases of $0.1 million in our sales and marketing travel expense and $0.2 million of start up costs associated with launching our new expedited ground product.

Gross Profit (Loss)

As a result of the foregoing, for the year ended December 31, 2005, we recognized a gross loss of $1.1 million compared to a gross profit of $21.5 million for the year ended December 31, 2004.

General and Administrative Expense

General and administrative expense decreased $3.0 million, or 27.3%, for the year ended December 31, 2005 as compared to the year ended December 31, 2004. The decrease was primarily due to incurring $1.9 million less in performance based compensation expense for eligible employees and executive officers and $1.2 million in lower professional fees related to tax return preparation, bankruptcy proceedings, legal

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matters and compliance with the Sarbanes-Oxley Act. Additionally, general and administrative expense was further reduced by $0.8 million of gains from the sale of assets compared to $0.4 million of gains from the sale of assets for the year ended December 31, 2004.

Other (Income) Expense

Other income increased $0.5 million, or 124.4%, for the year ended December 31, 2005 as compared to the year ended December 31, 2004. The increase was primarily due to $0.4 million related to the recovery of retroactive adjustments on our workers compensation policy related to the 1998 and 1999 policy years which were pre-bankruptcy and resulted partially from our discontinued operations and $0.1 million related to the recovery of a 2001 customer accounts receivable balance which was reserved by us during their bankruptcy proceedings.

Income Taxes

For the year ended December 31, 2005, we recognized no tax benefit because we continue to provide a full valuation allowance on our deferred tax assets.

Contractual Obligations

The following table sets forth our contractual obligations for the periods shown:

			Within
Contractual Obligations	Total		1 Year		2-3 Years		4-5 Years		Thereafter
			(Dollars in thousands)
Debt, including lease deferrals	$	1,293	$	635	$	301	$	308	$	49
Non-aircraft operating leases		40,671		5,363		8,783		7,516		19,009
Aircraft operating leases, aircraft use agreement and aircraft maintenance agreements		111,849		14,872		26,107		25,544		45,326
Total contractual cash obligations	$	153,813	$	20,870	$	35,191	$	33,368	$	64,384

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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 includes 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.

	March 31,			June 30,			September 30,			December 31,			March 31,			June 30,			September 30,			December 31,
Quarter Ended:	2005			2005			2005			2005(1)			2006			2006			2006			2006(2)
										Unaudited
							(In thousands, except per share data)
Total revenue	$	33,629		$	36,451		$	40,690		$	45,867		$	40,087		$	45,468		$	57,921		$	86,166
Gross profit (loss) from continuing operations		(424	)		(311	)		1,492			(1,884	)		(6,301	)		(6,482	)		(3,172	)		11,307
Operating income (loss)		(2,644	)		(2,167	)		(406	)		(3,962	)		(8,604	)		(8,550	)		(5,885	)		8,487
Income (loss) from continuing operations before income taxes		(2,112	)		(2,155	)		(409	)		(3,834	)		(8,385	)		(8,637	)		(6,026	)		8,615
Income (loss) from continuing operations	$	(2,112	)	$	(2,155	)	$	(409	)	$	(3,834	)	$	(8,385	)	$	(8,637	)	$	(6,026	)	$	8,615
Basic net income (loss) from continuing operations per share(3)	$	(0.04	)	$	(0.04	)	$	(0.01	)	$	(0.08	)	$	(0.17	)	$	(0.17	)	$	(0.12	)	$	0.16
Diluted net income (loss) from continuing operations per share(3)	$	(0.04	)	$	(0.04	)	$	(0.01	)	$	(0.08	)	$	(0.17	)	$	(0.17	)	$	(0.12	)	$	0.15

(1)	The operating results for the quarter ended December 31, 2005, include a loss of $1.3 million related to a lower of cost or market adjustment related to our active Boeing 727-200 inventory parts and supplies and a loss of $1.1 million for additional valuation reserves related to our surplus Boeing 727-200 inventory parts and supplies.
(2)	The operating results for the quarter ended December 31, 2006, include a net loss of $0.8 million related to a $2.3 million lower of cost or market adjustment related to our active Boeing 727-200 inventory parts and supplies offset by a reduction of $1.5 million in the valuation reserves related to our surplus Boeing 727-200 inventory parts and supplies. Also included are the revenue and associated costs related to managing the C-NET network.
(3)	The shares of common stock underlying the warrants issued in 2002 in accordance with the plan of reorganization are deemed to be outstanding for periods presented because the warrants have a nominal exercise price.

Our business is seasonal in nature. In a typical year, we experience improving revenue with each passing quarter, beginning with the first quarter.

Beginning in the fourth quarter of 2004, we believe our expedited freight services were negatively impacted by the increasing cost of aircraft fuel which resulted in our charging our customers higher prices as we increased the existing fuel surcharge to offset these costs. In addition, we believe our expedited freight services were also negatively impacted by the overall increasing price of energy which may have had a dampening effect upon the U.S. economy. As a result, we reduced our capacity in the scheduled freight network by reducing the utilization of chartered aircraft and decreased the utilization of the aircraft operated by our cargo airline in the scheduled freight network. During 2006 and into the first quarter of 2007, we believe our expedited scheduled freight business continued to be negatively impacted by these factors.

Our scheduled freight network and cargo airline have significant fixed costs which cannot be materially reduced in the short term. Operating the scheduled freight network requires the operation of the scheduled freight network hub and a certain minimum amount of aircraft and truck operations for each day that we

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operate the scheduled freight network. Once chargeable weight reaches the break-even point, each additional dollar of revenue contributes a relatively high percentage to operating income. However, if chargeable weight does not reach the break-even point, the scheduled freight network operation will sustain losses, which could be significant depending on the amount of the deficit. Therefore, we typically have seasonal working capital needs in the first and second quarters of the year to the extent that our revenues do not allow us to cover our costs. Since our expedited freight business is both seasonal and tied to the economic trends of the U.S. economy, we may also incur additional working capital needs during the third and fourth quarters of the year.

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We have exposure to changing interest rates on our Revolving Facility. The Revolving Facility contains a variable interest rate equal to prime plus 1.5%, subject to a floor of 9.0% and a cap of 11.0%. At March 29, 2007, we had approximately $9.3 million outstanding on the Revolving Facility with an interest rate of 9.75%. Based on our outstanding balance under the Revolving Facility, a hypothetical 100 basis points increase in interest rates would not result in a material increase in our annual interest expense. 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 U.S. Treasury backed money-market funds. At December 31, 2006, approximately $3.9 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.

Aircraft fuel is a significant cost of operating aircraft. While in some cases we prepay for aircraft fuel on a short-term basis prior to delivery, we do not have any agreements with aircraft fuel suppliers assuring the availability or price stability of aircraft fuel. We also do not participate in any hedging activities related to aircraft fuel. At current levels of operations in our expedited scheduled freight business, each $.01 change in the price per gallon of aircraft fuel results in a change in our annual fuel cost of $250,000.

We do not purchase or hold any derivative financial instruments.

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 and Financial Statement Schedules.”

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

None.

ITEM 9A.  CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures.  The term “disclosure controls and procedures” is defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, or the Exchange Act. This term refers to the controls and procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified by the Securities and Exchange Commission. Our management, including our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this annual report. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective as of the end of the period covered by this annual report.

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Changes in Internal Controls.  We maintain a system of internal control over financial reporting that is 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 changes to our internal control over financial reporting during our last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

We are currently undergoing a comprehensive effort to ensure compliance with the regulations under Section 404 of the Sarbanes-Oxley Act that take effect for our fiscal year ending December 31, 2007, including an evaluation of the internal controls related to the operations of the assets acquired from ACT. This effort includes internal control documentation and review of controls under the direction of senior management. In the course of its ongoing implementation, our management has identified certain areas requiring improvement, which we are addressing.

ITEM 9B.  OTHER INFORMATION

None.

PART III

ITEM 10.   DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

The information regarding our directors required by Item 10 is incorporated by reference from our definitive proxy statement for our 2007 Annual Meeting of Stockholders under the captions “Election of Directors” and “Board of Directors and Committees of our Board of Directors, Stockholder Matters and Code of Conduct.” The information regarding our executive officers required by Item 10 is submitted as a separate section of this annual report on Form 10-K. See “Item 4A: Executive Officers of the Registrant.”

ITEM 11.   EXECUTIVE COMPENSATION

The information required by Item 11 is incorporated by reference from our definitive proxy statement for our 2007 Annual Meeting of Stockholders under the captions “Compensation of Executive Officers,” “Compensation Discussion and Analysis,” “Summary Compensation Table,” “Grants of Plan Based Awards,” “Outstanding Equity Awards,” “Option Exercises and Stock Vested,” “Compensation Committee Interlocks and Insider Participation” and “Compensation Committee Report.”

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

The information required by Item 403 of Regulation S-K is incorporated by reference from our definitive proxy statement for our 2007 Annual Meeting of Stockholders under the caption “Securities Ownership of Certain Beneficial Owners and Management.”

ITEM 13.   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE

The information required by Item 13 is incorporated by reference from our definitive proxy statement for our 2007 Annual Meeting of Stockholders under the caption “Certain Relationships and Related Transactions” “Board of Directors and Committees of Our Board of Directors, Stockholder Matters and Code of Conduct.”

ITEM 14.   PRINCIPAL ACCOUNTING FEES AND SERVICES

The information required by Item 14 is incorporated by reference from our definitive proxy statement for our 2007 Annual Meeting of Stockholders under the caption “Fees Billed to Kitty Hawk by Grant Thornton LLP.”

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PART IV

ITEM 15.   EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a) 1. Financial Statements

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

	Page
Report of Independent Registered Public Accounting Firm		F-2
Consolidated Balance Sheets		F-3
Consolidated Statements of Operations		F-4
Consolidated Statements of Stockholders’ Equity		F-5
Consolidated Statements of Cash Flows		F-6
Notes to Consolidated Financial Statements		F-7

2. Financial Statement Schedules

No financial statement schedules are filed as part of this annual report on Form 10-K either because the required information is included in the financial statements, including the notes thereto, or such schedules are not required.

3. Exhibits

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

		Exhibit
2	.1	Debtors’ Final Joint Plan of Reorganization, dated August 2, 2002 (Exhibit 2.2 to the Kitty Hawk Inc.’s Form 8-K dated August 20, 2002, and 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 incorporated herein by reference).
2	.3	Order Granting Debtors’ Motion to Modify Debtors’ Final Joint Plan of Reorganization, dated September 26, 2002 (Exhibit 2.3 to Kitty Hawk, Inc.’s Form 10-K dated March 28, 2003, and incorporated herein by reference).
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 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 incorporated herein by reference).
3	.2	Certificate of Amendment of the Second Amended and Restated Certificate of Incorporation of Kitty Hawk, Inc., dated July 13, 2004 (Exhibit 3.3 to Kitty Hawk, Inc.’s Registration Statement on Form 8-A dated August 23, 2004, and incorporated herein by reference).
3	.3	Second Amended and Restated Bylaws of Kitty Hawk, Inc., dated October 31, 2003 (Exhibit 3.3 to Kitty Hawk, Inc.’s amended Registration Statement on Form 8-A/A dated November 12, 2003, and 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 incorporated herein by reference).
4	.2	Certificate of Designation, Preferences and Rights of Series A Preferred Stock, par value $0.01 per share, of Kitty Hawk, Inc., filed as of January 28, 2004 (Exhibit 4.1 to Kitty Hawk, Inc.’s Form 10-K for the year ended December 31, 2003, and incorporated by reference herein).
4	.3	Certificate of Designation, Preferences and Rights of Series B Preferred Stock, par value $0.01 per share, of Kitty Hawk, Inc., filed as of November 14, 2005 (Exhibit 4.1 to Kitty Hawk, Inc.’s Registration Statement on Form S-3 dated January 12, 2006, and incorporated herein by reference).

54

		Exhibit
10	.1	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).
10	.2	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	.3	Agreement between Kitty Hawk Aircargo, Inc. and Flight Deck Crewmembers in the service of Kitty Hawk Aircargo, Inc. as represented by The Kitty Hawk Aircargo Pilots Association (Exhibit 10.1 to Kitty Hawk, Inc.’s Form 10-Q dated November 12, 2003, and incorporated herein by reference).
10	.4*	Security Agreement, dated March 29, 2007, by and between Kitty Hawk, Inc. and Laurus Master Fund, Ltd. (“Laurus.) (Does not include the schedules and exhibits to this exhibit. Schedules and exhibits will be provided to the SEC upon request)
10	.5*	Warrant Agreement, dated March 29, 2007, by and between Kitty Hawk, Inc. and Laurus.
10	.6*	Registration Rights Agreement, dated March 29, 2007, by and between Kitty Hawk, Inc. and Laurus.
10	.7	Rights Agreement, dated January 21, 2004, by and between Kitty Hawk, Inc. and American Stock Transfer and Trust Company (Exhibit 1 to Kitty Hawk, Inc.’s Registration Statement on Form 8-A dated January 26, 2004, and incorporated herein by reference).
10	.8*	Amendment No. 1 to Rights Agreement, dated November 9, 2005, by and between Kitty Hawk, Inc. and American Stock Transfer and Trust Company.
10	.9†	Kitty Hawk 2003 Long Term Equity Incentive Plan, dated as of July 29, 2003 (Exhibit 4.5 to Kitty Hawk, Inc.’s Registration Statement on Form S-8 dated September 24, 2003, and incorporated herein by reference).
10	.10†	Amendment Number One to the Kitty Hawk 2003 Long Term Equity Incentive Plan, effective as of June 30, 2005 (Exhibit 10.1 to Kitty Hawk, Inc.’s Form 8-K dated as of June 30, 2005, and incorporated by reference herein).
10	.11†	Amendment No. 2 to the 2003 Kitty Hawk Long-Term Equity Incentive Plan, dated as of December 31, 2005 (Exhibit 10.5 to Kitty Hawk, Inc.’s Form 8-K dated as of December 31, 2005, and incorporated by reference herein).
10	.12†	Amendment Number Three to the 2003 Kitty Hawk Long-Term Equity Incentive Plan, dated as of May 23, 2006 (Exhibit 10.1 to Kitty Hawk, Inc.’s Form 8-K dated as of May 24, 2006, and incorporated by reference herein).
10	.13†	Form of Executive Officer Restricted Stock Unit Award Agreement (Exhibit 10.1 to Kitty Hawk, Inc.’s Form 8-K dated as of December 31, 2005, and incorporated by reference herein).
10	.14†	Form of Outside Director Restricted Stock Unit Award Agreement (Exhibit 10.2 to Kitty Hawk, Inc.’s Form 8-K dated as of December 31, 2005, and incorporated by reference herein).
10	.15†	Form of Employee Incentive Stock Option Agreement (Exhibit 10.3 to Kitty Hawk, Inc.’s Form 8-K dated as of December 31, 2005, and incorporated by reference herein).
10	.16†	Form of Employee Non-Qualified Stock Option Agreement (Exhibit 10.4 to Kitty Hawk, Inc.’s Form 8-K dated as of December 31, 2005, and incorporated by reference herein).
10	.17	Aircraft Lease Common Terms Agreement between Aviation Financial Services Inc. and Kitty Hawk Aircargo, Inc., dated as of May 4, 2004 (confidential treatment has been requested for certain portions of this exhibit pursuant to Rule 24b-2 under the Securities Exchange Act of 1934. In accordance with Rule 24b-2, these confidential portions have been omitted from this exhibit and filed separately with the SEC) (Exhibit 10.1 to Kitty Hawk, Inc.’s Form 10-Q/A, dated November 17, 2004, and incorporated herein by reference).

55

		Exhibit
10	.18	Form of lease for Boeing 737-300SF cargo aircraft — serial numbers 23538, 24462, 23708, 24020, 24902, and 24916 (confidential treatment has been requested for certain portions of this exhibit pursuant to Rule 24b-2 under the Securities Exchange Act of 1934. In accordance with Rule 24b-2, these confidential portions have been omitted from this exhibit and filed separately with the SEC) (Exhibit 10.2 to Kitty Hawk, Inc.’s Form 10-Q/A, dated as of November 17, 2004, and incorporated herein by reference).
10	.19	Full Service Aircraft Services Agreement between Kitty Hawk Aircargo, Inc. and Aviation Services International, LLC dated as of March 7, 2005 (confidential treatment has been requested for certain portions of this exhibit pursuant to Rule 24b-2 under the Securities Exchange Act of 1934. In accordance with Rule 24b-2, these confidential portions have been omitted from this exhibit and filed separately with the SEC) (Exhibit 10.1 to Kitty Hawk, Inc.’s Form 10-Q for the quarter ended March 31, 2005, and incorporated herein by reference.
10	.20†	Employment Agreement, dated as of December 13, 2004, by and between Kitty Hawk, Inc. and Robert W. Zoller (Exhibit 10.1 to Kitty Hawk, Inc.’s Form 8-K dated as of December 17, 2004, and incorporated herein by reference).
10	.21†	Employment Agreement, dated as of December 15, 2006, by and between Kitty Hawk, Inc. and Gary Jensen (Exhibit 10.1 to Kitty Hawk, Inc.’s Form 8-K dated as of March 7, 2007, and incorporated herein by reference).
10	.22†	Employment Agreement, dated as of June 1, 2006, by and between Kitty Hawk, Inc. and Steven A. Markhoff (Exhibit 10.1 to Kitty Hawk, Inc.’s Form 8-K dated as of June 2, 2006 and incorporated herein by reference).
10	.23†	Employment Agreement, dated as of June 1, 2006, by and between Kitty Hawk, Inc. and Jessica L. Wilson (Exhibit 10.2 to Kitty Hawk, Inc.’s Form 8-K dated as of June 2, 2006, and incorporated herein by reference).
10	.24†	Employment Agreement, effective as of July 11, 2005, by and between Kitty Hawk, Inc. and James R. Kupferschmid (Exhibit 10.1 to Kitty Hawk, Inc.’s Form 8-K dated as of July 15, 2005, and incorporated herein by reference).
10	.25†	Employment Agreement, dated as of February 19, 2007, by and between Kitty Hawk Aircargo, Inc. and Robert Barron (Exhibit 10.1 to Kitty Hawk, Inc.’s Form 8-K dated as of march 7, 2007, and incorporated herein by reference).
10	.26	Second Amended and Restated Aircraft and Engine Use Agreement, dated as of January 1, 2004 (confidential treatment has been requested for certain portions of this exhibit pursuant to Rule 24b-2 under the Securities Exchange Act of 1934. In accordance with Rule 24b-2, these confidential portions have been omitted from this exhibit and filed separately with the SEC) (Exhibit 10.15 to Kitty Hawk, Inc.’s Form 10-K for the year ended December 31, 2004, and incorporated herein by reference).
10	.27	Registration Rights Agreement, dated as of May 8, 2004, by and among Kitty Hawk, Inc., Resurgence Asset Management, L.L.C., Everest Capital Limited and Stockton, LLC (Exhibit 4.1 to Kitty Hawk, Inc.’s Form 8-K dated May 11, 2004, and incorporated herein by reference).
10	.28	Registration Rights Agreement, dated November 14, 2005, by and among Kitty Hawk, Inc. and the stockholders named therein (Exhibit 4.2 to Kitty Hawk, Inc.’s Registration Statement on Form S-3 dated January 12, 2006, and incorporated herein by reference).
10	.29	Securities Purchase Agreement, dated November 9, 2005, by and among Kitty Hawk, Inc. and the purchasers named therein (Exhibit 4.3 to Kitty Hawk, Inc.’s Registration Statement on Form S-3 dated January 12, 2006, and incorporated herein by reference).
10	.30	Standstill Agreement, dated November 14, 2005, by and among Kitty Hawk, Inc. and the stockholders named therein (Exhibit 4.4 to Kitty Hawk, Inc.’s Registration Statement on Form S-3 dated January 12, 2006, and incorporated herein by reference).

56

		Exhibit
10	.31	Form of Common Stock Purchase Warrant (Exhibit 4.5 to Kitty Hawk, Inc.’s Registration Statement on Form S-3 dated January 12, 2006, and incorporated herein by reference).
21	.1	Subsidiaries of the Registrant (Exhibit 21.1 to Kitty Hawk, Inc.’s Registration Statement on Form S-3 dated August 21, 2006, and incorporated herein by reference).
23	.1*	Consent of Grant Thornton LLP.
31	.1*	Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31	.2*	Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32	.1*	Certification Pursuant Executive Officer 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

57

SIGNATURE

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 2nd day of April, 2007.

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 2nd day of April, 2007.

Signature	Title
/s/  Robert W. Zoller, Jr. Robert W. Zoller, Jr.	Chief Executive Officer, President and Director (Principal Executive Officer)
/s/  James R. Kupferschmid James R. Kupferschmid	Vice President & Chief Financial Officer (Principal Financial Officer)
/s/  Jessica L. Wilson Jessica L. Wilson	Chief Accounting Officer and Treasurer (Principal Accounting Officer)
/s/  Gerald L. Gitner Gerald L. Gitner	Non-Executive Chairman of the Board of Directors and Director
/s/  Myron M. Kaplan Myron M. Kaplan	Director
/s/  Raymond Greer Raymond Greer	Director
/s/  Joseph D. Ruffolo Joseph D. Ruffolo	Director
/s/  Laurie M. Shahon Laurie M. Shahon	Director
/s/  Melvin L. Keating Melvin L. Keating	Director

58

KITTY HAWK, INC. AND SUBSIDIARIES

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

	Page
Report of Independent Registered Public Accounting Firm		F-2
Consolidated Balance Sheets as of December 31, 2006 and 2005		F-3
Consolidated Statements of Operations for the years ended December 31, 2006, 2005 and 2004		F-4
Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2006, 2005 and 2004		F-5
Consolidated Statements of Cash Flows for the years ended December 31, 2006, 2005 and 2004		F-6
Notes to Consolidated Financial Statements		F-7

F-1

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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, 2006 and 2005, and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2006. 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 the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform an audit of its internal control over financial reporting. Our audit included consideration of internal controls over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Kitty Hawk, Inc. and subsidiaries as of December 31, 2006 and 2005, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2006, in conformity with accounting principles generally accepted in the United States of America.

As described in Note 3 to the consolidated financial statements, the Company adopted the provisions of Statement of Financial Accounting Standards No. 123 (revised 2004) “Share Based Payment,” effective January 1, 2006.

GRANT THORNTON LLP

Dallas, Texas

March 31, 2007

F-2

KITTY HAWK, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

	December 31,
	2006			2005
	(In thousands, except share data)
ASSETS
Current assets:
Cash and cash equivalents	$	9,589		$	26,650
Restricted cash and short-term investments		250			250
Trade accounts receivable, net of allowance for doubtful accounts of $0.5 million and $0.1 million, respectively		26,252			15,672
Inventory and aircraft supplies		2,240			2,932
Deposits and prepaid expenses		3,732			2,000
Prepaid aircraft fuel		1,171			1,727
Other current assets, net		282			89
Total current assets		43,516			49,320
Property and equipment, net		7,411			7,614
Intangible assets, net		2,896			—
Total assets	$	53,823		$	56,934
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Current liabilities:
Accounts payable — trade	$	7,235		$	4,551
Accrued wages and compensation related expenses		2,293			1,981
Other accrued expenses		15,973			7,273
Taxes payable		890			1,068
Current debt		257			1,949
Total current liabilities		26,648			16,822
Other long-term liabilities		135			355
Total liabilities		26,783			17,177
Commitments and contingencies
Series B Redeemable Preferred Stock, $0.01 par value: Authorized shares — 15,000; issued and outstanding — 14,550 and 14,800, at December 31, 2006 and 2005, respectively		12,142			12,350
Stockholders’ equity:
Preferred stock, $0.01 par value: Authorized shares — 9,985,000; none issued		—			—
Common stock, $0.000001 par value: Authorized shares — 100,000,000; issued and outstanding — 52,827,853 and 50,310,061 at December 31, 2006 and 2005, respectively		—			—
Additional capital		26,425			24,094
Retained earnings (deficit)		(11,527	)		3,313
Total stockholders’ equity		14,898			27,407
Total liabilities and stockholders’ equity	$	53,823		$	56,934

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

F-3

KITTY HAWK, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

	Year Ended			Year Ended			Year Ended
	December 31,			December 31,			December 31,
	2006			2005			2004
	(In thousands, except share and per share data)
Revenue:
Scheduled freight	$	191,579		$	151,910		$	154,016
Network management		26,442			—			—
ACMI		5,713			2,431			3,486
Miscellaneous		5,908			2,296			995
Total revenue		229,642			156,637			158,497
Cost of revenue:
Flight expense		33,653			30,241			27,924
Transportation expense		56,543			17,106			14,603
Fuel expense		61,530			54,656			45,838
Maintenance expense		16,817			14,207			7,047
Freight handling expense		46,191			26,715			27,705
Depreciation and amortization		3,468			3,693			3,091
Operating overhead expense		16,088			11,146			10,809
Total cost of revenue		234,290			157,764			137,017
Gross profit (loss)		(4,648	)		(1,127	)		21,480
General and administrative expense		9,904			8,052			11,073
Operating income (loss)		(14,552	)		(9,179	)		10,407
Other (income) expense:
Interest expense		559			287			333
Other, net		(678	)		(956	)		(426	)
Income (loss) before income taxes		(14,433	)		(8,510	)		10,500
Income tax expense		—			—			3,970
Net income (loss)	$	(14,433	)	$	(8,510	)	$	6,530
Preferred stock dividends, including beneficial conversion feature		1,172			313			—
Net income (loss) allocable to common stockholders	$	(15,605	)	$	(8,823	)	$	6,530
Basic net income (loss) per share	$	(0.30	)	$	(0.17	)	$	0.13
Diluted net income (loss) per share	$	(0.30	)	$	(0.17	)	$	0.12
Weighted average common shares outstanding — basic		52,854,459			51,447,898			50,779,179
Weighted average common shares outstanding — diluted		52,854,459			51,447,898			53,767,124

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

F-4

KITTY HAWK, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

	Common Stock
	Number of		Number of								Retained
	Unrestricted		Restricted					Additional			Earnings
	Shares		Shares			Amount		Capital			(Deficit)			Total
	(In thousands, except share data)
Balance at December 31, 2003		40,622,584		137,500		$	—	$	18,311		$	5,293		$	23,604
Net income		—		—			—		—			6,530			6,530
Tax expense allocated to Additional Capital related to bankruptcy		—		—			—		3,717			—			3,717
Compensation expense associated with stock option grants		—		—			—		82			—			82
Issue common stock related to exercise of stock options to acquire stock		705,555		—			—		214			—			214
Issue common stock related to exercise of warrants to acquire stock		5,261,494		—			—		—			—			—
Repurchase of restricted shares		—		(106,250	)		—		(31	)		—			(31	)
Vesting of restricted shares		31,250		(31,250	)		—		—			—			—
Balance at December 31, 2004		46,620,883		—			—		22,293			11,823			34,116
Net loss		—		—			—		—			(8,510	)		(8,510	)
Additional Capital allocated to warrants in connection with the Series B Redeemable Preferred Stock		—		—			—		1,565			—			1,565
Compensation expense associated with stock option and restricted stock unit grants		—		—			—		114			—			114
Issue common stock related to exercise of stock options to acquire stock		407,757		—			—		122			—			122
Issue common stock related to exercise of warrants to acquire stock		3,281,421		—			—		—			—			—
Balance at December 31, 2005		50,310,061		—			—		24,094			3,313			27,407
Net loss		—		—			—		—			(14,433	)		(14,433	)
Dividends paid for Series B Redeemable Preferred Stock		—		—			—		—			(407	)		(407	)
Compensation expense associated with stock option and restricted stock unit grants		—		—			—		777			—			777
Issue common stock related to asset purchase agreement		1,773,818		—			—		1,260			—			1,260
Issue common stock related to conversion of Series B Redeemable Preferred Stock		260,308		—			—		208			—			208
Issue common stock related to exercise of stock options to acquire stock		288,300		—			—		86			—			86
Issue common stock related to exercise of warrants to acquire stock		195,366		—			—		—			—			—
Balance at December 31, 2006		52,827,853		—		$	—	$	26,425		$	(11,527	)	$	14,898

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

F-5

KITTY HAWK, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

	Year Ended			Year Ended			Year Ended
	December 31,			December 31,			December 31,
	2006			2005			2004
	(In thousands)
Operating activities:
Net income (loss)	$	(14,433	)	$	(8,510	)	$	6,530
Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities:
Depreciation and amortization expense		3,768			4,046			3,444
Gain on disposal of property and equipment		(537	)		(784	)		(405	)
Tax expense allocated to additional capital		—			—			3,717
Compensation expense related to stock options and restricted stock units		777			114			82
Reversal of accrued aircraft maintenance reserves		—			—			(4,751	)
Provision for inventory reserves		757			2,375			562
(Reversal of) provision for allowance for doubtful accounts		417			(528	)		159
Changes in operating assets and liabilities, net of acquisitions:
Trade accounts receivable		(10,996	)		(1,410	)		(1,777	)
Settlement receivable		—			—			1,765
Inventory and aircraft supplies		(65	)		(588	)		197
Prepaid expenses and other assets		(494	)		220			(1,668	)
Accounts payable and accrued expenses		10,997			2,260			179
Accrued aircraft maintenance reserves		—			(89	)		(3,547	)
Net cash (used in) provided by operating activities		(9,809	)		(2,894	)		4,487
Investing activities:
Proceeds from sale of assets		1,112			1,492			794
Redemption of (establish) restricted cash		—			971			(642	)
Assets acquired from Air Container Transport, Inc.		(3,217	)		—			—
Capital expenditures		(1,795	)		(3,239	)		(3,725	)
Net cash used in investing activities		(3,900	)		(776	)		(3,573	)
Financing activities:
Borrowings (paydowns) on Credit Facility		(1,949	)		—			1,949
Dividends paid on Series B Redeemable Preferred Stock		(407	)		—			—
Issuance of preferred stock		—			13,914			—
Proceeds from exercise of stock options		86			122			214
Repurchase of restricted common stock		—			—			(31	)
Loan origination costs		—			—			(109	)
Repayments of long-term debt		(1,082	)		—			(2,382	)
Net cash provided by (used in) financing activities		(3,352	)		14,036			(359	)
Net increase (decrease) in cash and cash equivalents		(17,061	)		10,366			555
Cash and cash equivalents at beginning of period		26,650			16,284			15,729
Cash and cash equivalents at end of period	$	9,589		$	26,650		$	16,284
Income taxes paid	$	—		$	—		$	465
Interest paid	$	558		$	287		$	333
Non-cash activities:
Stock issued to acquire assets from Air Container Transport, Inc.	$	1,260		$	—		$	—
Conversion of Series B Redeemable Preferred Stock	$	208		$	—		$	—

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

Kitty Hawk, Inc. is a holding company and does not currently have any independent operations. The Company provides freight services utilizing its three operating subsidiaries: (i) a scheduled freight network (Kitty Hawk Cargo), (ii) a ground transportation services company (Kitty Hawk Ground) and (iii) an all-cargo airline (Kitty Hawk Aircargo).

Kitty Hawk Cargo operates a scheduled freight network that principally provides two products for predominantly heavy weight and oversized freight, an expedited overnight and second-morning air product and a time-definite ground freight product. The network operates between selected cities in North America, including the continental U.S., Canada and Puerto Rico. The Company has business alliances that allow it to provide freight services to Alaska, Hawaii and Mexico. As of March 26, 2007, the scheduled freight network offered an expedited overnight and second-morning air freight product to 54 business centers and an expedited time-definite ground freight product to 46 business centers. Most of the expedited air freight product in the network is transported from its city of origination to the Company’s hub and sort facility in Fort Wayne, Indiana before being routed by aircraft or truck to its destination city. The Company’s ground freight product is routed through regional hubs located in Los Angeles, California; San Francisco, California; Seattle, Washington; Dallas, Texas; Atlanta, Georgia; Newark, New Jersey and Fort Wayne, Indiana.

Kitty Hawk Ground, incorporated in April 2006, provides dedicated ground transportation services for Kitty Hawk Cargo’s scheduled freight network utilizing assets acquired from Air Container Transport, Inc., or ACT, in June 2006 (see Note 5), as well as managing owner operators and contracted dedicated trucks. Kitty Hawk Ground also generates revenue by providing dedicated or EUV ground services for a limited number of customers, including international and domestic airlines, and local transportation services not associated with the network.

Kitty Hawk Aircargo provides dedicated air transportation services primarily for Kitty Hawk Cargo’s scheduled freight network using Boeing 727-200 and Boeing 737-300SF cargo aircraft. Kitty Hawk Aircargo also markets and provides ACMI (providing the aircraft, crew, maintenance and insurance) and ad-hoc charter transportation services to a variety of customers.

2.   Summary of Significant Accounting Policies

Principles of Consolidation

As of and for the years ended December 31, 2006, 2005 and 2004, the consolidated financial statements include the accounts of Kitty Hawk, Inc. and its wholly-owned subsidiaries, Kitty Hawk Aircargo and Kitty Hawk Cargo. Beginning in April 2006, the accounts of Kitty Hawk Ground are included in the consolidated financial statements. All intercompany transactions and accounts have been eliminated in consolidation.

Use of Estimates

The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America 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. The more significant estimates are the liquidity analysis assumptions, allowance for doubtful accounts, allowance for excess inventory, aircraft maintenance and lease return reserves, depreciable lives of assets,

F-7

KITTY HAWK, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

amortization lives of intangible assets and valuation allowance related to deferred tax assets. 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.

Restricted Cash and Short-Term Investments

At December 31, 2006 and 2005, restricted cash and short-term investments consist primarily of a certificate of deposit that collateralizes the Company’s corporate credit card program.

Allowance for Doubtful Accounts

Accounts receivable are reduced by an allowance for an estimate of amounts that are uncollectible. Substantially all of the Company’s receivables are due from customers located 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). In some cases, the Company extends open credit to customers that refuse to make financial disclosure, but who 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 reserve is based on an analysis that estimates the amount of its total customer receivable balance that is not collectible. This analysis includes a review of customer aged receivables and payment trends. The Company writes off accounts receivable as they become uncollectible. Credit losses have consistently been within management’s expectations.

The activity in the Company’s allowance for doubtful accounts is as follows:

			Additions
			Charged
	Balance at the		(Credited)								Balance at the
	Beginning of		to								End of the
Description	the Period		Expense			Recoveries		Deductions			Period
	(In thousands)
Year ended December 31, 2004	$	539	$	159		$	27	$	(17	)	$	708
Year ended December 31, 2005	$	708	$	(528	)	$	3	$	(63	)	$	120
Year ended December 31, 2006	$	120	$	417		$	6	$	(60	)	$	483

For the year ended December 31, 2005, the allowance for doubtful accounts decreased due to fewer customer receivables deemed uncollectible. For the year ended December 31, 2006, the allowance for doubtful accounts increased due to an increase in the estimated uncollectible accounts receivable primarily attributable to the operation of the assets acquired from ACT (see Note 5).

Inventory and Aircraft Supplies

Inventory and aircraft supplies consist of rotable aircraft parts, expendable parts and consumable supplies. As inventory is acquired or repaired, it is added to inventory at the cost to acquire the parts and supplies or to repair the parts. As inventory is used in maintenance operations, it is expensed at the average carrying costs of that part or supply. The inventory and aircraft supplies are carried at the lower of cost or fair market value. The Company’s inventory and aircraft supplies are segregated into active items and surplus items based on a review of its current fleet composition plans, including the expected retirement dates of the Boeing 727-200 cargo aircraft and the expected usage of its current inventory and aircraft supplies.

F-8

KITTY HAWK, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

At December 31, 2006 and 2005, the Company estimated that the recorded cost of a portion of its active inventory and aircraft supplies exceeded fair market value and wrote down these items by $2.3 million and $1.3 million, respectively, to reduce the carrying value to fair market value.

At December 31, 2006, the Company identified surplus inventory and aircraft supplies with a carrying value of $0.8 million. The book value of these items were compared to their fair value using an orderly liquidation valuation because the Company expects to sell these items. The Company has recorded a reserve related to the surplus inventory and aircraft supplies. The reserve related to the surplus inventory and aircraft supplies of $1.7 million at December 31, 2005 was reduced to $0.2 million at December 31, 2006 because of the application of the lower of cost or market adjustments to these assets and less inventory identified as surplus at December 31, 2006 based on the Company’s current fleet plan. The net effect of the adjustments to inventory and aircraft supplies during 2006 was additional expense of $0.8 million.

The activity in the Company’s reserve for surplus inventory and aircraft supplies is as follows:

			Additions
	Balance at the		Charged								Balance at the
	Beginning of		(Credited) to								End of the
Description	the Period		Expense			Recoveries		Deductions			Period
	(In thousands)
Year ended December 31, 2004	$	—	$	600		$	—	$	—		$	600
Year ended December 31, 2005	$	600	$	1,075		$	—	$	—		$	1,675
Year ended December 31, 2006	$	1,675	$	(1,497	)	$	—	$	(9	)	$	169

Property and Equipment

Expenditures for additions, improvements, aircraft modifications and heavy C-check maintenance costs are capitalized. Routine maintenance and repairs are expensed when incurred. Depreciation is computed using the straight-line method over the estimated useful lives of the assets or to the next scheduled major maintenance event for certain airframes and aircraft engines, with estimated residual values of up to $50,000 for Pratt & Whitney JT8D engines.

Estimated useful lives are as follows:

Airframes and engines	1 — 4 years
Aircraft leasehold improvements	10 years
Trucks, trailers and automobiles	1 — 10 years
Software	3 — 5 years
Machinery and equipment	3 — 7 years
Leasehold estate and leasehold improvements	5 — 15 years

The Company previously provided maintenance reserves for Company owned airframes and aircraft engines which, at September 30, 2002, the Company intended to maintain in revenue service or return to revenue service. These maintenance reserves for periodic airframe maintenance (light C-checks) and engine heavy shop visits were accrued based on the hours flown. For owned airframes and aircraft engines acquired after September 30, 2002 or which were originally identified as not returning to revenue service and are returned to revenue service, any light C-checks or engine heavy shop visits would be capitalized and amortized over the period leading to the next scheduled maintenance event. For airframes and engines that are leased from third parties, reserves for periodic maintenance events are only recorded in the event the lease return conditions require a maintenance event to be performed prior to the expiration of the lease (see Note 9).

At the end of 2004, the Company reviewed its Boeing 727-200 airframe and Pratt & Whitney JT8D-9A aircraft engine maintenance reserves in conjunction with a review of its current aircraft fleet composition

F-9

KITTY HAWK, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

plans. Based on these reviews, management concluded that the Company would not need to perform heavy maintenance on Pratt & Whitney JT8D-9A aircraft engines for which reserves had been established as it believed the Company had sufficient Pratt & Whitney JT8D-9A aircraft engines in serviceable condition and available for revenue service to support its fleet composition plans. In addition, the review of the fleet composition plans indicated that the Company did not need to perform heavy maintenance on the remaining Boeing 727-200 airframe for which a maintenance reserve existed. As a result of these reviews and changes in its estimates for Boeing 727-200 airframe and Pratt & Whitney JT8D-9A aircraft engine maintenance reserve requirements, the Company reversed the accrued Boeing 727-200 airframe maintenance reserve of $0.8 million and the accrued Pratt & Whitney JT8D-9A aircraft engine maintenance reserve of $3.9 million as of December 31, 2004. In the event that the Company determines at a later date that it does not have enough Pratt & Whitney JT8D-9A aircraft engines to support its fleet composition plans, the Company will either seek to lease Pratt & Whitney JT8D-9A aircraft engines, or capitalize and amortize the cost of heavy maintenance on its owned Pratt & Whitney JT8D-9A aircraft engines if heavy maintenance is required. In the event that the Company determines at a later date to perform heavy maintenance on its owned airframes, the Company will capitalize and amortize the cost of the heavy maintenance event.

The activity in the reserves related to airframe and engine heavy maintenance and lease return conditions is as follows:

	Balance at the										Balance at the
	Beginning of		Charged to								End of the
	the Period		Expense		Deductions			Adjustments			Period
	(In thousands)
Year ended December 31, 2004	$	8,387	$	3,110	$	(6,657	)	$	(4,751	)	$	89
Year ended December 31, 2005	$	89	$	—	$	(89	)	$	—		$	—

Intangible Assets

As of December 31, 2006, the Company has recorded certain intangible assets related to the June 2006 acquisition of the operating assets of ACT. (See Note 5.) These assets are amortized using the straight line method over the estimated useful lives of the assets.

Intangible assets consist of the following:

				Non-Compete
	Customer Lists			Agreements			Trade Name			Goodwill
Amortization Period	10 Years			3 Years			3 Years			Indefinite Life		Total
	(Amounts in thousands)
Acquisition of the operating assets of ACT	$	1,700		$	1,100		$	190		$	206	$	3,196
Amortization Expense		(85	)		(183	)		(32	)		—		(300	)
Net book value at December 31, 2006	$	1,615		$	917		$	158		$	206	$	2,896

F-10

KITTY HAWK, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The following table shows the estimated amortization expense for each of the next five years, assuming no further additions to intangible assets are made

	December 31,
	(In thousands)
2007	$	600
2008		600
2009		385
2010		170
2011		170
Total	$	1,925

Accounting for Impairment of Long-Lived Assets and Intangible Assets

The Company evaluates all long-lived assets and intangible assets, including goodwill, 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. As the Company realizes its deductible amounts existing at December 31, 2002 through the reduction of taxable income, tax expense is recorded with an offset in additional paid in capital. 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, restricted cash, short term investments, trade accounts receivable and accounts payable 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 available to the Company.

Revenue Recognition

Scheduled freight revenue for the movement of air and ground freight in the network and other non-network related ground transportation revenue is recognized upon completion of delivery, net of discounts offered. Network management, ACMI and ad-hoc charter revenue is recognized when the service is completed.

Earnings Per Share

In March 2003, the Company issued common shares and warrants to purchase 9,814,886 shares of common stock to its former creditors in accordance with its plan of reorganization under its May 2000 Chapter 11 bankruptcy proceeding. Such warrants are treated as outstanding shares of common stock for purposes of calculating earnings or loss per share because the $0.000001 per share exercise price of the warrants is nominal. These shares are deemed to be outstanding as of October 1, 2002. As of December 31,

F-11

KITTY HAWK, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

2006, warrants to purchase 1,271,971 shares of common stock remain outstanding. These warrants expire in 2013.

A reconciliation of the shares used in the per share computation are as follows:

	Year Ended December 31,
	2006		2005		2004
Weighted average shares outstanding — basic		52,854,459		51,447,898		50,756,963
Effect of dilutive securities		—		—		3,010,161
Weighted average shares outstanding — diluted		52,854,459		51,447,898		53,767,124
Securities excluded from computation due to antidilutive effect:
Due to net loss		2,976,715		22,543,728		—
Due to out-of-the-money — Preferred Stock		19,020,001		—		—
Due to out-of-the-money — Stock options		1,785,333		1,022,000		250,000

New Accounting Pronouncements

In July 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes — an Interpretation of FASB Statement 109 (“FIN 48”), which clarifies the accounting for uncertainty in tax positions taken or expected to be taken in a tax return, including issues relating to financial statement recognition and measurement. FIN 48 provides that the tax effects from an uncertain tax position can be recognized in the financial statements only if the position is “more-likely-than-not” of being sustained if the position were to be challenged by a taxing authority. The assessment of the tax position is based solely on the technical merits of the position, without regard to the likelihood that the tax position may be challenged. If an uncertain tax position meets the “more-likely-than-not” threshold, the largest amount of tax benefit that is greater than 50 percent likely of being recognized upon ultimate settlement with the taxing authority, is recorded. The provisions of FIN 48 are effective for fiscal years beginning after December 15, 2006, with the cumulative effect of the change in accounting principle recorded as an adjustment to opening retained earnings. The Company is currently evaluating the impact of adopting FIN 48 on our financial statements but does not expect the adoption to have a material effect on its financial position.

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.” SFAS No. 157 defines fair value, establishes a framework for measuring fair value under Generally Accepted Accounting Principles and requires enhanced disclosures about fair value measurements. It does not require any new fair value measurements. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. SFAS No. 157 will not have a material impact on the Company’s financial statements.

In February 2007, the FASB issued FASB Statement No. 159, The Fair Value Option for Financial Assets and Financial Liabilities — Including an Amendment of FASB Statement No. 115 (“SFAS 159”). The fair value option established by SFAS 159 permits all entities to choose to measure eligible items at fair value at specified election dates. A business entity will report unrealized gains and losses on items for which the fair value option has been elected in earnings (or another performance indicator if the business entity does not report earnings) at each subsequent reporting date. The fair value option: (a) may be applied instrument by instrument, with a few exceptions, such as investments otherwise accounted for by the equity method; (b) is irrevocable (unless a new election date occurs); and (c) is applied only to entire instruments and not to portions of instruments. FASB No. 159 is effective as of the beginning of fiscal years beginning after

F-12

KITTY HAWK, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

November 15, 2007. The adoption of SFAS 159 is not expected to be material to the Company’s financial statements.

3.   Stock Based Compensation

In September 2003, the Company’s stockholders approved the Kitty Hawk 2003 Long Term Equity Incentive Plan, or the Plan. The Plan, as amended in May 2006, provides for the issuance of up to 8,500,000 shares of common stock either through grants of stock options, restricted stock units (“RSUs”) or other awards. The options granted generally have an exercise price equal to the quoted market price of the stock on the date of grant. The options and restricted stock units granted generally vest over periods of 12 to 48 months. The options expire ten years from the date of grant, subject to earlier forfeiture provisions. The restricted stock units granted to the Company’s management are not convertible to common stock until the individual leaves the Company or there is a change of control as defined in the Plan. The restricted stock units granted to members of the Company’s Board of Directors are not convertible to common stock until the earlier of the director’s termination of service, a change of control as defined in the Plan or four years from the date of grant.

Prior to January 1, 2006, the Company accounted for its stock options and RSUs granted under the Plan under the provisions of the American Institute of Certified Public Accountants Accounting Principles Board, or APB, Opinion No. 25, “Accounting for Stock Issued to Employees”, and related interpretations and adopted the disclosure-only provisions of Financial Accounting Standards Board, or FASB, Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation.”

Effective January 1, 2006, the Company adopted Statement of Financial Accounting Standards No. 123 (revised 2004), or SFAS 123R, “Share-Based Payment” which requires the measurement and recognition of compensation cost at fair value for all share-based payments, including stock options and RSUs. The Company used the modified prospective transition method which does not require restatement of previously issued financial statements. Under the modified prospective method, the Company will recognize the cost of new awards, awards modified, repurchased or cancelled after January 1, 2006, and the portion of awards for which the requisite service period has not been rendered (unvested awards) that are outstanding as of January 1, 2006.

Stock-based compensation for the year ended December 31, 2006 includes compensation expense as follows:

	Year Ended
	December 31,
	2006
	(In thousands)
Flight expense	$	122
Maintenance expense		20
Freight handling expense		76
Operating overhead expense		133
General and administrative expense		426
Total compensation expense	$	777

The fair value of options granted in 2006 was estimated using the lattice option pricing model using the assumptions in the table below. The risk free interest rate is the U.S. Treasury Strip rate posted at the date of grant having a term equal to the expected life of the options. An increase in the risk free interest rate will increase the fair value of future grants. Expected life is the period of time over which the options granted are expected to remain unexercised. Generally, the options have a maximum term of ten years. The Company examines actual stock options exercised to estimate the expected life of the options and expected forfeiture

F-13

KITTY HAWK, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

rate. An increase in the expected term will increase the fair value of future grants. Volatility is based on changes in the market value of the Company’s stock. An increase in expected volatility will increase the fair value of future grants. Dividend yield is the annual rate of dividend per share over the exercise period of the option. The Company does not intend to pay dividends, and historically has not paid dividends, on its common stock and is restricted from paying dividends on its common stock as a term of its revolving credit facility.

	Year Ended
	December 31,
	2006
Risk free interest rate		4.65	%
Expected term (years)		6
Volatility		66.49	%
Dividend yield		—
Annual forfeiture rate		5.00	%

The following table summarizes the stock option and RSU activity under the Plan for the year ended December 31, 2006:

							Weighted
							Average
							Exercise
	Available for			Options/RSUs			Price of Stock
	Grant			Outstanding			Options
Outstanding at December 31, 2005		765,961			4,545,727		$	0.60
Authorized for grant		1,500,000			—			—
Options granted (weighted-average fair value $0.53)		(425,079	)		425,079		$	0.79
RSUs granted (weighted-average fair value $0.79)		(595,472	)		595,472			—
Exercised (total intrinsic value of $0.2 million)		—			(288,300	)	$	0.30
Canceled (weighted average grant date fair value $0.85)		255,625			(255,625	)	$	0.94
Outstanding at December 31, 2006		1,501,035			5,022,353		$	0.55

The following summarizes unvested and vesting activity related to stock options and RSUs for the year ended December 31, 2006:

				Weighted Average
				Fair Value at
	Options/RSUs			Grant Date
Unvested at January 1, 2006		2,343,383		$	0.65
Vested during the period (total fair value of $0.7 million)		(1,302,001	)	$	0.54
Granted		1,020,551		$	0.68
Forfeited		(227,625	)	$	0.81
Unvested at December 31, 2006		1,834,308		$	0.73

F-14

KITTY HAWK, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The following table summarizes information about the stock options and RSUs outstanding at December 31, 2006:

			Weighted		Weighted		Aggregate
			Average		Average Exercise		Intrinsic
	Number of		Remaining		Price of		Value at
	Options/RSUs		Life (Years)		Options/RSUs		December 31,
Exercise Prices	Outstanding		Outstanding		Outstanding		2006
$—		882,372		—		—
$0.30		2,307,902		6.58	$	0.30
$0.57 - $ 0.95		363,079		9.58	$	0.75
$1.04 - $1.105		727,000		9.00	$	1.05
$1.14 - $ 1.17		274,000		8.57	$	1.16
$1.40 - $ 1.43		218,000		7.78	$	1.40
$1.62		250,000		7.42	$	1.62
Outstanding at December 31, 2006		5,022,353		8.02	$	0.55	$	2,812,518

The following table summarizes information about the vested stock options and RSUs at December 31, 2006:

			Weighted		Weighted		Aggregate
			Average		Average Exercise		Intrinsic
	Number of		Remaining		Price of		Value at
	Options/RSUs		Contractual		Vested		December 31,
Exercise Prices	Vested(1)		Terms		Options/RSUs		2006
$-		249,101		—		—
$0.30		2,270,402		6.58	$	0.30
$0.57 - $0.95		6,667		8.81	$	0.88
$1.04 - $1.105		231,667		8.98	$	1.05
$1.14 - $1.17		93,000		8.56	$	1.16
$1.40 - $1.43		140,333		7.77	$	1.40
$1.62		196,875		7.42	$	1.62
Exercisable at December 31, 2006		3,188,045		7.82	$	0.56	$	1,785,305

(1) Each of the outstanding options is currently exercisable. Option holders who exercise unvested options will receive restricted stock for such unvested options. The restrictions on such restricted stock will lapse on the same schedule that the underlying options would have vested.

The total compensation expense related to unvested options and RSUs as of December 31, 2006 was $1.1 million, including the effect of estimated future forfeitures, and is expected to be recognized over a weighted average period of 2.9 years.

	Compensation
	Expense
	(In thousands)
Year ending December 31, 2007	$	632
Year ending December 31, 2008		332
Year ending December 31, 2009		130
Year ending December 31, 2010		41
Total	$	1,135

F-15

KITTY HAWK, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

As a result of the adoption of SFAS 123R, our financial results were lower than under our previous accounting method for share-based compensation by the following amounts:

	Year Ended
	December 31, 2006
	(In thousands, except
	per share amounts)
Income from continuing operations before income taxes	$	507
Income from continuing operations		507
Net loss		507
Basic and diluted loss per common share	$	(0.01	)

Prior to 2006, the Company was required to disclose the pro forma effect of stock based compensation based on the fair value method. The Company used the Black-Scholes option pricing model to calculate the fair value of options for the stock options outstanding as of December 31, 2005. The following weighted average assumptions were used in determining the fair value of the options granted during the period noted:

	Year Ended			Year Ended
	December 31,			December 31,
	2005			2004
Risk free interest rate		4.116	%		4.475	%
Expected term (years)		6			10
Volatility		57.25	%		50	%
Dividend yield		0	%		0	%

The following table illustrates the effect on net income, net of taxes, and earnings per share if the Company had applied fair value accounting for the stock options and RSUs outstanding as of December 31, 2005 and 2004.

	Year Ended			Year Ended
	December 31,			December 31,
	2005			2004
	(In thousands, except per share data)
Net income (loss), as reported	$	(8,823	)	$	6,530
Add: Total stock-based employee compensation expense determined under the intrinsic method for all awards		114			82
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards		(374	)		(373	)
Pro forma net income (loss)	$	(9,083	)	$	6,239
Basic loss per share — as reported	$	(0.17	)	$	0.13
Basic loss per share — pro forma	$	(0.18	)	$	0.12
Diluted loss per share — as reported	$	(0.17	)	$	0.12
Diluted loss per share — pro forma	$	(0.18	)	$	0.12

4.   Series B Redeemable Preferred Stock

Series B Redeemable Preferred Stock.  On November 14, 2005, the Company sold 14,800 shares of Series B Convertible Preferred Stock, par value $0.01 per share (the “Series B Redeemable Preferred Stock”), in a private placement. The Company received net cash proceeds of approximately $13.9 million from the sale of the Series B Redeemable Preferred Stock. The shares of Series B Redeemable Preferred Stock are

F-16

KITTY HAWK, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

convertible into shares of the Company’s common stock at a conversion price of $0.9604 per share, subject to adjustment for changes in the Company’s capitalization. The Series B Redeemable Preferred Stock votes on an as converted basis with the Company’s common stock and has a class vote as required by applicable law. The Series B Redeemable Preferred Stock has a quarterly cash dividend equal to 8.00% per annum. Dividends on the Series B Redeemable Preferred Stock accruing prior to June 30, 2006 will be cumulated and will be distributed over the subsequent four quarters without interest. If any shares of Series B Redeemable Preferred Stock remain outstanding on November 14, 2010, the holder may cause the Company to redeem the shares of Series B Redeemable Preferred Stock at the purchase price paid per share plus any accrued but unpaid dividends on such shares on a pro rata basis through the redemption date. If the common stock is trading at 200% of the conversion price on any national securities exchange for 30 consecutive trading days ending on or after November 14, 2006, the Company has the right to redeem the outstanding shares of the Series B Redeemable Preferred Stock at the purchase price paid per share plus any accrued but unpaid dividends on such shares on a pro rata basis through the redemption date. The Series B Redeemable Preferred Stock has a liquidation preference of $1,000 per share plus accrued and unpaid dividends. In addition, as long as the holder of Series B Redeemable Preferred Stock beneficially owns at least 20% of the shares of the Series B Redeemable Preferred Stock purchased by the holder on or before November 14, 2005, the holder will have the right to participate pro rata in future issuances of capital stock of the Company for the purpose of raising additional funds for use by the Company, with certain exceptions. As of December 31, 2006, the Series B Redeemable Preferred Stock has $0.9 million of cumulated and unpaid dividends.

Warrants.  In connection with the issuance of the Series B Redeemable Preferred Stock, the Company granted the purchasers warrants (the “Warrants”) to purchase an aggregate of 3,609,756 shares of the Company’s common stock. The Warrants have a term of five years, an exercise price of $0.82 per share, subject to adjustment for changes in the Company’s capitalization, and are currently exercisable. The warrants had a fair value of $1.7 million, or $0.46 per warrant, estimated using the Black-Scholes valuation model. Of the total net proceeds of $13.9 million, $1.6 million was allocated to the warrants which was recorded as additional paid in capital with the remainder allocated to the fair value of the Series B Redeemable Preferred Stock.

Beneficial Conversion Feature.  On November 14, 2005, the fair value of the common stock issuable upon conversion of the Series B Redeemable Preferred Stock was greater than the conversion price of the Series B Redeemable Preferred Stock which resulted in a beneficial conversion feature of $0.2 million. Since the Series B Redeemable Preferred Stock are immediately convertible, the beneficial conversion feature was recorded as a preferred stock dividend on November 14, 2005.

5.  Asset Acquisition

On June 22, 2006, the Company, through its wholly-owned subsidiary Kitty Hawk Ground, acquired substantially all of the operating assets of ACT, including: owned and leased trucks and trailers; owner operator agreements; leased facilities; trademarks and intellectual property; and customer and employee lists. At closing, Kitty Hawk Ground also assumed contracts relating to ACT’s leased trucks and trailers, leased operating facilities, other equipment leases and contracts with owner operators. Kitty Hawk Ground did not assume any pre-closing liabilities of ACT, except for limited liabilities expressly set forth in the asset purchase agreement.

Kitty Hawk Ground is operating the transportation assets that were acquired from ACT. ACT operated an airport-to-airport expedited ground freight network primarily in California, Oregon, Washington, British Columbia, Colorado, Utah, Illinois and Texas. The Company acquired these assets to further expand its expedited ground service and expand its air and ground operations on the West coast.

The purchase price was $5.0 million, funded in a combination of $2.75 million of cash paid at closing, the issuance of 1,773,818 shares of unregistered Kitty Hawk common stock and deferred payments of

F-17

KITTY HAWK, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

$0.25 million and $0.5 million with interest, due six months and one year after closing, respectively. The first deferred payment was satisfied on December 22, 2006. The remaining deferred payment is secured by a letter of credit. The Company has registered the resale of the shares of its common stock issued to ACT. The accompanying financial statements include the results of operating the ACT assets from June 22, 2006.

The Company has completed its final purchase price allocation. The purchase price allocation of $5.2 million, including transaction costs, was allocated as follows:

	December 31, 2006
	(In thousands)
Current assets	$	120
Property and equipment		1,910
Other long-term assets		3,196
Total assets acquired	$	5,226

Approximately $3.2 million of the purchase price was allocated to the acquired intangible assets, including customer lists of $1.7 million, non-compete agreements of $1.1 million, the ACT trade name of $0.2 million, $0.1 million to a below market facility lease and $0.2 million of goodwill. Approximately $1.9 million was allocated to the tangible assets including trucks and trailers of $1.8 million and $0.1 million of freight handling equipment and office furniture and fixtures.

The following table presents unaudited supplemental pro forma information as if the ACT assets had been acquired as of the beginning of each of the periods presented:

	Year Ended December 31,
	2006			2005			2004
	(In thousands, except per share data)
Revenue	$	251,370		$	201,120		$	201,480
Net income (loss) allocable to common stockholders	$	(17,201	)	$	(9,988	)	$	5,246
Basic income (loss) per share	$	(0.32	)	$	(0.19	)	$	0.10
Diluted income (loss) per share	$	(0.32	)	$	(0.19	)	$	0.09

6.   Property and Equipment

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

	December 31,
	2006			2005
	(In thousands)
Airframes and engines	$	9,741		$	11,394
Trucks, trailers and automobiles		2,119			294
Machinery and equipment		1,751			1,404
Leasehold estate and leasehold improvements		2,101			2,073
Software and computers		1,924			1,724
Other		1,786			1,004
Total property and equipment		19,422			17,893
Less: Accumulated depreciation		(12,011	)		(10,279	)
Net property and equipment	$	7,411		$	7,614

F-18

KITTY HAWK, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

7.   Other Accrued Expenses

Other accrued expenses consist of the following:

	December 31,
	2006		2005
	(In thousands)
Freight handling expenses	$	8,235	$	1,686
Equipment lease expenses		1,990		—
Trucking expense		863		1,064
Maintenance expense		771		486
Landing and parking expenses		714		1,178
Other		3,400		2,859
Total other accrued expenses	$	15,973	$	7,273

8.   Current Debt

On July 19, 2006, the Company entered into a Revolving Credit and Security Agreement, or the Credit Facility, with PNC Bank, N.A., or PNC. The Credit Facility provided for a $20.0 million revolving credit and letter of credit facility, or the Credit Facility, due as a balloon payment in 2009. The obligations under the Credit Facility are secured by substantially all the assets of the Company and its subsidiaries.

The Credit Facility replaced a $15.0 million revolving credit facility with Wells Fargo Business Credit, Inc., or Wells Fargo. Proceeds from the Credit Facility were used to repay existing indebtedness to Wells Fargo and to pay approximately $0.2 million in fees and expenses related to the Credit Facility transaction. Availability under the Credit Facility was used primarily for working capital needs.

Availability under the Credit Facility is limited to a borrowing base equal to the lesser of $20.0 million or 85% of eligible receivables and is further limited by a reserve as described below. PNC may reject any receivable deemed ineligible in the exercise of its judgment. Additionally, the Credit Facility provides for letters of credit of up to $5.0 million. Letter of credit fees are computed at an annual rate of 2.5% of the average daily face amount of each outstanding letter of credit. At December 31, 2006, the Company had a borrowing base of $20.0 million subject to a $2.0 million liquidity reserve, no outstanding borrowings and outstanding letters of credit of $4.4 million. At December 31, 2005, the Company had a borrowing base of $10.8 million, unused availability of $6.7 million, $1.9 million of outstanding borrowings and outstanding letters of credit of $2.2 million.

Interest on outstanding advances under the Credit Facility is payable monthly in arrears at a rate per annum equal to the higher of (i) the base commercial lending rate of PNC and (ii) the Federal Funds Open Rate plus 50 basis points. The Credit Facility also allows the Company to borrow money based on a Eurodollar rate. Interest on Eurodollar rate advances is payable in arrears at a rate of LIBOR plus 2.75%.

The Credit Facility provided for a facility fee of .375% per annum on the unused portion of the Credit Facility. This fee is payable monthly in arrears. Additionally, the Company is obligated to pay a termination fee of $200,000 if it terminates the Credit Agreement prior to July 19, 2007 that is reduced to $100,000 if it terminates the Credit Agreement at any time after July 19, 2007 and before the final maturity date of July 19, 2009.

The Credit Facility contains various affirmative and negative covenants, including, among others, covenants that restrict the ability of the Company and its subsidiaries to: engage in mergers, consolidations, or other reorganizations; create or permit liens on assets; incur certain indebtedness, capitalized lease obligations, or guarantee obligations; pay dividends or other distributions (other than dividends on the Company’s Series B

F-19

KITTY HAWK, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Redeemable Preferred Stock); change the nature of the Company’s business; make certain investments or capital expenditures; make certain loans or extensions of credit; change its fiscal year; enter into certain transactions with affiliates; or form new subsidiaries.

The Credit Facility also contains default clauses that permit the acceleration of all amounts due following an event of default at the discretion of the lenders, and lock box provisions that apply the Company’s cash collections to outstanding borrowings. Upon and after the occurrence of an event of default, the outstanding obligations bear interest at 2% over the applicable rate. Based on the terms of the Credit Facility and pursuant to EITF Issue No. 95-22, “Balance Sheet Classification of Revolving Credit Agreement Obligations Involving Lock-Box Arrangements,” the Company classifies amounts outstanding under the Credit Facility, if any, as current.

On September 30, 2006, the Company was not in compliance with the Fixed Charge Coverage Ratio set forth in the Credit Facility. On November 13, 2006, the Company entered into a First Amendment to the Credit Facility which waived the non-compliance and made the following additional changes to the Credit Facility.

The amendment changed the per annum interest rate under the Credit Facility to equal the sum of the base commercial lending rate of PNC plus a base rate margin. The base rate margin varies over time and varies based on the Company’s financial performance. From November 13, 2006 until five business days after delivery of the Company’s compliance certificate for the period ending March 31, 2007, the base rate margin is 2%. The base rate margin is reset five business days after delivery of the Company’s compliance certificate for each quarter starting March 31, 2007 based on the Company’s Fixed Charge Coverage Ratio (as defined in the amendment) as described in the following table:

		Base Rate			Base Rate
		Margin if			Margin if
		Condition			Condition
Fiscal Period	Condition	Satisfied			Not Satisfied
March 31, 2007	The Company shall have maintained a Fixed Charge Coverage Ratio which is greater than or equal to 1.5 to 1 for the six months then ended		1.5	%		2.0	%
June 30, 2007	The Company shall have maintained a Fixed Charge Coverage Ratio which is greater than or equal to 1.5 to 1 for the year then ended		1.25	%		2.0	%
December 31, 2007, and at the end of any fiscal quarter thereafter	The Company shall have maintained a Fixed Charge Coverage Ratio which is greater than or equal to 1.5 to 1, but less than 2.0 to 1, for the year then ended		1.0	%		2.0	%
December 31, 2007, and at the end of any fiscal quarter thereafter	The Company shall have maintained a Fixed Charge Coverage Ratio which is greater than or equal to 2.0 to 1 for the year then ended		0	%		N/A

The amendment changed the Fixed Charge Coverage Ratio definition and replaced the Fixed Charge Coverage Ratio covenant in its entirety. The amendment requires the Company to maintain a Fixed Charge Coverage Ratio of not less than 1.0 to 1, measured as of (i) December 31, 2006, for the three months then ended, (ii) January 31, 2007, for the four months then ended, (iii) February 28, 2007, for the five months then ended, (iv) March 31, 2007, for the six months then ended, (v) April 30, 2007, for the seven months then ended, (vi) May 31, 2007, for the eight months then ended, (vii) June 30, 2007, for the year then ended, (viii) July 31, 2007, for the ten months then ended, (ix) August 31, 2007, for the eleven months then ended

F-20

KITTY HAWK, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

and (x) as of the last day of each month thereafter, for the year then ended. The calculation of the Fixed Charge Coverage Ratio will exclude aircraft maintenance capital expenditures unless undrawn availability under the Credit Facility is less than $5.0 million for thirty consecutive days. As of December 31, 2006, the Company was in compliance with this covenant.

The amendment also replaced the Tangible Net Worth covenant in its entirety. The amendment requires the Company to maintain Tangible Net Worth equal (a) as of December 31, 2006, for the fiscal year then ended, not less than $14,000,000 and (b) as of the last day of each fiscal year thereafter, for the fiscal year then ended, not less than the sum of (A) Tangible Net Worth as of the last day of the fiscal year ended year prior plus (B) the net income of the Company for the fiscal year multiplied by 0.75 less any cash dividends permitted by the Credit Facility. As of December 31, 2006, the Company was in compliance with this covenant.

In addition, per the amendment, availability under the Credit Facility was reduced by a reserve of $3.5 million until January 1, 2007. However, the reserve was reduced to $2.0 million until January 1, 2007 upon the award of a contract with the United States Postal Service, or the USPS, to manage a daytime air and ground cargo network for the holiday season mail from November 28, 2006 through December 24, 2006, or the C-NET network. The reserve increased to $5.0 million on January 2, 2007 and will increase to $7.5 million on April 2, 2007. The reserve is reset quarterly starting with the delivery of the Company’s compliance certificate for the period March 31, 2007 based on the Company’s Fixed Charge Coverage Ratio (as defined in the amendment) as described in the following table:

				Reserve
				Amount
		Reserve Amount if		if Condition
Testing Date	Condition	Condition Satisfied		not Satisfied
March 31, 2007	The Company shall have maintained a Fixed Charge Coverage Ratio which is greater than or equal to 1.5 to 1 for the six months then ended	$	5.0 million	$	7.5 million
June 30, 2007	Company shall have maintained a Fixed Charge Coverage Ratio which is greater than or equal to 1.5 to 1 for the year then ended	$	3.5 million	$	7.5 million
December 31, 2007, and at the end of any fiscal quarter thereafter	Company shall have maintained a Fixed Charge Coverage Ratio which is greater than or equal to 1.5 to 1, but less than 2.0 to 1, for the year then ended	$	2.0 million	$	7.5 million
December 31, 2007, and at the end of any fiscal quarter thereafter	Company shall have maintained a Fixed Charge Coverage Ratio which is greater than or equal to 2.0 to 1 for the year then ended	$	0		N/A

The amendment also modified the lock box provisions to cause the Company’s cash proceeds to become the property of PNC. The amendment eliminates the ability of the Company to borrow money based on a Eurodollar rate and requires the Company to report accounts payable and accounts receivable monthly and to deliver a borrowing base certificate each week. The amendment also allows the lenders to sell, assign or transfer its rights relating to revolving advances under the Credit Facility to certain parties without the consent of the Company. The Company paid PNC an amendment fee of $275,000. All other material terms and conditions of the Credit Facility remained unchanged. On March 29, 2007, the Company terminated the Credit Facility and recorded charges of $0.2 million for early termination of the Credit Facility and $0.5 million to write-off unamortized loan origination fees. (See Note 17.)

F-21

KITTY HAWK, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

In June 2006, the Company entered into two notes payable to finance a portion of its insurance premiums. The notes bear interest at 5.7% and 7.5% and mature in May 2007. The outstanding balance as of December 31, 2006 was approximately $257,000.

9.   Income Taxes

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

	Year Ended		Year Ended		Year Ended
	December 31,		December 31,		December 31,
	2006		2005		2004
	(In thousands)
Current income tax provision	$	—	$	—	$	159
Deferred income tax:
Federal		—		—		3,176
State		—		—		635
Total deferred income tax		—		—		3,811
Total income tax expense	$	—	$	—	$	3,970

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:

	Year Ended			Year Ended			Year Ended
	December 31,			December 31,			December 31,
	2006			2005			2004
	(In thousands)
Federal income tax (benefit) at statutory rate	$	(4,907	)	$	(2,893	)	$	3,570
State income taxes, net of federal benefit		(361	)		(213	)		524
Non-deductible expenses, principally meals		106			104			129
Change in valuation allowance for U.S. federal and state taxes		5,360			3,002			(997	)
Increase in deferred tax asset not benefited		(198	)		—			(2,973	)
Tax expense allocated to Additional Capital related to bankruptcy		—			—			3,717
Total	$	—		$	—		$	3,970

F-22

KITTY HAWK, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Deferred tax assets were as follows:

	December 31,
	2006			2005
	(In thousands)
Deferred tax assets related to:
Net operating loss carryforward	$	14,420		$	9,506
Property and equipment		4,670			4,573
Accounts receivable		2,782			2,515
Alternative minimum tax credits		2,465			2,465
Accrued expenses		475			625
Intangible assets		91			—
Other		6			177
Gross deferred tax asset		24,909			19,861
Deferred tax liabilities related to:
Airframe maintenance		526			802
Prepaid insurance		381			272
Other		—			145
Gross deferred tax liability		907			1,219
Valuation allowance		(24,002	)		(18,642	)
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. As a result of the Company incurring significant operating losses in the past, there can be no assurance of sufficient profitability to realize any tax benefit from the deferred tax asset.

At December 31, 2006, the Company had net operating losses of approximately $39.5 million available to offset future taxable income, resulting in a deferred tax asset of approximately $14.4 million at December 31, 2006. These losses expire through 2026. Alternative minimum tax credits can be used to reduce certain taxes that may be payable in the future and have no expiration date.

Upon the Company’s emergence from bankruptcy, its shares of common stock and warrants were distributed to a small group of holders. As these holders have disposed of their shares through transfers of the Company’s stock and warrants and since our issuance of the Series B Redeemable Preferred Stock, there have been changes in the composition and concentration of its stockholder base. These changes in stock ownership resulted in a change in control of the Company’s greater than 5% stockholders as defined in Section 382 of the Internal Revenue Code during September 2005. Therefore, the Company’s ability to utilize its current net operating losses and other deductions to offset any future taxable income which may be generated will be subject to an annual limitation of $1.9 million. Further, any future change in control as defined by the Internal Revenue Code, may result in a limitation on the use of these deductions for a particular tax year.

10.   Aircraft Commitments

On May 4, 2004, Kitty Hawk Aircargo entered into ten year operating leases, with two 30-month extension options, with affiliates of GE Capital Aviation Services, or GECAS, for seven Boeing 737-300SF cargo aircraft. The Company took delivery of the Boeing 737-300SF cargo aircraft and placed them into revenue service during 2005.

F-23

KITTY HAWK, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

On March 7, 2005, the Company entered into a long-term maintenance support agreement for its fleet of seven Boeing 737-300SF cargo aircraft, or the IAI Maintenance Agreement, with Aviation Services International, LLC, a division of Israel Aircraft Industries’ Bedek Division, or IAI. The IAI Maintenance Agreement covers the initial term of the Boeing 737-300SF cargo aircraft leases plus any extension options exercised by the Company. The IAI Maintenance Agreement also allows the Company to add additional Boeing 737-300SF cargo aircraft if it acquires additional Boeing 737-300SF cargo aircraft.

The IAI Maintenance Agreement covers maintenance of the Boeing 737-300SF cargo aircraft engines, landing gear and certain rotable components and provides the Company with access to a spare parts pool and dedicated consignment inventory of spare parts. Pursuant to the IAI Maintenance Agreement, on a monthly basis, the Company pays IAI a fixed rate per aircraft for the landing gear maintenance, a rate per flight hour for access to the spare parts pool and the repair of the rotable components covered under the agreement, and a rate per flight hour for the maintenance on the engines covered under the agreement. In return, IAI performs all required maintenance on the landing gear, engines and rotable components with certain exclusions. The exclusions include repair of aircraft engines due to foreign object damage, or FOD; damage caused by the Company’s negligent use of the landing gear, engine or rotable component; repairs necessitated by Airworthiness Directives issued by the FAA; optional Service Bulletins issued by the engine and component manufacturers; and repairs to landing gear, engines or components that are beyond economic repair.

The rates per flight hour that the Company pays IAI for the engine and rotable components is subject to certain Boeing 737-300SF cargo aircraft fleet annual flight hour minimums. The rate per flight hour for access to the rotable component spare parts pool and for repair of rotable components covered under the agreement is also scaled based on Boeing 737-300SF cargo aircraft fleet flight hour utilization with the rate per flight hour decreasing with higher annual fleet utilization. The rate per flight hour for engine maintenance is also adjustable annually based upon various operating factors. The fixed monthly rate for the Boeing 737-300SF cargo aircraft landing gear maintenance, the rate per flight hour for maintenance of the engines and the rate per flight hour for access to the rotable component spare parts pool and for repair of the rotable components is subject to a fixed annual escalation as provided for in the IAI Maintenance Agreement.

In addition, as part of the IAI Maintenance Agreement, the Company pays IAI a monthly fee for access to the dedicated consignment inventory of spare parts equal to a percentage of the value, when purchased by IAI, of the dedicated consignment inventory. After the second year of the IAI Maintenance Agreement and during each successive year thereafter, the Company has the ability to purchase this dedicated consignment inventory on a predetermined declining residual value.

Pursuant to the IAI Maintenance Agreement, IAI provides the Company with spare engines for both scheduled and unscheduled engine maintenance at prevailing market rates. Should the duration of the repair exceed the guarantee provided in the IAI Maintenance Agreement, IAI is responsible for spare engine lease costs beyond the guaranteed repair time.

Through the IAI Maintenance Agreement, IAI has also assumed financial liability for the landing gear, engine and certain rotable component lease return condition requirements for the Boeing 737-300SF cargo aircraft contained in our aircraft leases.

The IAI Maintenance Agreement may be terminated by IAI upon an event of default by the Company including, but not limited to, the Company’s failure to pay IAI, a filing for bankruptcy protection by the Company or a successful involuntary bankruptcy petition being filed against the Company.

From time to time, the Company enters into lease agreements for Pratt & Whitney JT8D engines which generally range in length of time from one month to three years. The leases generally provide for monthly minimum lease payments depending on the condition of the engine and the length of the lease. As of December 31, 2006, the Company was leasing 14 Pratt & Whitney JT8D engines under various agreements.

F-24

KITTY HAWK, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

In connection with its emergence from Chapter 11 bankruptcy, on October 1, 2002, Aircargo entered into four new operating leases for Boeing 727-200 cargo aircraft in with affiliates of Pegasus. Each of the leases expired in May 2004.

Under these leases, in addition to rental payments, the Company was required to pay maintenance reserves each month with the amount determined based on flight hours or cycles of utilization during the previous month. In addition, under the terms of these leases, each aircraft had to be returned to the lessor with no less than 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 the Company originally took delivery of each of the aircraft.

The Company took a charge of $1.7 million in the first six months of 2004 because the Company’s estimate of the costs to meet these aircraft lease return obligations exceeded the $2.4 million of lease return reserves the Company had recorded as of December 31, 2003 for these aircraft. As of December 31, 2004, the Company had fully satisfied the lease return obligations under all four of the leases. The cost of the lease return obligations approximated the amount accrued at June 30, 2004. In addition, the Company incurred additional lease expense related to these aircraft in the amount of $0.2 million in each of the second and third quarters of 2004 for the time between the expiration of the lease and the date the aircraft were ultimately returned to the lessor.

On December 31, 2002, the Company entered into a two year Aircraft and Engine Use Agreement with the Kitty Hawk Collateral Liquidating Trust, or the Trust, to make 12 Boeing 727-200 cargo airframes and 33 aircraft engines available for operation by Kitty Hawk Aircargo. These airframes and aircraft engines had been pledged as collateral to secure the Company’s former 9.95% Senior Secured Notes. The holders of the Company’s former 9.95% Senior Secured Notes formed the Trust to manage these airframes and aircraft engines. As of December 31, 2006, the beneficiaries of the Trust include Resurgence Asset Management which beneficially owns greater than 5% of the Company’s common stock. For a description of the Company’s material relationships with these entities, see Note 12 — Related Party Transactions. The Company amended this agreement effective January 1, 2004.

The amended agreement primarily extended, with certain minimum usage commitments, the lease terms for 11 Boeing 727-200 cargo airframes from December 31, 2004 to dates ranging from December 31, 2004 to December 31, 2006 and extended the use of 28 aircraft engines from December 31, 2004 until the aircraft engines reach the earlier of the estimated time of their next heavy maintenance event or December 31, 2007. In addition, the amended agreement gave the Company the option, at its discretion by November 1, 2004, to further extend the leases on two of these airframes from December 31, 2004 up to December 31, 2007 and on two more of these airframes from December 31, 2004 up to June 30, 2008. On November 8, 2004, the Company entered into a second amendment to this agreement with an effective date of November 1, 2004.

The second amended agreement primarily reduced the block hour rates, modifies the lease terms for 11 Boeing 727-200 cargo airframes and modifies certain minimum usage requirements. The lease terms were modified to coincide with the approximate date of the expected next heavy maintenance event of each particular airframe and range from December 31, 2004 to December 31, 2006. The second amendment also extends the use of 29 aircraft engines until the aircraft engines reach the earlier of the estimated time of their next heavy maintenance event or December 31, 2008.

In addition, the second amended agreement cancels the amended agreement’s extension options on four airframes and provides the Company with new options to further extend, at its discretion, the leases on two of the airframes from March 31, 2006 to June 30, 2009, on one of the airframes from December 31, 2006 to December 31, 2009 and on one of the airframes from December 31, 2004 to December 31, 2009. Concurrently with the execution of the second amended agreement, the Company exercised its option to extend the lease term on one of these airframes from December 31, 2004 to December 31, 2009. Pursuant to the exercise of

F-25

KITTY HAWK, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

each of the four airframe options, the Trust will be required to fund up to a majority of the currently anticipated costs of the next heavy maintenance event on each of the airframes and the Company will be required to meet minimum usage guarantees during each extended lease term which will allow the Trust to recover the cost of the heavy maintenance. In the event a specific airframe option is exercised, the Company will be responsible for any heavy maintenance costs in excess of the amount paid by the Trust. As of December 31, 2006, the Company is leasing one airframe and three aircraft engines under this arrangement.

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

	December 31,
Year	2006
	(In thousands)
2007	$	14,872
2008		13,415
2009		12,691
2010		12,728
2011		12,816
Thereafter		45,326
Total	$	111,848

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 Chapter 11 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 is being repaid over a 48 month period beginning July 5, 2003 and bears interest at 5% per annum from July 5, 2003. As of December 31, 2006, the Company has recorded $0.3 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 $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.

In December 2006, the Company entered into a four year operating lease for 25 new trucks to replace 25 trucks coming off a lease which was assumed when the operating assets of ACT were acquired in June 2006. The lease provides for monthly lease payments of $54,184. Additionally, the Company assumed several other leases for trucks and trailers in June 2006. These leases expire on various dates through December 2007 and some are operated under a month to month arrangement.

The Company also leases office buildings, airport aprons, cargo storage and related facilities, including the leases assumed in June 2006, under noncancelable operating leases which expire on various dates through August 2011. In addition, the Company periodically leases other facilities and equipment under month-to-month lease agreements.

F-26

KITTY HAWK, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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

	December 31,
Year	2006
	(In thousands)
2007	$	5,363
2008		4,612
2009		4,172
2010		4,087
2011		3,429
Thereafter		19,009
Total	$	40,672

In the normal course of business, the Company is a party to various legal proceedings and other claims. While the outcome of these proceedings and other claims cannot be predicted with certainty, management does not believe these matters will have a material adverse affect on the Company’s financial condition or results of operations.

12.   Related Party Transactions

The Company has an agreement with the Trust to use aircraft and engines and had an agreement with Pegasus to lease aircraft and engines (see Note 10). Under the Company’s plan of reorganization, Pegasus received approximately 5.0% of the Company’s newly issued common stock on a fully-diluted basis and the beneficiaries of the Trust received 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, 2006, the Company owed the Trust approximately $0.2 million for aircraft usage in December 2006.

For the years ended December 31, 2006, 2005 and 2004, the Company paid approximately $2.4 million, $4.5 million and $9.0 million related to various agreements with Pegasus and the Trust for use of aircraft and engines, for required payments of maintenance reserves and satisfaction of all Pegasus lease return conditions. In addition, the Trust reimbursed the Company $1.3 million and $1.9 million for heavy maintenance events paid on behalf of the Trust under the agreement during 2005 and 2004. No heavy maintenance events were incurred during 2006 on behalf of the Trust.

The Company has a registration rights agreement dated as of May 8, 2004, with Everest Capital Limited, Resurgence Asset Management L.L.C. and Stockton, LLC which are beneficiaries of the Trust. Under this agreement, the Company granted each of Everest Capital, Resurgence Asset Management and Stockton, and certain of their subsequent transferees, the right to make one written demand on the Company on or after February 2, 2003 to file a registration statement under the Securities Act of 1933 (the “Securities Act”), covering some or all of the shares of common stock they received in connection with the Company’s plan of reorganization. On June 16, 2004, the Company received a demand pursuant to the registration rights agreement. In satisfaction of the demand, the Company filed a registration statement on Form S-3 to register 25,975,515 shares of common stock beneficially owned by the selling stockholders. The Form S-3 became effective on December 8, 2004.

The Company bore virtually all of the expenses associated with registering the shares of common stock subject to the registration rights agreement. The Company’s 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.

F-27

KITTY HAWK, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

On November 9, 2005, the Company sold 14,800 shares of Series B Redeemable Preferred Stock in a private placement. Also, in connection with the issuance of the Series B Redeemable Preferred Stock, the Company granted the purchasers warrants to purchase an aggregate of 3,609,756 shares of the Company’s common stock. The purchasers included 5% or greater stockholders and their affiliates, including Lloyd I. Miller, III and Bryant R. Riley. Bryant R. Riley is an affiliate of SACC Partners, LP. The Company paid a placement fee of $740,000 to B. Riley & Co., Inc. in connection with the private placement. B. Riley & Co., Inc. is an affiliate of Bryant R. Riley and SACC Partners, LP. See Note 17.

In connection with the sale of the Series B Redeemable Preferred Stock, the Company also entered into a registration rights agreement with the purchasers. Under the registration rights agreement, the Company filed a registration statement on Form S-3 with the Securities and Exchange Commission on January 12, 2006 relating to the resale by the purchasers of the shares of common stock issuable upon conversion of the Series B Redeemable Preferred Stock or exercise of the warrants. In addition, the Company registered the resale of shares of common stock held by Lloyd I. Miller, III and his affiliates. The Company paid all of the fees and expenses in connection with the preparation and filing of the registration statement and the listing of the shares of common stock issuable upon conversion of the Series B Redeemable Preferred Stock or exercise of the warrants with the American Stock Exchange.

In connection with the private placement, the Company amended its existing rights agreement to exempt Lloyd I. Miller, III and his affiliates and associates from triggering the rights agreement in connection with the private placement. Under this amendment, Lloyd I. Miller, III and his affiliates and associates, or Miller, can beneficially own up to 23.5% of the Company’s voting securities without triggering the rights agreement. This exemption terminates when Miller’s beneficial ownership of the Company’s voting securities falls below 15% or if Miller is in material breach of the standstill agreement described below.

In connection with sale of the Series B Redeemable Preferred Stock, the Company also entered into a standstill agreement with each of the purchasers. Under this standstill agreement, subject to certain conditions and exemptions, the purchasers of the Series B Redeemable Preferred Stock may not (i) enter into a voting agreement; (ii) call a special meeting of the stockholders; (iii) commence a tender offer for any voting securities; (iv) attempt to acquire a substantial portion of the Company’s assets or facilitate any business combination or restructuring of the Company; (v) amend or appeal anti-takeover measures the Company currently has in place; (vi) arrange, or participate in, any financing for any of the foregoing transactions; or (vii) prior to November 14, 2006, seek a waiver of any provision of the standstill agreement. In addition, Miller has agreed not to vote any shares of the Company’s capital stock in excess of 14.99% of the outstanding shares of common stock in any proxy solicitation (other than one conducted by the Company) or an election contest, without the approval of the Company’s Board of Directors.

13.   Employee Compensation Plans and Arrangements

The Company has a retirement savings plan under Section 401(k) of the Internal Revenue Code, or the 401(k) Plan, which covers all employees meeting minimum service requirements. Under the plan, during 2006, employees could voluntarily contribute up to the maximum limit of $15,000. During 2006, the Company provided discretionary matching contributions of 50% of the employees’ contribution up to 8% of the employees’ salary. During 2006, 2005 and 2004, Company contributions amounted to $0.7 million, $0.5 million and $0.4 million, respectively. Employee contributions are remitted as they are collected.

14.   Collective Bargaining Agreement

The pilots of Aircargo, the Company’s air cargo subsidiary, were represented by the Kitty Hawk Pilots Association International (“KPA”). On October 16, 2003, the KPA ratified a Merger Agreement to merge with the Airline Pilots Association International (“ALPA”), a national union representing airline pilots. The merger

F-28

KITTY HAWK, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

agreement was also ratified by the Executive Committee of ALPA on October 21, 2003. The merger became effective on January 1, 2004.

On October 17, 2003, the KPA ratified its first Collective Bargaining Agreement with Aircargo. The agreement covers all flight crew members of Aircargo with respect to compensation, benefits, scheduling, grievances, seniority, and furlough and has a ten year term. The agreement was implemented on December 1, 2003. As of December 31, 2006, approximately 94% of Aircargo’s flight crew members were members of ALPA, which represented approximately 15% of the Company’s total number of employees. Aircargo does not anticipate that the agreement will have a material adverse effect on its costs or operations. On February 9, 2007, the Company and ALPA began renegotiations on two sections of the CBA related to compensation and the Company’s matching contribution to its 401(k) Plan as allowed on the third anniversary of the CBA implementation. If a settlement is not reached by April 9, 2007, the Company and ALPA will be required to submit their best and final position to a final offer, or “baseball” style arbitration. The Company cannot determine if the outcome of the renegotiations will have a material adverse effect on its costs or operations.

15.   Significant Customers

The Company provided scheduled freight services to five customers who accounted for 27.4%, 31.3% and 33.6% of its scheduled freight revenue for the years ended December 31, 2006, 2005 and 2004, respectively. The Company had receivables from these customers that comprised approximately 18.8% and 36.1% of the Company’s outstanding accounts receivable balance as of December 31, 2006 and 2005, respectively. The Company provided scheduled freight services to one of these customers who accounted for 9.9%, 11.2% and 11.8% of its scheduled freight revenue for the years ended December 31, 2006, 2005 and 2004, respectively. This customer accounted for 8.3% and 13.0% of the Company’s outstanding accounts receivable at December 31, 2006 and 2005, respectively. Historically, this level of concentration of risk is typical for the on-going operations of the Company.

The Company provided network management services, scheduled freight services and ACMI services to one customer who accounted for 100.0%, 1.5%, and 82.3% of each respective revenue, or 14.7% of its total revenue, for the year ended December 31, 2006. The Company had receivables from this customer that comprised approximately 19.0% of the Company’s outstanding accounts receivable balance as of December 31, 2006.

16.   Business Segment Data

As of December 31, 2006, the Company’s operations were comprised of three segments — a scheduled freight network, including managing the C-NET network, a ground transportation services company and a cargo airline. Each segment’s respective financial performance is detailed below. Each segment is currently evaluated on financial performance at the operating income line.

The column labeled “other” consists of corporate activities. Business assets are owned by, or allocated to, each of the business segments. The allocation of assets is primarily a result of intercompany charges for services between the segments. Assets included in the column labeled “other” include cash, allowance for doubtful accounts and the leasehold estate related to the building occupied by the corporate offices.

The change in segment assets from December 31, 2005 to December 31, 2006 was attributable to (i) an increase in accounts receivable from external customers resulting from increased revenues in the scheduled freight network segment and management of the C-NET network, (ii) the acquisition of substantially all of the operating assets of Air Container Transport, Inc., a California corporation, and an increase in the intercompany receivable balance in the ground transportation services company, (iii) the effects of depreciation and amortization of the assets of the cargo airline segment and (iv) an increase in the intercompany receivable balances from the other segments in the corporate segment due primarily to funding their operations.

F-29

KITTY HAWK, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

				Ground
	Scheduled			Transportation
	Freight			Services		Cargo									Consolidated
	Network			Company		Airline			Other			Eliminations			Balance
	(In thousands)
Year ended December 31, 2006:
Revenue from external customers	$	218,022		$	5,904	$	5,716		$	—		$	—		$	229,642
Revenue from intersegment operations		—			21,456		51,856			—			(73,312	)		—
Depreciation and amortization		552			710		2,206			300			—			3,768
Operating income (loss)		(17,529	)		499		2,510			(32	)		—			(14,552	)
Interest expense		55			—		—			504			—			559
Other income		—			—		(157	)		(521	)		—			(678	)
Net income (loss)	$	(17,584	)	$	499	$	2,667		$	(15	)		—		$	(14,433	)
Total assets	$	26,533		$	33,154	$	10,236		$	39,200		$	(55,300	)	$	53,823
Year ended December 31, 2005:
Revenue from external customers	$	152,729		$	—	$	3,908		$	—		$	—		$	156,637
Revenue from intersegment operations		—			—		44,652			—			(44,652	)		—
Depreciation and amortization		525			—		3,167			354			—			4,046
Operating income (loss)		(5,376	)		—		(3,751	)		(52	)		—			(9,179	)
Interest expense		61			—		3			223			—			287
Other income		(172	)		—		(105	)		(679	)		—			(956	)
Net income (loss)		(5,265	)		—		(3,649	)		404			—			(8,510	)
Total assets	$	18,251		$	—	$	10,959		$	38,961		$	(11,237	)	$	56,934
Year ended December 31, 2004:
Revenue from external customers	$	154,016		$	—	$	4,481		$	—		$	—		$	158,497
Revenue from intersegment operations		—			—		40,843			—			(40,843	)		—
Depreciation and amortization		450			—		2,641			353			—			3,444
Operating loss		6,830			—		4,082			(505	)		—			10,407
Interest expense		111			—		6			216			—			333
Other income		(113	)		—		(95	)		(218	)		—			(426	)
Net income (loss)		6,832			—		4,171			(503	)		—			10,500
Total assets	$	16,475		$	—	$	14,940		$	26,023		$	(8,368	)	$	49,070

17.   Subsequent Event

New Revolving Facility.  On March 29, 2007, the Company entered into a Security Agreement and Secured Revolving Note, or the Revolving Facility, with Laurus Master Fund, Ltd., or Laurus. This Revolving Facility replaces the prior credit facility with PNC Bank, National Association, or the Credit Facility (see Note 8). The Revolving Facility provides for borrowings up to $25 million, subject to a borrowing base of up to 90% of eligible receivables. The Revolving Facility bears interest at prime plus 1.5%, subject to a floor of 9.0% and a cap of 11.0%. There are no financial performance covenants. The Revolving Facility contains non-financial covenants that restrict the Company’s ability to, among other things: engage in mergers, consolidations, or other reorganizations; create or permit liens on assets; dispose of certain assets; incur certain indebtedness; guarantee obligations; pay dividends or other distributions (other than dividends on its Series B

F-30

KITTY HAWK, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Redeemable Preferred Stock); materially change the nature of its business; make certain investments; make certain loans or advances; prepay certain indebtedness (with the exception of Laurus or in the ordinary course of business); change its fiscal year or make changes in accounting treatment or reporting practices except as required by GAAP or the law; enter into certain transactions with affiliates; or form new subsidiaries. The Revolving Facility matures on September 30, 2010. The obligations under the Revolving Facility are secured by substantially all of the Company’s assets, including the stock of its subsidiaries. As of March 29, 2007, the Company had a borrowing base of $14.7 million, outstanding borrowings of $9.3 million and $5.4 million of availability. The outstanding borrowings include $3.9 million to cash collateralize the Company’s outstanding letters of credit. The Company paid a placement fee of $250,000 to B. Riley & Co., Inc., an affiliate of one of our greater than 5% stockholders, in connection with the Revolving Facility.

The Company also issued to Laurus a five year warrant to purchase up to 8,216,657 shares of its common stock, or the Warrant. The exercise price of the Warrant is $0.91 per share. The exercise price is not subject to adjustment or reset, other than to reflect stock splits, stock dividends and similar transactions. Pursuant to the terms of the Warrant, Laurus will not sell any shares for which it has exercised the Warrant prior to March 29, 2008. Laurus also will not sell shares for which it has exercised the Warrant during a 22 day trading period in a number that exceeds 20% of the aggregate dollar trading volume of the Company’s common stock for the 22 day trading period immediately preceding the sales.

In connection with the Warrant, the Company entered into a registration rights agreement whereby it agreed to file a registration statement with the Securities and Exchange Commission covering the registration of the shares of common stock issuable upon exercise of the Warrant within 90 days of the closing date of the Revolving Facility. The Company agreed to use its best efforts to have the registration statement declared effective within 180 days of the closing date of the Revolving Facility.

Liquidity.  The Company believes it may have been unable to comply with the covenants and liquidity reserves under the PNC Credit Facility during 2007. Therefore, the Company recently replaced the PNC Credit Facility with the Revolving Facility with Laurus that contains no financial performance covenants or liquidity reserves. At March 31, 2007, based on current forecasts, the Company believes it has sufficient available cash and borrowing capacity under the Revolving Facility to fund its working capital needs over the next twelve months. However, there is no assurance that its forecasts will prove to be accurate, including its forecast that, because of the Company’s performance managing the 2006 C-NET network, it will be awarded the management of the 2007 C-NET network in the event that the USPS decides to operate it. If the demand for the Company’s expedited freight services continues to be negatively impacted by rising fuel prices or general weakness in demand for its air and ground freight products in 2007, or if the Company’s forecasts prove to materially inaccurate, it may need to raise additional funds, supplement its current sources of liquidity during the next twelve months and/or seek material modifications to its Revolving Facility. Substantially all of the Company’s assets are encumbered under the Revolving Facility. If it is required to raise additional funds, supplement its existing sources of liquidity or make modifications to its Revolving Facility and it is unable to do so either on economic terms or at all, the Company’s business may be materially adversely affected.

F-31

EX-10.4

Exhibit 10.4

SECURITY AGREEMENT

LAURUS MASTER FUND, LTD.

KITTY HAWK, INC.

KITTY HAWK CARGO, INC.

KITTY HAWK AIRCARGO, INC.

KITTY HAWK GROUND, INC.

and

KH GROUND, INC.

Dated: March 29, 2007

TABLE OF CONTENTS

		Page
1.	General Definitions and Terms; Rules of Construction		1
2.	Loan Facility		2
3.	Repayment of the Loans		3
4.	Procedure for Loans		4
5.	Interest and Payments		4
6.	Security Interest		5
7.	Representations, Warranties and Covenants Concerning the Collateral		6
8.	Payment of Accounts		9
9.	Collection and Maintenance of Collateral		10
10.	Inspections and Appraisals		10
11.	Financial Reporting		10
12.	Additional Representations and Warranties		12
13.	Covenants		23
14.	Further Assurances		31
15.	Closing Conditions		31
16.	Additional Borrowing Conditions		35
17.	Representations, Warranties and Covenants of Laurus		36
18.	Power of Attorney		38
19.	Term of Agreement		38
20.	Termination of Lien		38
21.	Events of Default		39
22.	Remedies		41
23.	Waivers		42
24.	Expenses		42
25.	Assignment		43
26.	No Waiver; Cumulative Remedies		43
27.	Application of Payments		44
28.	Indemnity		44
29.	Revival		44
30.	Borrowing Agency Provisions		44
31.	Cape Town Convention		45
32.	Notices		46

i

		Page (5)
33.	Governing Law, Jurisdiction and Waiver of Jury Trial		47
34.	Limitation of Liability		48
35.	Miscellaneous		48
36.	Entire Understanding; Maximum Interest		48
37.	Severability		48
38.	Survival		48
39.	Captions		48
40.	Counterparts; Telecopier Signatures		49
41.	Construction		49
42.	Publicity		49
43.	Joinder		49
44.	Legends		49

ii

SECURITY AGREEMENT

     This Security Agreement is made as of March 29, 2007 by and among LAURUS MASTER FUND, LTD., a Cayman Islands company (“Laurus”), KITTY HAWK, INC., a Delaware corporation (the “Parent”), and each party listed on Exhibit A attached hereto (each an “Eligible Subsidiary” and collectively, the “Eligible Subsidiaries”) the Parent and each Eligible Subsidiary, each a “Company” and collectively, the “Companies”).

BACKGROUND

     The Companies have requested that Laurus make advances available to the Companies; and

     Laurus has agreed to make such advances on the terms and conditions set forth in this Agreement.

AGREEMENT

     NOW, THEREFORE, in consideration of the mutual covenants and undertakings and the terms and conditions contained herein, the parties hereto agree as follows:

     1. General Definitions and Terms; Rules of Construction.

     (a) General Definitions. Capitalized terms used in this Agreement shall have the meanings assigned to them in Annex A or elsewhere in this Agreement.

     (b) Accounting Terms. Any accounting terms used in this Agreement, which are not specifically defined, shall have the meanings customarily given them in accordance with GAAP and all financial computations shall be computed, unless specifically provided herein, in accordance with GAAP consistently applied.

     (c) Other Terms. All other terms used in this Agreement and defined in the UCC, shall have the meaning given therein unless otherwise defined herein.

     (d) Rules of Construction. All Schedules, Addenda, Annexes and Exhibits hereto or expressly identified to this Agreement are incorporated herein by reference and taken together with this Agreement constitute but a single agreement. The words “herein”, “hereof” and “hereunder” or other words of similar import refer to this Agreement as a whole, including the Exhibits, Addenda, Annexes and Schedules thereto, as the same may be from time to time amended, modified, restated or supplemented, and not to any particular section, subsection or clause contained in this Agreement. Wherever from the context it appears appropriate, each term stated in either the singular or plural shall include the singular and the plural, and pronouns stated in the masculine, feminine or neuter gender shall include the masculine, the feminine and the neuter. The term “or” is not exclusive, unless the context requires otherwise. The term “including” (or any form thereof) shall not be limiting or exclusive. All references to statutes and related regulations shall include any amendments of same and any successor statutes and regulations. All references in this Agreement or in the Schedules, Addenda, Annexes and Exhibits to this Agreement to sections, schedules, disclosure schedules, exhibits, and attachments shall refer to the corresponding sections, schedules, disclosure schedules, exhibits, and attachments of or to this Agreement. All references to any

instruments or agreements, including references to any of this Agreement or the Ancillary Agreements shall include any and all modifications or amendments thereto and any and all extensions or renewals thereof. If the due date for performance under this Agreement is not a Business Day, the due date shall be extended automatically to the next Business Day following the original due date.

     2. Loan Facility.

     (a) Loans.

          (i) Subject to the terms and conditions set forth herein and in the Ancillary Agreements, Laurus may make loans (the “Loans”) to the Companies from time to time during the Term which, in the aggregate at any time outstanding, will not exceed the lesser of (x) the Capital Availability Amount and (y) an amount equal to (I) the Accounts Availability minus (II) such reserves as Laurus may reasonably in its good faith judgment deem proper and necessary from time to time and of which Laurus gives the Companies five (5) Business Days prior written notice (provided, if an Event of Default has occurred and is continuing, no such prior notice shall be required) (the “Reserves”). The lesser of the amounts derived at any time pursuant to clauses (x) and (y) of the preceding sentence shall be referred to as the “Formula Amount.” The Companies shall, jointly and severally, execute and deliver to Laurus on the Closing Date the Note. The Companies hereby each acknowledge and agree that Laurus’ obligation to purchase the Note from the Companies on the Closing Date shall be contingent upon the satisfaction (or waiver by Laurus in its sole discretion) of the items and matters set forth in the closing checklist provided by Laurus to the Companies on or prior to the Closing Date. The Companies hereby each further acknowledge and agree that, immediately prior to each borrowing hereunder and immediately after giving effect thereto, the Companies shall be deemed to have certified to Laurus that at the time of each such proposed borrowing and also after giving effect thereto (i) there shall exist no Event of Default, (ii) all representations, warranties and covenants made by the Companies in connection with this Agreement and the Ancillary Agreements are true, correct and complete and (iii) all of each Company’s and its respective Subsidiaries’ covenant requirements under this Agreement and the Ancillary Agreements have been met. The Companies hereby agree to provide a certificate confirming the foregoing concurrently with each request for a borrowing hereunder.

          (ii) The Companies acknowledge that Laurus must exercise reasonable discretion in all matters which may increase or decrease the advance percentages used in determining Accounts Availability, based either on the Companies’ past performance, or on its reasonable business prospects, and each of the Companies hereby consent to any such increases or decreases which may limit or restrict advances requested by the Companies.

          (iii) If any interest, fees, costs or charges payable to Laurus hereunder are not paid when due, each of the Companies shall thereby be deemed to have requested, and Laurus is hereby authorized at its discretion to make and charge to the Companies’ account, a Loan as of such date in an amount equal to such unpaid interest, fees, costs or charges.

          (iv) Reserved.

          (v) Laurus will account to Company Agent monthly with a statement of all Loans and other advances, charges and payments made pursuant to this Agreement, and such account rendered by Laurus shall be deemed final, binding and conclusive unless Laurus is notified by

- 2 -

Company Agent in writing to the contrary within thirty (30) days of the date each account was rendered specifying the item or items to which objection is made.

          (vi) During the Term, the Companies may borrow and prepay Loans in accordance with the terms and conditions hereof.

          (vii) If any Eligible Account is not paid by the Account Debtor within ninety (90) days after the date that such Eligible Account was invoiced (a “Delinquent Account”), then, within three (3) Business Days after obtaining knowledge thereof, (A) the Company Agent shall deliver to Laurus a certification as to each Company’s Eligible Accounts prepared on a pro forma basis giving effect to such Delinquent Account and setting forth the Formula Amount on such Business Day and (B) if the outstanding principal amount of the Loans exceeds the Formula Amount as reflected in such pro forma certificate, the Companies shall jointly and severally immediately repay Loans in an amount equal to such excess.

     3. Repayment of the Loans. The Companies (a) may prepay the Obligations from time to time in accordance with the terms and provisions of the Note; (b) shall jointly and severally repay on the expiration of the Term (i) the then aggregate outstanding principal balance of the Loans together with accrued and unpaid interest, fees and charges and; (ii) all other amounts owed Laurus under this Agreement and the Ancillary Agreements; and (c) shall jointly and severally repay on any day on which the then aggregate outstanding principal balance of the Loans are in excess of the Formula Amount at such time, Loans in an amount equal to such excess. Any payments of principal, interest, fees or any other amounts payable hereunder or under any Ancillary Agreement shall be made prior to 12:00 noon (New York time) on the due date thereof in immediately available funds.

     4. Procedure for Loans. Company Agent may by written notice request a borrowing of Loans prior to 11:30 a.m. (New York time) on the Business Day of its request to incur, on such Business Day, a Loan. Together with each request for a Loan (or at such other intervals as Laurus may request), Company Agent shall deliver to Laurus a Borrowing Base Certificate in the form of Exhibit B attached hereto, which shall be certified as true and correct by the Chief Executive Officer, Chief Financial Officer, Chief Accounting Officer or Treasurer of Company Agent together with all supporting documentation relating thereto. All Loans shall be disbursed from whichever office or other place Laurus may designate from time to time and shall be charged to the Companies’ account on Laurus’ books. The proceeds of each Loan made by Laurus shall be made available to Company Agent on the Business Day following the Business Day so requested in accordance with the terms of this Section 4 by way of credit to the applicable Company’s operating account maintained with such bank as Company Agent designated to Laurus. Any and all Obligations due and owing hereunder may be charged to the Companies’ account and shall constitute Loans.

     5. Interest and Payments.

     (a) Interest.

          (i) Except as modified by Section 5(a)(iii) below, the Companies shall jointly and severally pay interest at the Contract Rate on the unpaid principal balance of each Loan until such time as such Loan is collected in full in good funds in dollars of the United States of America.

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          (ii) Interest and payments shall be computed on the basis of actual days elapsed in a year of 360 days. At Laurus’ option, Laurus may charge the Companies’ account for said interest.

          (iii) Effective upon the occurrence of any Event of Default and for so long as any Event of Default shall be continuing, the Contract Rate shall automatically be increased as set forth in the Note (such increased rate, the “Default Rate”), and all outstanding Obligations, including unpaid interest, shall continue to accrue interest from the date of such Event of Default at the Default Rate applicable to such Obligations.

          (iv) In no event shall the aggregate interest payable hereunder or under the Note exceed the maximum rate permitted under any applicable law or regulation, as in effect from time to time (the “Maximum Legal Rate”), and if any provision of this Agreement or any Ancillary Agreement is in contravention of any such law or regulation, interest payable under this Agreement and each Ancillary Agreement shall be computed on the basis of the Maximum Legal Rate (so that such interest will not exceed the Maximum Legal Rate).

          (v) The Companies shall jointly and severally pay principal, interest and all other amounts payable hereunder, or under any Ancillary Agreement, without any deduction whatsoever, including any deduction for any set-off or counterclaim.

     (b) Payment; Certain Closing Conditions.

          (i) Payment. Upon execution of this Agreement by each Company and Laurus, the Companies shall jointly and severally pay to Laurus Capital Management, LLC, the investment advisor of Laurus (“LCM”), a non-refundable payment in an amount equal to three and one-half percent (3.50%) of the Capital Availability Amount. The foregoing payment is referred to herein as the “LCM Payment.” Such payment shall be deemed fully earned on the Closing Date and shall not be subject to rebate or proration for any reason.

          (ii) Overadvance Payment. Without affecting Laurus’ rights hereunder in the event the Loans exceed the Formula Amount (each such event, an “Overadvance”), all such Overadvances shall bear additional interest at a rate equal to two percent (2%) per month of the amount of such Overadvances for all times such amounts shall be in excess of the Formula Amount. All amounts that are incurred pursuant to this Section 5(b)(ii) shall be due and payable by the Companies monthly, in arrears, on the first business day of each calendar month and upon expiration of the Term.

          (iii) Expenses. The Companies shall jointly and severally reimburse Laurus for its expenses (including reasonable legal fees and expenses and expenses of Laurus’ due diligence review of each Company) incurred in connection with the Transactions, including, without limitation, the preparation and negotiation of this Agreement and the Ancillary Agreements. The Companies have previously made a non-refundable deposit of $25,000 to Laurus and such amount shall be credited against the expenses referred to this Section 5(b)(iii). Such expense reimbursement shall be in addition to, and not in lieu of, due diligence fees of $30,000, which the Companies shall jointly and severally pay to Laurus in connection with the Transactions. The Companies shall also jointly and severally pay to Laurus a structuring fee of $50,000. Amounts required to be paid under this Section 5(b)(iii), including, without limitation, legal fees and expenses of Laurus incurred in connection with the Transactions, will be paid on the Closing Date.

- 4 -

          (iv) Financial Information Default. Without affecting Laurus’ other rights and remedies, in the event any Company fails to deliver the financial information required by Section 11 on or before the date required by this Agreement, the Companies shall jointly and severally pay Laurus an aggregate fee in the amount of $500.00 per week (or portion thereof) for each such failure until such failure is cured to Laurus’ satisfaction or waived in writing by Laurus. All amounts that are incurred pursuant to this Section 5(b)(iv) shall be due and payable by the Companies monthly, in arrears, on the first business of each calendar month and upon expiration of the Term.

     6. Security Interest.

     (a) To secure the prompt payment to Laurus of the Obligations, in addition to and not in lieu of the Aircraft Security Documents, each Company hereby assigns, pledges and grants to Laurus a continuing security interest in and Lien upon all of the Collateral. All of each Company’s Books and Records relating to the Collateral shall, until delivered to or removed by Laurus, be kept by such Company in trust for Laurus until all Obligations have been paid in full. Each confirmatory assignment schedule or other form of assignment hereafter executed by each Company shall be deemed to include the foregoing grant, whether or not the same appears therein.

     (b) In addition to the rights of Laurus under the Aircraft Security Documents, each Company hereby (i) authorizes Laurus to file any financing statements, continuation statements or amendments thereto that (x) indicate the Collateral (1) as all assets and personal property of such Company or words of similar effect, regardless of whether any particular asset comprised in the Collateral falls within the scope of Article 9 of the UCC of such jurisdiction, or (2) as being of an equal or lesser scope or with greater detail, and (y) contain any other information required by Part 5 of Article 9 of the UCC for the sufficiency or filing office acceptance of any financing statement, continuation statement or amendment and (ii) ratifies its authorization for Laurus to have filed any initial financial statements, or amendments thereto if filed prior to the date hereof. Each Company acknowledges that it is not authorized to file any financing statement or amendment or termination statement with respect to any financing statement without the prior written consent of Laurus and agrees that it will not do so without the prior written consent of Laurus, subject to such Company’s rights under Section 9-509(d)(2) of the UCC.

     (c) Each Company hereby grants to Laurus an irrevocable, non-exclusive license (exercisable upon the termination of this Agreement due to an occurrence and during the continuance of an Event of Default without payment of royalty or other compensation to such Company) to use, transfer, license or sublicense any Intellectual Property now owned, licensed to, or hereafter acquired by such Company, and wherever the same may be located, and including in such license access to all media in which any of the licensed items may be recorded or stored and to all computer and automatic machinery software and programs used for the compilation or printout thereof, and represents, promises and agrees that any such license or sublicense is not and will not be in conflict with the contractual or commercial rights of any third Person; provided, that such license will terminate on the termination of this Agreement and the payment in full of all Obligations.

     7. Representations, Warranties and Covenants Concerning the Collateral. In addition to, and not in lieu of, any representations, warranties and covenants made by any Company in the Ancillary Documents, including, without limitation, the Aircraft Security Documents, each Company represents, warrants (each of which such representations and warranties shall be deemed repeated upon the making of each request for a Loan and made as of the time of each and every Loan hereunder) and covenants with Laurus that:

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     (a) all of the Collateral (i) is owned by it free and clear of all Liens (including any claims of infringement) except those in Laurus’ favor and Permitted Liens and (ii) is not subject to any agreement prohibiting the granting of a Lien or requiring notice of or consent to the granting of a Lien.

     (b) it shall not encumber, mortgage, pledge, assign or grant any Lien in any Collateral or any other assets to anyone other than Laurus and except for Permitted Liens.

     (c) the Liens granted pursuant to this Agreement, upon due completion of all necessary actions constitute valid perfected security interests in all of the Collateral in favor of Laurus as security for the prompt and complete payment and performance of the Obligations, enforceable in accordance with the terms hereof against any and all of its creditors and purchasers and such security interest is prior to all other Liens in existence on the date hereof.

     (d) no effective security agreement, mortgage, deed of trust, financing statement, equivalent security or Lien instrument or continuation statement covering all or any part of the Collateral is or will be on file or of record in any public office, except those relating to Permitted Liens.

     (e) it shall not dispose of any of its properties or assets, or any of the properties or assets of its Subsidiaries, whether by sale, lease or otherwise except for:

          (i) the sale or other transfer (including, without limitation, installation on leased Aircraft, trucks and trailers) of Equipment consisting of Spare Parts, Tooling Equipment and Ground Equipment (as each such term is defined in the Aircraft Mortgage);

          (ii) Equipment consisting of Engines (as defined in the Aircraft Mortgage) and Aircraft so long as (x) such Equipment is obsolete, is worn-out or is, or will soon be, in need of repairs or servicing that the Company does not believe, in its reasonable business judgment, are in the economic best interest of the Company to make, (y) for the 30 (thirty) days prior to such sale or other disposition the Companies’ Excess Availability exceeds $1,500,000 and (z) at no time during the thirty (30)-day period prior to such sale or other disposition did the Formula Amount exceed the outstanding balance of the Loans by less than $1,000,000, and then only to the extent that (1) the proceeds of any such disposition are used to acquire replacement Equipment which is subject to Laurus’ first priority security interest or are used to repay Loans or to pay general corporate expenses, or (2) following the occurrence of an Event of Default which continues to exist the proceeds of which are remitted to Laurus to be held as cash collateral for the Obligations;

          (iii) the transfer of possession of Equipment pursuant to Civil Reserve Air Fleet Program administered under Executive Order No. 12056, as amended, or any similar or substitute programs of the United States government, so long as (A) the Companies promptly notify Laurus of such transfer of possession and provide Laurus with the name and address of the contracting officer or representative of the Military Aircraft Command of the United States Air Force to whom notice must be given in respect of such Equipment and (B) the Companies use their best efforts to assist Laurus with the assignment of any proceeds thereof;

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          (iv) the consummation of a wet lease, cargo services agreement, charter or similar agreement in the ordinary course of business (individually and collectively, “Cargo Services Agreements”), provided, however, the Companies shall promptly notify Laurus of any such Cargo Services Agreement with a term longer than ninety (90) days; and

          (v) delivery of possession of Equipment to its manufacturer or a certified maintenance provider for testing, service, repair, maintenance or overhaul work or for alterations or modifications for a period not to exceed six (6) months (individually and collectively, “Maintenance Events”), and each Company may temporarily use Equipment loaned from such manufacturer or certified maintenance provider on an Aircraft while any Equipment is in the possession of such manufacturer or maintenance provider.

     (f) it shall defend the right, title and interest of Laurus in and to the Collateral against the claims and demands of all Persons whomsoever, and take such actions, including (i) all actions necessary to grant Laurus “control” of any Investment Property, Deposit Accounts, Letter-of-Credit Rights or electronic Chattel Paper owned by it, with any agreements establishing control to be in form and substance satisfactory to Laurus, (ii) the prompt (but in no event later than five (5) Business Days following Laurus’ request therefor) delivery to Laurus of all original Instruments, Chattel Paper, negotiable Documents and certificated Stock owned by it (in each case, accompanied by stock powers, allonges or other instruments of transfer executed in blank), (iii) notification of Laurus’ interest in Collateral at Laurus’ request, and (iv) the institution of litigation against third parties as shall be prudent in order to protect and preserve its and/or Laurus’ respective and several interests in the Collateral.

     (g) it shall promptly, and in any event within five (5) Business Days after the same is acquired by it, notify Laurus of any commercial tort claim (as defined in the UCC) acquired by it and unless otherwise consented by Laurus, it shall enter into a supplement to this Agreement granting to Laurus a Lien in such commercial tort claim.

     (h) it shall place notations upon its Books and Records and any of its financial statements to disclose Laurus’ Lien in the Collateral.

     (i) if it retains possession of any Chattel Paper or Instrument with Laurus’ consent, upon Laurus’ request such Chattel Paper and Instruments shall be marked with the following legend: “This writing and obligations evidenced or secured hereby are subject to the security interest of Laurus Master Fund, Ltd.” Notwithstanding the foregoing, upon the reasonable request of Laurus, such Chattel Paper and Instruments shall be delivered to Laurus.

     (j) it shall perform in a reasonable time all other steps requested by Laurus to create and maintain in Laurus’ favor a valid perfected first Lien in all Collateral subject only to Permitted Liens.

     (k) it shall notify Laurus promptly and in any event within three (3) Business Days after obtaining knowledge thereof (i) of any event or circumstance that, to its knowledge, would cause Laurus to consider $100,000 or greater, in the aggregate, of any then existing Accounts as no longer constituting Eligible Accounts (other than Accounts which have been collected) since the date of the most recently delivered Borrowing Base Certificate; (ii) of any material delay in its performance of any of its obligations to any Account Debtor; (iii) of any assertion by any Account Debtor of any material claims, offsets or counterclaims; (iv) of any material allowances, credits

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and/or monies granted by it to any Account Debtor; (v) of all material adverse information relating to the financial condition of an Account Debtor; (vi) of any material return of goods; and (vii) of any loss, damage or destruction of any of the Collateral.

     (l) all Eligible Accounts (i) represent complete bona fide transactions which require no further act under any circumstances on its part to make such Accounts payable by the Account Debtors, (ii) are not subject to any present or future contingent offsets or counterclaims, and (iii) do not represent bill and hold sales, consignment sales, guaranteed sales, sale or return or other similar understandings or obligations of any Affiliate or Subsidiary of such Company. It has not made, nor will it make, any agreement with any Account Debtor for any extension of time for the payment of any Account, any compromise or settlement for less than the full amount thereof, any release of any Account Debtor from liability therefor, or any deduction therefrom except in the ordinary course of its business consistent with historical practice and as previously disclosed to Laurus in writing.

     (m) it shall not permit any of its Equipment to become a Fixture to real estate or accessions to other personal property.

     (n) it shall maintain and keep all of its Books and Records concerning the Collateral at its executive offices listed in Schedule 12(dd).

     (o) it shall maintain and keep the tangible Collateral at the addresses listed in Schedule 12(dd), and will not change such locations (except in connection with Maintenance Events, with respect to the movement of the Aircraft, trucks, tractors and trailers in the ordinary course of business or Collateral disposed of as permitted pursuant to Section 7(e) hereof) or open a new location, without at least thirty (30) days prior written notice to Laurus of such changes or new location and (ii) prior to such change or opening of a new location where Collateral having a value of more than $50,000 will be located, it executes and delivers to Laurus such agreements deemed reasonably necessary or prudent by Laurus, including landlord agreements, mortgagee agreements and warehouse agreements, each in form and substance satisfactory to Laurus, to adequately protect and maintain Laurus’ security interest in such Collateral.

     (p) Schedule 7(p) lists all banks and other financial institutions at which it maintains deposits and/or other accounts, and such Schedule correctly identifies the name, address and telephone number of each such depository, the name in which the account is held, a description of the purpose of the account, and the complete account number. It shall not establish any depository or other bank account with any financial institution (other than the accounts set forth on Schedule 7(p)) without Laurus’ prior written consent.

     (q) All Inventory manufactured by it in the United States of America shall be produced in accordance with the requirements of the Federal Fair Labor Standards Act of 1938, as amended and all rules, regulations and orders related thereto or promulgated thereunder.

     8. Payment of Accounts.

     (a) Each Company will irrevocably direct all of its present and future Account Debtors and other Persons obligated to make payments constituting Collateral to make such payments directly to the lockboxes maintained by such Company (the “Lockboxes”) with PNC Bank, National Association or such other financial institution accepted by Laurus in writing as may be

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selected by such Company (the “Lockbox Bank”) pursuant to the terms of the certain agreements among one or more Companies, Laurus and/or the Lockbox Bank dated as of March 28, 2007. On or prior to the Closing Date, each Company shall and shall cause the Lockbox Bank to enter into all such documentation acceptable to Laurus pursuant to which, among other things, the Lockbox Bank agrees to: (a) sweep the Lockbox on a daily basis and deposit all checks received therein to an account designated by Laurus in writing and (b) comply only with the instructions or other directions of Laurus concerning the Lockbox. All of each Company’s invoices, account statements and other written or oral communications directing, instructing, demanding or requesting payment of any Account of any Company or any other amount constituting Collateral shall conspicuously direct that all payments be made to the Lockbox or such other address as Laurus may direct in writing. If, notwithstanding the instructions to Account Debtors, any Company receives any payments, such Company shall immediately remit such payments to Laurus in their original form with all necessary endorsements. Until so remitted, such Company shall hold all such payments in trust for and as the property of Laurus and shall not commingle such payments with any of its other funds or property.

     (b) At Laurus’ election, following the occurrence of an Event of Default which is continuing, Laurus may notify each Company’s Account Debtors of Laurus’ security interest in the Accounts, collect them directly and charge the collection costs and expenses thereof to each Company’s and the Eligible Subsidiaries’ joint and several account.

     9. Collection and Maintenance of Collateral.

     (a) Upon five (5) Business Days prior written notice (provided, if an Event of Default has occurred and is continuing no such prior notice shall be required), Laurus may verify each Company’s Accounts from time to time, but not more often than once every three (3) months, unless an Event of Default has occurred and is continuing or Laurus believes that such verification is necessary to preserve or protect the Collateral, utilizing an audit control company or any other agent of Laurus.

     (b) Proceeds of Accounts received by Laurus will be deemed received on the Business Day after Laurus’ receipt of such proceeds in good funds in dollars of the United States of America to an account designated by Laurus. Any amount received by Laurus after 12:00 noon (New York time) on any Business Day shall be deemed received on the next Business Day.

     (c) As Laurus receives the proceeds of Accounts of any Company, it shall (i) apply such proceeds, as required, to amounts outstanding under the Note, and (ii) remit all such remaining proceeds (net of interest, fees and other amounts then due and owing to Laurus hereunder) to Company Agent (for the benefit of the applicable Companies) upon request. Notwithstanding the foregoing, following the occurrence and during the continuance of an Event of Default, Laurus, at its option, may (a) apply such proceeds to the Obligations in such order as Laurus shall elect, (b) hold all such proceeds as cash collateral for the Obligations and each Company hereby grants to Laurus a security interest in such cash collateral amounts as security for the Obligations and/or (c) do any combination of the foregoing.

     10. Inspections and Appraisals. At all times during normal business hours, and upon reasonable prior notice, Laurus, and/or any agent of Laurus shall have the right to (a) have access to, visit, inspect, review, evaluate and make physical verification and appraisals of each Company’s properties and the Collateral, (b) inspect, audit and copy (or take originals if necessary) and make extracts from each Company’s Books and Records, including management letters prepared

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by the Accountants, and (c) discuss with each Company’s directors, principal officers, and independent accountants, each Company’s business, assets, liabilities, financial condition, results of operations and business prospects. Each Company will deliver to Laurus any instrument necessary for Laurus to obtain records from any service bureau maintaining records for such Company. If an Event of Default has occurred and is continuing and any internally prepared financial information, including that required under this Section is unsatisfactory in any manner to Laurus, Laurus may request that the Accountants review the same.

     11. Financial Reporting. Company Agent will deliver, or cause to be delivered, to Laurus each of the following, which shall be in form and detail acceptable to Laurus:

     (a) As soon as available, and in any event within ninety (90) days after the end of each fiscal year of the Parent (or one hundred five (105) days after the end of any fiscal year for which the Parent has filed a Form 12b-25 (or successor form) with the SEC extending the filing date for its Annual Report on Form 10-K for such fiscal year), the Parent’s audited financial statements and each Company’s unaudited financial statements with a report of independent certified public accountants of recognized standing selected by the Parent and acceptable to Laurus (the “Accountants”), which annual financial statements of the Parent shall be without qualification and without limitation as to the scope of audit and shall include each of the Parent’s and each of its Subsidiaries’ balance sheet as at the end of such fiscal year and the related statements of each of the Parent’s and each of its Subsidiaries’ income, retained earnings and cash flows for the fiscal year then ended, prepared on a consolidating and consolidated basis to include the Parent and each Subsidiary of the Parent, all in reasonable detail and prepared in accordance with GAAP, together with (i) if and when available, copies of any management letters prepared by the Accountants; and (ii) a certificate of the Parent’s President, Chief Executive Officer or Chief Financial Officer stating that such financial statements have been prepared in accordance with GAAP and whether or not such officer has knowledge of the occurrence of any Default or Event of Default hereunder and, if so, stating in reasonable detail the facts with respect thereto;

     (b) As soon as available and in any event within forty five (45) days after the end of each fiscal quarter of the Parent (or fifty (50) days after the end of any fiscal quarter for which the Parent has filed a Form 12b-25 (or successor form) with the SEC extending the filing date for its Quarterly Report on Form 10-Q for such fiscal quarter), an unaudited/internal balance sheet and statements of income, retained earnings and cash flows of each of the Parent and each of its Subsidiaries as at the end of and for such quarter and for the year to date period then ended, prepared on a consolidating and consolidated basis to include the Parent and each Subsidiary of the Parent, in reasonable detail and stating in comparative form the figures for the corresponding date and periods in the previous year, all prepared in accordance with GAAP, subject to year-end adjustments and accompanied by a certificate of the Parent’s President, Chief Executive Officer or Chief Financial Officer, stating (i) that such financial statements have been prepared in accordance with GAAP, subject to year-end audit adjustments, and (ii) whether or not such officer has knowledge of the occurrence of any Default or Event of Default hereunder not theretofore reported and remedied and, if so, stating in reasonable detail the facts with respect thereto;

     (c) As soon as available and in any event within thirty (30) days after the end of each calendar month, an unaudited/internal balance sheet and statements of income, retained earnings and cash flows of each of the Parent and its Subsidiaries as at the end of and for such month and for the year to date period then ended, prepared on a consolidating and consolidated basis to include the Parent and each Subsidiary of the Parent, in reasonable detail and stating in comparative form the

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figures for the corresponding date and periods in the previous year, all prepared in accordance with GAAP, subject to year-end adjustments and accompanied by a certificate of the Parent’s President, Chief Executive Officer or Chief Financial Officer, stating (i) that such financial statements have been prepared in accordance with GAAP, subject to year-end audit adjustments, and (ii) whether or not such officer has knowledge of the occurrence of any Default or Event of Default hereunder not theretofore reported and remedied and, if so, stating in reasonable detail the facts with respect thereto;

     (d) Within fifteen (15) days after the end of each month (or more frequently if an Event of Default has occurred and is continuing), agings of each Company’s Accounts, unaudited trial balances and their accounts payable and a calculation of each Company’s Accounts and Eligible Accounts, provided, however, that if Laurus shall request the foregoing information more often than as set forth in the immediately preceding clause, each Company shall have fifteen (15) days from each such request to comply with Laurus’ demand;

     (e) Promptly after (i) the filing thereof, copies of the Parent’s most recent registration statements and annual, quarterly, monthly or other regular reports which the Parent files with the Securities and Exchange Commission (the “SEC”), unless such information is available to Parent on the SEC’s EDGAR system, and (ii) the issuance thereof, copies of such financial statements, reports and proxy statements as the Parent shall send to its stockholders, unless such information is available to Parent on the SEC’s EDGAR system.

     (f) The Parent shall deliver, or cause the applicable Subsidiary of the Parent to deliver, such other information, as Laurus shall reasonably request.

     12. Additional Representations and Warranties. Each Company hereby represents and warrants to Laurus as follows:

     (a) Organization, Good Standing and Qualification. It and each of its Subsidiaries is a corporation, partnership or limited liability company, as the case may be, duly organized, validly existing and in good standing under the laws of its jurisdiction of organization. It and each of its Subsidiaries has the corporate, limited liability company or partnership, as the case may be, power and authority to own and operate its properties and assets and, insofar as it is or shall be a party thereto, to (i) execute and deliver this Agreement and the Ancillary Agreements, (ii) to issue and sell the Note, (iii) to issue and sell the Warrants and the shares of Common Stock issuable upon exercise of the Warrants (the “Warrant Shares”), and to (iv) carry out the provisions of this Agreement and the Ancillary Agreements and to carry on its business as presently conducted. It and each of its Subsidiaries is duly qualified and is authorized to do business and is in good standing as a foreign corporation, partnership or limited liability company, as the case may be, in all jurisdictions in which the nature or location of its activities and of its properties (both owned and leased) makes such qualification necessary, except for those jurisdictions in which failure to do so has not had, or could not reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect.

     (b) Subsidiaries. Each of its direct and indirect Subsidiaries, the direct owner of each such Subsidiary and its percentage ownership thereof, is set forth on Schedule 12(b).

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     (c) Capitalization; Voting Rights.

          (i) The authorized capital stock of the Parent, as of the date hereof consists of 110,000,000 shares, of which 100,000,000 are shares of Common Stock, par value $0.000001 per share, 52,925,896 shares of which are issued and outstanding, and 10,000,000 are shares of preferred stock, par value $0.01 per share of which 15,000 shares have been designated as Series B redeemable Preferred Stock and 14,550 shares of such series are issued and outstanding. The authorized, issued and outstanding capital stock of each Subsidiary of each Company is set forth on Schedule 12(c).

          (ii) Except as disclosed on Schedule 12(c), other than: (i) the shares reserved for issuance under the Parent’s stock option plans; and (ii) shares which may be issued pursuant to this Agreement and the Ancillary Agreements, there are no outstanding options, warrants, rights (including conversion or preemptive rights and rights of first refusal), proxy or stockholder agreements, or arrangements or agreements of any kind for the purchase or acquisition from the Parent of any of its securities. Except as disclosed on Schedule 12(c), neither the offer, issuance or sale of any of the Note or the Warrants, or the issuance of any of the Warrant Shares, nor the consummation of any transaction contemplated hereby will result in a change in the price or number of any securities of the Parent outstanding, under anti-dilution or other similar provisions contained in or affecting any such securities.

          (iii) All issued and outstanding shares of the Parent’s Common Stock: (i) have been duly authorized and validly issued and are fully paid and nonassessable; and (ii) were issued in material compliance with all applicable state and federal laws concerning the issuance of securities.

          (iv) The rights, preferences, privileges and restrictions of the shares of the Common Stock are as stated in the Parent’s Certificate of Incorporation, as amended (the “Charter”). The Warrant Shares have been duly and validly reserved for issuance. When issued in compliance with the provisions of this Agreement and the Parent’s Charter, the Securities will be validly issued, fully paid and nonassessable, and will be free of any liens or encumbrances (other than those granted by Laurus); provided, however, that the Securities may be subject to restrictions on transfer under state and/or federal securities laws and all other law applicable to Certified Air Carriers as set forth herein or as otherwise required by such laws at the time a transfer is proposed. Except as set forth in Schedule 12(c), no Company is presently under any obligation, and has not granted any rights to register any of its presently outstanding securities or any of its securities that may hereafter be issued. Except as set forth in Schedule 12(c), to knowledge of the Companies, none of their stockholders have entered into any agreement with respect to its voting of equity securities.

     (d) Authorization; Binding Obligations. All corporate, partnership or limited liability company, as the case may be, action on its and its Subsidiaries’ part (including their respective officers and directors) necessary for the authorization of this Agreement and the Ancillary Agreements, the performance of all of its and its Subsidiaries’ obligations hereunder and under the Ancillary Agreements on the Closing Date and, the authorization, issuance and delivery of the Note and the Warrant has been taken or will be taken prior to the Closing Date. This Agreement and the Ancillary Agreements, when executed and delivered and to the extent it is a party thereto, will be its and its Subsidiaries’ valid and binding obligations enforceable against each such Person in accordance with their terms, except:

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          (i) as limited by applicable bankruptcy, insolvency, reorganization, moratorium or other laws of general application affecting enforcement of creditors’ rights; and

          (ii) general principles of equity that restrict the availability of equitable or legal remedies.

     The issuance of the Note is not and will not be subject to any preemptive rights or rights of first refusal that have not been properly waived or complied with. The issuance of the Warrants and the subsequent exercise of the Warrants for Warrant Shares are not and will not be subject to any preemptive rights or rights of first refusal that have not been properly waived or complied with.

     (e) Citizenship of Stockholders. As of the Closing Date, each of the stockholders of record of Kitty Hawk Aircargo, Inc. is a Citizen of the United States.

     (f) Voting Trust. Except as set forth on Schedule 12(f), to the Parent’s knowledge, there are no voting trusts, proxies, or agreements relating to the voting of the Parent’s Common Stock by or among the Parent or any of its stockholders.

     (g) Air Carrier. Kitty Hawk Aircargo, Inc. is a Certificated Air Carrier.

     (h) Liabilities; Solvency. (i) Neither it nor any of its Subsidiaries has any liabilities, except current liabilities incurred in the ordinary course of business and liabilities disclosed in any Exchange Act Filings.

          (ii) Both before and after giving effect to (a) the Loans incurred on the Closing Date or such other date as Loans requested hereunder are made or incurred, (b) the disbursement of the proceeds of, or the assumption of the liability in respect of, such Loans pursuant to the instructions or agreement of any Company and (c) the payment and accrual of all transaction costs in connection with the foregoing, each Company and each Subsidiary of each Company, is and will be, Solvent.

     (i) Agreements; Action. Except as set forth on Schedule 12(i) or as disclosed in any Exchange Act Filings:

          (i) There are no agreements, understandings, instruments, contracts, judgments, orders, writs or decrees to which it or any of its Subsidiaries is a party or to its knowledge by which it is bound which may involve: (i) obligations (contingent or otherwise) of, or payments to, it or any of its Subsidiaries in excess of $500,000 per annum (other than ordinary course obligations); or (ii) the transfer or license of any patent, copyright, trade secret or other proprietary right to or from it (other than any commercial “off-the-shelf” software license such as certain “shrink-wrap” licenses and any other intellectual property licenses which are nonexclusive, terminable and available to businesses at a market price); or (iii) contractual provisions restricting the development, manufacture or distribution of its or any of its Subsidiaries’ products or services; or (iv) indemnification by it or any of its Subsidiaries with respect to infringements of proprietary rights (other than any commercial “off-the-shelf” software license such as certain “shrink-wrap” licenses and any other intellectual property licenses which are nonexclusive, terminable and available to businesses at a market price).

          (ii) Since December 31, 2005 (the “Balance Sheet Date”), neither it nor any of its Subsidiaries has: (i) declared or paid any dividends, or authorized or made any distribution

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upon or with respect to any class or series of its capital stock, except dividends in the amount of approximately $407,044.67 paid to holders of the Series B Preferred Stock on June 30, 2006; (ii) incurred any Indebtedness or any other liabilities (other than ordinary course obligations and obligations with regard to Equipment, Inventory and Aircraft) individually in excess of $50,000 or, in the case of Indebtedness and/or liabilities individually less than $50,000, in excess of $100,000 in the aggregate; (iii) made any loans or advances to any Person not in excess, individually or in the aggregate, of $100,000, other than ordinary advances for travel expenses; or (iv) sold, exchanged or otherwise disposed of any of its assets or rights, other than the sale of its Inventory and Equipment in the ordinary course of business.

     (iii) For the purposes of subsections (i) and (ii) of this Section 12(i), all Indebtedness, liabilities, agreements, understandings, instruments, contracts and proposed transactions involving the same Person (including Persons it or any of its applicable Subsidiaries has reason to believe are affiliated therewith or with any Subsidiary thereof) shall be aggregated for the purpose of meeting the individual minimum dollar amounts of such subsections.

     (iv) The Parent has established and maintains disclosure controls and procedures (the “Disclosure Controls”) (as defined in Rule 13a-15 under the Exchange Act). Such disclosure controls and procedures are designed to ensure that material information relating to the Parent, including its Subsidiaries, is made known to the Parent’s principal executive officer and its principal financial officer by others within those entities, particularly during the periods in which the periodic reports required under the Exchange Act are being prepared. Based on the Parent’s evaluation of internal controls as of the end of the period covered by the Parent’s most recent quarterly report on Form 10-Q (the “Evaluation Time”), such Disclosure Controls were effective at the Evaluation Time in timely alerting the Parent’s principal executive officer and principal financial officer to material information required to be included in the Parent’s periodic reports required under the Exchange Act. No event, circumstance or event has occurred since the Evaluation Time that would cause the Parent to believe that the Parent’s Disclosure Controls are not currently effective in any material respect.

     (v) The Parent makes and keeps books, records, and accounts that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of its assets. It maintains internal control over financial reporting (“Financial Reporting Controls”) designed by, or under the supervision of, its principal executive and principal financial officers, and effected by its board of directors, management, and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP, including those policies and procedures that:

          (1) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of its assets;

          (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that its receipts and expenditures are being made only in accordance with authorizations of its management and directors; and

          (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of its assets that could have a material effect on the financial statements.

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          (vi) The Parent has established and maintains a system of internal control over financial reporting (as defined in Rule 13a-15 under the Exchange Act). Based on the evaluation of the Parent’s internal control over financial reporting at the Evaluation Time by the Parent’s Chief Executive Officer and Chief Financial Officer, such internal control over financial reporting was, at the Evaluation Time, sufficient to provide reasonable assurance regarding the reliability of the Parent’s financial reporting and the preparation of Parent financial statements for external purposes in accordance with GAAP. No event, circumstance or event has occurred since the Evaluation Time that would cause the Parent to believe that the Parent’s internal controls are not currently effective in any material respect.

     (j) Obligations to Related Parties. Except as set forth on Schedule 12(j), neither it nor any of its Subsidiaries has any obligations to their respective officers, directors, stockholders or employees other than:

          (i) for payment of salary for services rendered and for bonus payments;

          (ii) reimbursement for reasonable expenses incurred on its or its Subsidiaries’ behalf;

          (iii) for other standard employee benefits made generally available to all employees (including stock option agreements outstanding under any stock option plan approved by its and its Subsidiaries’ Board of Directors, as applicable); and

          (iv) obligations listed in its and each of its Subsidiary’s financial statements or disclosed in any of the Parent’s Exchange Act Filings.

Except as described above or set forth on Schedule 12(j), none of its executive officers, directors or, to the best of its knowledge, key employees, any of its Subsidiaries or any members of their immediate families, are indebted to it or any of its Subsidiaries, individually or in the aggregate, in excess of $50,000 or have any direct or indirect ownership interest in any Person with which it or any of its Subsidiaries is affiliated (other than Parent and its Subsidiaries) or with which it or any of its Subsidiaries has a material business relationship, or any Person which competes with it or any of its Subsidiaries, other than passive investments in publicly traded companies (representing less than one percent (1%) of such company) which may compete with it or any of its Subsidiaries. Except as described above, as disclosed in the Parent’s Exchange Act Filings or as set forth in Schedule 12(j), none of its executive officers or directors, or any member of their immediate families, is, directly or indirectly, interested in any material contract with it or any of its Subsidiaries and no material agreements, understandings or proposed transactions are contemplated between it or any of its Subsidiaries and any such Person. Except as set forth on Schedule 12(j), neither it nor any of its Subsidiaries is a guarantor or indemnitor of any Indebtedness of any other Person (other than Parent and its Subsidiaries).

     (k) Changes. Except as set forth on Schedule 12(k), since the Balance Sheet Date, except as disclosed in any Exchange Act Filing or in any Schedule to this Agreement or to any of the Ancillary Agreements, there has not been:

          (i) any change in its or any of its Subsidiaries’ business, assets, liabilities, condition (financial or otherwise), properties, operations or prospects, which, individually or in the aggregate, has had, or could reasonably be expected to have, a Material Adverse Effect;

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          (ii) any resignation or termination of any of its or its Subsidiaries’ executive officers, key employees or groups of employees;

          (iii) any material change, except in the ordinary course of business, in its or any of its Subsidiaries’ contingent obligations by way of guaranty, endorsement, indemnity, warranty or otherwise;

          (iv) any damage, destruction or loss, whether or not covered by insurance, which has had, or could reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect;

          (v) any waiver by it or any of its Subsidiaries of a valuable right or of a material debt owed to it;

          (vi) any direct or indirect material loans made by it or any of its Subsidiaries to any of its or any of its Subsidiaries’ stockholders, employees, executive officers or directors, other than advances made in the ordinary course of business;

          (vii) any material change in any compensation arrangement or agreement with it or any of its Subsidiaries and any key employee, executive officer, director or stockholder;

          (viii) any declaration or payment of any dividend (other than as set forth in Section 7(i)(ii) as to dividends in respect of shares of Series B Preferred Stock) or other distribution of its or any of its Subsidiaries’ assets;

          (ix) any labor organization activity related to it or any of its Subsidiaries;

          (x) any debt, obligation or liability incurred, assumed or guaranteed by it or any of its Subsidiaries, except those for immaterial amounts and for current liabilities incurred in the ordinary course of business;

          (xi) any sale, assignment or transfer of any Intellectual Property or other intangible assets;

          (xii) any change in any material agreement to which it or any of its Subsidiaries is a party or by which either it or any of its Subsidiaries is bound which, either individually or in the aggregate, has had, or could reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect;

          (xiii) any other event or condition of any character that, either individually or in the aggregate, has had, or could reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect; or

          (xiv) any arrangement or commitment by it or any of its Subsidiaries to do any of the acts described in subsection (i) through (xiii) of this Section 12(k).

     (l) Title to Properties and Assets; Liens, Etc. Except as set forth on Schedule 12(l), it and each of its Subsidiaries has good and marketable title to their respective properties and assets, and good title to its leasehold interests, in each case subject to no Lien, other than Permitted Liens. All material facilities, Equipment, Fixtures, vehicles and other properties

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owned or leased by it or any of its Subsidiaries are in good operating condition and repair (other than the Parked Aircraft) and are reasonably fit and usable for the purposes for which they are being used. Except as set forth on Schedule 12(l), it and each of its Subsidiaries is in compliance with all material terms of each lease to which it is a party or is otherwise bound. Without limiting any provisions of the foregoing Section 12(l), the Aircraft (other than the Parked Aircraft) are in such condition so as to enable the airworthiness certificate of such Aircraft to be in good standing under the regulations of the FAA and DOT and have been certified by the FAA as to type and airworthiness, there is in effect with respect to such Aircraft a current and valid airworthiness certificate issued by the FAA and there is no fact known to the Companies that materially adversely affect the value, utility or condition of such Aircraft when compared to the carrying value of such Aircraft on the Company’s balance sheet or that has not been disclosed to Laurus.

     (m) Intellectual Property.

          (i) It and each of its Subsidiaries owns or possesses sufficient legal rights to all Intellectual Property necessary for their respective businesses as now conducted and, to its knowledge as presently proposed to be conducted, without any known infringement of the rights of others. There are no outstanding options, licenses or agreements of any kind relating to its or any of its Subsidiary’s owned Intellectual Property, nor is it or any of its Subsidiaries bound by or a party to any options, licenses or agreements of any kind with respect to the Intellectual Property of any other Person (other than any commercial “off-the-shelf” software license such as certain “shrink-wrap” licenses and any other intellectual property licenses which are nonexclusive, terminable and available to businesses at a market price).

          (ii) Since December 31, 2005, neither it nor any of its Subsidiaries has received any communications alleging that it or any of its Subsidiaries has violated any of the Intellectual Property or other proprietary rights of any other Person, nor is it or any of its Subsidiaries aware of any basis therefor.

          (iii) Neither it nor any of its Subsidiaries believes it is or will be necessary to utilize any inventions, trade secrets or proprietary information of any of its employees made prior to their employment by it or any of its Subsidiaries, except for inventions, trade secrets or proprietary information that have been rightfully assigned to it or any of its Subsidiaries.

     (n) Compliance with Other Instruments. Neither it nor any of its Subsidiaries is in violation or default of (x) any term of its Charter or bylaws, or (y) any provision of any Indebtedness, mortgage, indenture, contract, agreement or instrument to which it is party or by which it is bound or of any judgment, decree, order or writ, which violation or default, in the case of this clause (y), has had, or could reasonably be expected to have, either individually or in the aggregate, a Material Adverse Effect. The execution, delivery and performance of and compliance with this Agreement and the Ancillary Agreements to which it is a party, and the issuance of the Note and the other Securities each pursuant hereto and thereto, will not, with or without the passage of time or giving of notice, result in any such violation or be in conflict with any term of its Charter or bylaws or result in any such material violation, or be in material conflict with or constitute a material default under any such provision, or result in the creation of any Lien upon any of its or any of its Subsidiary’s properties or assets or the suspension, revocation, impairment, forfeiture or nonrenewal of any permit, license, authorization or approval applicable to it or any of its Subsidiaries, their businesses or operations or any of their assets or properties.

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     (o) Litigation. Except as set forth on Schedule 12(o), there is no action, suit, proceeding or investigation pending or, to its knowledge, currently threatened against it or any of its Subsidiaries that prevents it or any of its Subsidiaries from entering into this Agreement or the Ancillary Agreements, or from consummating the transactions contemplated hereby or thereby, or which has had, or could reasonably be expected to have, either individually or in the aggregate, a Material Adverse Effect, or could result in any change in its or any of its Subsidiaries’ current equity ownership, nor is it aware that there is any basis to assert any of the foregoing. Neither it nor any of its Subsidiaries is a party to or subject to the provisions of any order, writ, injunction, judgment or decree of any court or government agency or instrumentality which has had, or could reasonably be expected to have, either individually or in the aggregate, a Material Adverse Effect. There is no action, suit, proceeding or investigation by it or any of its Subsidiaries currently pending or which it or any of its Subsidiaries intends to initiate which has had, or could reasonably be expected to have, either individually or in the aggregate, a Material Adverse Effect. Except as set forth on Schedule 12 (o), no Company is a party to or, to its knowledge, target of or subject to any DOT, FAA or TSA investigation, cease and desist order, civil penalty notice or action, notice of proposed certificate action, orders suspending, revoking, or modifying or seeking to suspend, revoke or modify its DOT or FAA authority to engage in air transportation or any similar enforcement action, which could reasonably be expected to have either individually or in the aggregate a Material Adverse Effect. Except as set forth on Schedule 12 (o), no Company is aware of any facts, circumstances, conditions or events that such Company reasonably believes would result in any such action that would have a Material Adverse Effect upon such Company.

     (p) Tax Returns and Payments. It and each of its Subsidiaries has timely filed all tax returns (federal, state and local) required to be filed by it or have timely filed for extensions thereof. All taxes shown to be due and payable on such returns, any assessments imposed, and all other taxes due and payable by it and each of its Subsidiaries on or before the Closing Date, have been paid or will be paid prior to the time they become delinquent, other than those being contested in good faith. Except as set forth on Schedule 12(p), neither it nor any of its Subsidiaries has been advised:

          (i) that any of its returns, federal, state or other, have, since the Balance Sheet Date, been or are being audited as of the date hereof; or

          (ii) of any adjustment, deficiency, assessment or court decision in respect of its federal, state or other taxes.

Neither it nor any of its Subsidiaries has any knowledge of any liability of any tax to be imposed upon its properties or assets as of the date of this Agreement that is not adequately provided for.

     (q) Employees. Except as set forth on Schedule 12(q), neither it nor any of its Subsidiaries has any collective bargaining agreements with any of its employees. Except as disclosed in the Exchange Act Filings, there is no labor union organizing activity pending or, to its knowledge, threatened with respect to it or any of its Subsidiaries. Except as disclosed in the Exchange Act Filings or on Schedule 12(q), neither it nor any of its Subsidiaries is a party to or bound by any currently effective employment contract, deferred compensation arrangement, bonus plan, incentive plan, profit sharing plan, retirement agreement or other employee compensation plan or agreement. To its knowledge, none of its or any of its Subsidiaries’ employees, nor any consultant with whom it or any of its Subsidiaries has contracted, is in violation of any term of any employment contract, proprietary information agreement or any other agreement relating to the right of any such

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individual to be employed by, or to contract with, it or any of its Subsidiaries because of the nature of the business to be conducted by it or any of its Subsidiaries; and to its knowledge the continued employment by it and its Subsidiaries of their present employees, and the performance of its and its Subsidiaries contracts with its independent contractors, will not result in any such violation. To its knowledge, neither it nor any of its Subsidiaries is aware that any of its or any of its Subsidiaries’ employees is obligated under any contract (including licenses, covenants or commitments of any nature) or other agreement, or subject to any judgment, decree or order of any court or administrative agency that would interfere with their duties to it or any of its Subsidiaries. Neither it nor any of its Subsidiaries has received any notice alleging that any such violation has occurred. Except for employees who have a current effective employment agreement with it or any of its Subsidiaries, none of its or any of its Subsidiaries’ employees has been granted the right to continued employment by it or any of its Subsidiaries or to any material compensation following termination of employment with it or any of its Subsidiaries. Except as set forth on Schedule 12(q), neither it nor any of its Subsidiaries is aware that any executive officer, key employee or group of employees intends to terminate his, her or their employment with it or any of its Subsidiaries, as applicable, nor does it or any of its Subsidiaries have a present intention to terminate the employment of any executive officer, key employee or group of employees.

     (r) Registration Rights and Voting Rights. Except as set forth on Schedule 12(r) and except as disclosed in Exchange Act Filings, neither it nor any of its Subsidiaries is presently under any obligation, and neither it nor any of its Subsidiaries has granted any rights, to register any of its or any of its Subsidiaries’ presently outstanding securities or any of its securities that may hereafter be issued.

     (s) Compliance with Laws; Permits. Neither it nor any of its Subsidiaries is in violation of the Sarbanes-Oxley Act of 2002 or any SEC related regulation or rule or any rule of the Principal Market promulgated thereunder or any other applicable statute, rule, regulation, order or restriction of any domestic or foreign government or any instrumentality or agency thereof in respect of the conduct of its business or the ownership of its properties which has had, or could reasonably be expected to have, either individually or in the aggregate, a Material Adverse Effect. No governmental orders, permissions, consents, approvals or authorizations are required to be obtained and no registrations or declarations are required to be filed in connection with the execution and delivery of this Agreement or any Ancillary Agreement and the issuance of any of the Securities, except (i) those required under the Registration Rights Agreement and (ii) such as have been duly and validly obtained or filed, or with respect to any filings that must be made after the Closing Date, as will be filed in a timely manner. It and each of its Subsidiaries has all FAA and DOT permits and licenses and similar authority necessary for the conduct of its business. It and each of its Subsidiaries has all other material franchises, permits, licenses and any similar authority necessary for the conduct of its business as now being conducted by it, the lack of which could, either individually or in the aggregate, reasonably be expected to have a Material Adverse Effect.

     (t) Environmental and Safety Laws. Neither it nor any of its Subsidiaries is in material violation of any applicable local, state, federal, or foreign statute, regulation or rule, ordinance, order or other law relating to the environment or to the protection of public health and welfare or occupational health and safety (collectively, “E&S Law”), and to its knowledge, no material expenditures are or will be required in order to comply with any such E&S Law or to satisfy any reasonably anticipated liability arising under any E&S Law or the common law. Except (i) for use in the ordinary course of business in compliance with E&S Law and in a manner that is not reasonably likely to give rise to material liability or responsibility under any E&S Law or the

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common law or (ii) as set forth on Schedule 12(t), no Hazardous Materials (as defined below) are used or have been used, stored, or disposed of by it or any of its Subsidiaries or, to its knowledge, by any other Person on any property presently or formerly owned, leased or used by it or any of its Subsidiaries. For the purposes of the preceding sentence, “Hazardous Materials” shall mean: materials that are listed or defined as “hazardous” or “toxic” or “pollutants or contaminants” under any E&S Law, including those laws that govern the existence and/or remedy of contamination on property, the protection of the environment from contamination, the control of hazardous or other wastes, or other activities involving those types of materials, including, without limitation, building materials, any petroleum and petroleum products and byproducts, nuclear materials, asbestos, and polychlorinated biphenyls.

     (u) Valid Offering. Assuming the accuracy of the representations and warranties of Laurus contained in this Agreement, the offer and issuance of the Securities will be exempt from the registration requirements of the Securities Act of 1933, as amended (the “Securities Act”), and will have been registered or qualified (or are exempt from registration and qualification) under the registration, permit or qualification requirements of all applicable state securities laws.

     (v) Full Disclosure. As of the date of this Agreement, it and each of its Subsidiaries has provided Laurus with substantially all information requested by Laurus in connection with Laurus’ decision to enter into this Agreement. Neither this Agreement, the Ancillary Agreements nor the exhibits and schedules hereto and thereto nor any other document delivered by it or any of its Subsidiaries to Laurus or its attorneys or agents in connection herewith or therewith or with the transactions contemplated hereby or thereby, contain any untrue statement of a material fact nor omit to state a material fact necessary in order to make the statements contained herein or therein, in light of the circumstances in which they are made, not misleading, in each case as of their respective dates. Any financial projections and other estimates provided to Laurus by it or any of its Subsidiaries were based on its and its Subsidiaries’ experience in the industry and on assumptions of fact and opinion as to future events which it or any of its Subsidiaries, at the date of the issuance of such projections or estimates, believed to be reasonable.

     (w) Insurance. It and each of its Subsidiaries has general commercial, product liability, fire and casualty insurance policies with coverages, which it believes are customary for companies similarly situated to it and its Subsidiaries in the same or similar business.

     (x) SEC Reports and Financial Statements. Since the Balance Sheet Date, except as set forth on Schedule 12(x) and excluding filings on Form 8-K, Form 3, Form 4 and Form 5, it and each of its Subsidiaries has filed all proxy statements, reports and other documents required to be filed by it under the Exchange Act. The Parent has made available to Laurus: (i) its Annual Report on Form 10-K for its fiscal years ended December 31, 2005; and (ii) its Quarterly Reports on Form 10-Q for its fiscal quarters ended March 31, 2006, June 30, 2006 and September 30, 2006, and the Form 8-K filings which it has made during its fiscal years ending December 31, 2006 and 2007 to date (collectively, the “SEC Reports”). Except as set forth on Schedule 12(x), each SEC Report was, at the time of its filing, in substantial compliance with the requirements of its respective form and none of the SEC Reports, nor the financial statements (and the notes thereto) included in the SEC Reports, as of their respective filing dates, contained any untrue statement of a material fact or omitted to state 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. Such financial statements have been prepared in accordance with GAAP applied on a consistent basis during the periods involved (except (i) as may be otherwise indicated in such financial statements or the notes

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thereto or (ii) in the case of unaudited interim statements, to the extent they may not include footnotes or may be condensed) and fairly present in all material respects the financial condition, the results of operations and cash flows of the Parent and its Subsidiaries, on a consolidated basis, as of, and for, the periods presented in each such SEC Report.

     (y) Listing. The Parent’s Common Stock is listed or quoted, as applicable, on the Principal Market and satisfies all requirements for the continuation of such listing or quotation, as applicable, and the Parent shall do all things necessary for the continuation of such listing or quotation, as applicable. The Parent has not received any notice that its Common Stock will be delisted from, or no longer quoted on, as applicable, the Principal Market or that its Common Stock does not meet all requirements for such listing or quotation, as applicable.

     (z) No Integrated Offering. Neither it, nor any of its Subsidiaries nor any of its Affiliates, nor any Person acting on its or their behalf, has directly or indirectly made any offers or sales of any security or solicited any offers to buy any security under circumstances that would cause the offering of the Securities pursuant to this Agreement or any Ancillary Agreement to be integrated with prior offerings by it for purposes of the Securities Act which would prevent it from issuing the Securities pursuant to Rule 506 under the Securities Act, or any applicable exchange-related stockholder approval provisions, nor will it or any of its Affiliates or Subsidiaries take any action or steps that would cause the offering of the Securities to be integrated with other offerings.

     (aa) Reserved.

     (bb) Dilution. It specifically acknowledges that the Parent’s obligation to issue the shares of Common Stock upon exercise of the Warrants is binding upon the Parent and enforceable regardless of the dilution such issuance may have on the ownership interests of other stockholders of the Parent.

     (cc) Patriot Act. It certifies that, to the best of its knowledge, neither it nor any of its Subsidiaries has been designated, nor is or shall be owned or controlled, by a “suspected terrorist” as defined in Executive Order 13224. It hereby acknowledges that Laurus seeks to comply with all applicable laws concerning money laundering and related activities. In furtherance of those efforts, it hereby represents, warrants and covenants that: (i) none of the cash or property that it or any of its Subsidiaries will pay or will contribute to Laurus has been or shall be derived from, or related to, any activity that is deemed criminal under United States law; and (ii) no contribution or payment by it or any of its Subsidiaries to Laurus, to the extent that they are within its or any such Subsidiary’s control shall cause Laurus to be in violation of the United States Bank Secrecy Act, the United States International Money Laundering Control Act of 1986 or the United States International Money Laundering Abatement and Anti-Terrorist Financing Act of 2001. It shall promptly notify Laurus if any of these representations, warranties and covenants ceases to be true and accurate regarding it or any of its Subsidiaries. It shall provide Laurus with any additional information regarding it and each Subsidiary thereof that Laurus deems necessary or convenient to ensure compliance with all applicable laws concerning money laundering and similar activities. It understands and agrees that if at any time it is discovered that any of the foregoing representations, warranties and covenants are incorrect, or if otherwise required by applicable law or regulation related to money laundering or similar activities, Laurus may undertake appropriate actions to ensure compliance with applicable law or regulation, including but not limited to segregation and/or redemption of Laurus’ investment in it. It further understands that Laurus may release confidential information about it and its Subsidiaries and, if applicable, any underlying beneficial owners, to proper authorities if Laurus, in

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its sole discretion, determines that it is in the best interests of Laurus in light of relevant rules and regulations under the laws set forth in subsection (ii) above.

     (dd) Company Name; Locations of Offices, Records and Collateral. Schedule 12(dd) sets forth each Company’s name as it appears in official filings in the state of its organization, the type of entity of each Company, the organizational identification number issued by each Company’s state of organization or a statement that no such number has been issued, each Company’s state of organization, and the location of each Company’s chief executive office, corporate offices, warehouses, other locations of Collateral and locations where records with respect to Collateral are kept (including in each case the county of such locations) and, except as set forth in such Schedule 12(dd), such locations have not changed during the preceding twelve months. As of the Closing Date, during the prior five years, except as set forth in Schedule 12(dd), no Company has been known as or conducted business in any other name (including trade names). Each Company has only one state of organization.

     (ee) ERISA. Based upon the Employee Retirement Income Security Act of 1974 (“ERISA”), and the regulations and published interpretations thereunder: (i) neither it nor any of its Subsidiaries has engaged in any Prohibited Transactions (as defined in Section 406 of ERISA and Section 4975 of the Code); (ii) it and each of its Subsidiaries has met all applicable minimum funding requirements under Section 302 of ERISA in respect of its plans; (iii) neither it nor any of its Subsidiaries has any knowledge of any event or occurrence which would cause the Pension Benefit Guaranty Corporation to institute proceedings under Title IV of ERISA to terminate any employee benefit plan(s); (iv) neither it nor any of its Subsidiaries has any fiduciary responsibility for investments with respect to any plan existing for the benefit of persons other than its or such Subsidiary’s employees; and (v) neither it nor any of its Subsidiaries has withdrawn, completely or partially, from any multi-employer pension plan so as to incur liability under the Multiemployer Pension Plan Amendments Act of 1980.

     13. Covenants. Each Company, as applicable, covenants and agrees with Laurus (which covenants and agreements shall be binding upon any Subsidiary, if any, as if made by such Subsidiary as applicable to Subsidiary as well as such Company) that:

     (a) Stop-Orders. Neither the Parent nor any of its Subsidiaries will issue any stop order or other order impeding the sale and delivery of any of the Securities at such time as the Securities are registered for public sale or an exemption from such registration is available, except as required by state and federal securities laws or as permitted by Section 7(d) of the Registration Rights Agreement. The Parent shall advise Laurus, promptly after it receives notice of issuance by the SEC, any state securities commission or any other regulatory authority of any stop order or of any order preventing or suspending any offering of any securities of the Parent, or of the suspension of the qualification of the Common Stock of the Parent for offering or sale in any jurisdiction, or the initiation of any proceeding for any such purpose.

     (b) Listing. Within thirty (30) days of the Closing Date, the Parent shall file a Listing of Additional Shares Application to secure the listing or quotation, as applicable, of the shares of Common Stock issuable upon exercise of the Warrants on the Principal Market upon which shares of Common Stock are listed or quoted, as applicable, (subject to official notice of issuance) and shall maintain such listing or quotation, as applicable, so long as any other shares of Common Stock shall be so listed or quoted, as applicable. The Parent shall maintain the listing or quotation, as applicable, of its Common Stock on the Principal Market, and will comply in all material respects

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with the Parent’s reporting, filing and other obligations under the bylaws or rules of the National Association of Securities Dealers (“NASD”) and such exchanges, as applicable.

     (c) Market Regulations. To the extent required by law, the Parent shall notify the SEC, NASD and applicable state authorities of the transactions contemplated by this Agreement, and shall take all other necessary action and proceedings as may be required and permitted by applicable law, rule and regulation, for the legal and valid issuance of the Securities to Laurus and promptly provide copies thereof to Laurus.

     (d) Reporting Requirements. The Parent shall timely file with the SEC all reports required to be filed by it pursuant to the Exchange Act and refrain from terminating its status as an issuer required by the Exchange Act to file reports thereunder even if the Exchange Act or the rules or regulations thereunder would permit such termination.

     (e) Use of Funds. It shall use the proceeds of the Loans (i) to repay in full the Existing Indebtedness, (ii) so long as no Event of Default has occurred and is continuing or would result therefrom, to pay dividends to the holders of the Series B Preferred Stock and (iii) for general working capital purposes only.

     (f) Access to Facilities. It shall, and shall cause each of its Subsidiaries to, permit any representatives designated by Laurus (or any successor of Laurus), upon reasonable notice and during normal business hours, at Company’s expense and accompanied by a representative of Company Agent (provided that no such prior notice shall be required to be given and no such representative shall be required to accompany Laurus in the event Laurus believes such access is necessary to preserve or protect the Collateral or following the occurrence and during the continuance of an Event of Default), to:

          (i) visit and inspect any of its or any such Subsidiary’s properties;

          (ii) examine its or any such Subsidiary’s corporate and financial records (unless such examination is not permitted by federal, state or local law or by contract) and make copies thereof or extracts therefrom; and

          (iii) discuss its or any such Subsidiary’s affairs, finances and accounts with its or any such Subsidiary’s directors, officers and Accountants.

Notwithstanding the foregoing, neither it nor any of its Subsidiaries shall provide any material, non-public information to Laurus unless Laurus signs a confidentiality agreement and otherwise complies with Regulation FD, under the federal securities laws.

     (g) Taxes. It shall, and shall cause each of its Subsidiaries to, promptly pay and discharge, or cause to be paid and discharged, when due and payable, all lawful taxes, assessments and governmental charges or levies imposed upon it and its Subsidiaries’ income, profits, property or business, as the case may be; provided, however, that any such tax, assessment, charge or levy need not be paid currently if (i) the validity thereof shall currently and diligently be contested in good faith by appropriate proceedings, (ii) such tax, assessment, charge or levy shall have no effect on the Lien priority of Laurus in the Collateral, and (iii) if it and/or such Subsidiary, as applicable, shall have set aside on its and/or such Subsidiary’s books adequate reserves with respect thereto in accordance with GAAP; and provided, further, that it shall, and shall cause each of its Subsidiaries to, pay all such

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taxes, assessments, charges or levies forthwith upon the commencement of proceedings to foreclose any lien which may have attached as security therefor.

          (h) Insurance. It shall keep its assets which are of an insurable character insured by financially sound and reputable insurers against loss or damage by fire, explosion and other risks customarily insured against by companies in similar business similarly situated as it; and it shall maintain, with financially sound and reputable insurers, insurance against other hazards and risks and liability to persons and property to the extent and in the manner which it reasonably believes is customary for companies in similar business similarly situated as it and to the extent available on commercially reasonable terms. It will bear the full risk of loss from any loss of any nature whatsoever with respect to the assets pledged to Laurus as security for the Obligations. At its own cost and expense in amounts and with carriers reasonably acceptable to Laurus, it shall (i) keep all its insurable properties and properties in which it has an interest insured against the hazards of fire, flood, sprinkler leakage, those hazards covered by extended coverage insurance and such other hazards, and for such amounts, as is customary in the case of companies engaged in businesses similar to it including business interruption insurance; (ii) maintain insurance or a bond in such amounts as is customary in the case of companies engaged in businesses similar to it insuring against larceny, embezzlement or other criminal misappropriation of insured’s officers and employees who may either singly or jointly with others at any time have access to its assets or funds either directly or through governmental authority to draw upon such funds or to direct generally the disposition of such assets; (iii) maintain public liability insurance against claims for personal injury, death or property damage suffered by others; (iv) maintain all such worker’s compensation or similar insurance as may be required under the laws of any state or jurisdiction in which it is engaged in business; and (v) furnish Laurus with (x) copies of all policies and evidence of the maintenance of such policies, which policies shall include the provision that Laurus shall be notified in writing of any proposed cancellation or material change in such policy at least thirty (30) days in advance of such proposed cancellation or change (ten (10) days with respect to nonpayment of premiums and seven (7) days with respect to war risk and allied perils coverage) and will have sufficient time and the right to correct any deficiencies justifying such proposed cancellation or change, (y) excepting its workers’ compensation policy, endorsements to such policies, in form and substance satisfactory to Laurus, naming Laurus as additional insured, loss payee, and mortgagee (as its interests may appear) pursuant to a so-called “standard mortgagee clause”, and (z) evidence that as to Laurus the insurance coverage shall not be impaired or invalidated by any act or neglect of any company or any tenant or subtenant.

     Notwithstanding anything to the contrary in this Section 13(h), each Company shall at all times keep the Aircraft (other than the Parked Aircraft) insured with “all risk” hull insurance in an amount in an amount reasonably satisfactory to Laurus. Furthermore, notwithstanding the foregoing, in addition, each Company will carry or cause to be carried at its expense (A) aircraft public liability (including, without limitation, passenger legal liability) (and including aircraft war risk and hijacking insurance, if and to the extent the same is maintained by such Company with respect to other aircraft owned or leased, and operated by such Company on the same routes), insurance and property damage insurance (exclusive of manufacturer’s product liability insurance) with respect to the Aircraft, in an amount not less than the greater of (x) the amount of public liability and property damage insurance from time to time applicable to aircraft owned or operated by such Company of the same type as the Aircraft and (y) $500,000,000 per occurrence (or in amounts acceptable with industry standards), and (B) cargo liability insurance, in the case of both clause (i) and clause (ii), (1) of the type and covering the same risks as from time to time applicable to aircraft operated by such Company of the same type as the Aircraft and (2) which is maintained in effect with insurers of recognized responsibility. Any

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policies of insurance carried in accordance with this paragraph and any policies taken out in substitution or replacement for any of such policies (A) shall be amended to name Laurus as additional insured as its respective interests may appear, (B) shall provide that in respect of the interest of Laurus in such policies, the insurance shall not be invalidated by any action or inaction of the any Company, regardless of any breach or violation of any warranty, declaration or condition contained in such policies by such Company, and (C) shall provide that if the insurers cancel such insurance for any reason whatever or if any material change is made in such insurance which adversely affects the interest of Laurus, or such insurance shall lapse for non-payment of premium, such cancellation , lapse or change shall not be effective as to Laurus for thirty (30) days (seven (7) days in the case of war risk and allied perils coverage and ten (10) days with respect to nonpayment of premiums) after issuance to Laurus of written notice by such insurers of cancellation, lapse or change; provided, however, that if any notice period specified above is not reasonably obtainable, such policies shall provide for as long a period of prior notice as shall then be reasonably obtainable. Each liability policy shall waive any right of the insurers to any set-off or counterclaim or any other deduction, whether by attachment or otherwise, in respect of any liability of Laurus to the extent of any moneys due to Laurus.

     Each Company shall instruct the insurance carriers that in the event of any total loss of an Aircraft or if an Event of Default has occurred and is continuing, the carriers shall make payment for such loss to Laurus and not to the order of such Company and Laurus jointly. With respect to a loss other than a total loss of an Aircraft at a time when no Event of Default has occurred and is continuing, if such loss, when aggregated with all other losses occurring during such fiscal year, does not exceed $500,000, such Company may adjust and compromise claims with the insurance carrier and the insurance carrier may make payment directly to such Company. Such Company may elect to apply such payment toward the repair, replacement or restoration of any property in respect of which such payment was made by the insurance carrier no later than 150 days following the date of receipt of such payment; provided, all property purchased with such payment shall made be subject to the first priority Lien of this Agreement or the Aircraft Security Documents. Any such payment not applied within the 150-day period set forth in the previous sentence (or earlier, at the option of such Company) to so repair, replace or restore in accordance with such sentence shall be paid to Laurus by such Company as a prepayment of the Loans and as a permanent reduction of the Capital Availability Amount.

     In the event of a total loss of an Aircraft, if an Event of Default has occurred and is continuing or if such loss when aggregated with all other losses occurring during such fiscal year exceed $500,000, (i) if any insurance losses are paid by check, draft or other instrument payable to a Company and Laurus jointly, Laurus may endorse such Company’s name thereon and do such other things as Laurus may deem in its sole discretion advisable to reduce the same to cash and in such event, (ii) Laurus is hereby authorized to adjust and compromise claims.

     All loss recoveries received by Laurus upon any such insurance may be applied to the Obligations, in such order as Laurus in its sole discretion shall determine or shall otherwise be delivered to the Parent. Any surplus shall be paid by Laurus to the Parent, or applied as may be otherwise required by law. If an Event of Default has occurred and is continuing, any deficiency thereon shall be paid, jointly and severally, as applicable, by the Companies to Laurus, on demand.

          (i) Intellectual Property. It shall, and shall cause each of its Subsidiaries to, maintain in full force and effect its corporate existence, rights and franchises and all licenses and

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other rights to use Intellectual Property owned or possessed by it and reasonably deemed to be necessary to the conduct of its business.

     (j) Properties. Except as otherwise set forth in this Agreement as to Parked Aircraft or in the ordinary course of business, it shall, and shall cause each of its Subsidiaries to, keep its properties in good repair, working order and condition, reasonable wear and tear excepted, and from time to time make all needful and proper repairs, renewals, replacements, additions and improvements thereto; and it shall, and shall cause each of its Subsidiaries to, at all times comply with each provision of all leases to which it is a party or under which it occupies or utilizes such property if the breach of such provision could reasonably be expected to have a Material Adverse Effect.

     (k) Confidentiality. It shall not, and shall not permit any of its Subsidiaries to, disclose, and will not include in any public announcement, the name of Laurus, unless expressly agreed to by Laurus or unless and until such disclosure is required by law or applicable regulation, and then only to the extent of such requirement. Notwithstanding the foregoing, each Company and its Subsidiaries may disclose Laurus’ identity and the terms of this Agreement and the Ancillary Agreements to its current and prospective debt and equity financing sources. Laurus shall be permitted to discuss, distribute or otherwise transfer any non-public information of the Companies and their respective Subsidiaries in Laurus’ possession now or in the future to potential or actual (i) direct or indirect investors in Laurus and (ii) third party assignees or transferees of all or a portion of the obligations of any Company and/or any of its respective Subsidiaries hereunder and under the Ancillary Agreement, to the extent that such investor or assignee or transferee enters into a confidentiality agreement for the benefit of the Parent in such form as may be necessary to addresses the Parent’s Regulation FD requirements. Laurus acknowledges that, promptly following execution and delivery of this Agreement, conformed copies of this Agreement and the Ancillary Agreements and all amendments thereto may (notwithstanding the foregoing) be filed by the Parent as material agreements with the SEC.

     (l) Required Approvals. It shall not, and shall not permit any of its Subsidiaries to, without the prior written consent of Laurus:

          (i) create, incur, assume or suffer to exist any Indebtedness (exclusive of Permitted Indebtedness) whether secured or unsecured other than (A) each Company’s Indebtedness to Laurus, (B) each Company’s Indebtedness as set forth on Schedule 13(l)(i) attached hereto and made a part hereof and (C) any Indebtedness that is subordinated in right of payment, priority, structure and otherwise to the Obligations on terms and conditions reasonably and mutually acceptable to the Companies and Laurus and the provider of such subordinated Indebtedness;

          (ii) cancel any Indebtedness owing to it in excess of $50,000 in the aggregate during any twelve (12) month period (other than in exchange for which cancelled Indebtedness, it receives reasonably equivalent consideration and fair value), provided, however, the foregoing shall not authorize or permit the cancellation of any Indebtedness or obligation in any amount owed by any of any Company’s officers, directors, stockholders or employees;

          (iii) assume, guarantee, endorse or otherwise become directly or contingently liable in connection with any obligations of any other Person, except the endorsement of negotiable instruments by it or its Subsidiaries for deposit or collection or similar transactions in the

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ordinary course of business or any guarantees and indemnifications respecting Indebtedness otherwise permitted to be outstanding pursuant to this clause;

     (iv) directly or indirectly declare, pay or make any cash dividend or cash distribution on any class of its Stock or apply any of its funds, property or assets to the purchase, redemption or other retirement of any of its or its Subsidiaries’ Stock; provided, however, that so long as (i) no Event of Default has occurred and is continuing or would result therefrom and (ii) the aggregate amount of such dividends in any twelve-month (12) period does not exceed $1,700,000, the Parent may pay quarterly dividends on the Series B Preferred Stock;

     (v) purchase or hold beneficially any Stock or other securities or evidences of Indebtedness of, make or permit to exist any loans or advances to, or make any investment or acquire any interest whatsoever in, any other Person, including any partnership or joint venture, except (w) travel advances, (x) the extension of commercial trade credit in connection with the performance of services and sale of Equipment in the ordinary course of business, (y) loans to its and its Subsidiaries’ officers and employees not exceeding at any one time an aggregate of $10,000, other than advancement of expenses in the ordinary course of business, and (z) loans to its existing Subsidiaries so long as such Subsidiaries are designated as either a co-borrower hereunder or has entered into such guaranty and security documentation required by Laurus, including, without limitation, to grant to Laurus a first priority perfected security interest in substantially all of such Subsidiary’s assets to secure the Obligations;

     (vi) create or permit to exist any Subsidiary, other than any Subsidiary in existence on the date hereof and listed in Schedule 12(b) unless such new Subsidiary is a wholly-owned Subsidiary and is designated by Laurus as either a co-borrower or guarantor hereunder and such Subsidiary shall have entered into all such documentation required by Laurus, including, without limitation, to grant to Laurus a first priority perfected security interest in substantially all of such Subsidiary’s assets to secure the Obligations;

     (vii) directly or indirectly, prepay any Indebtedness (other than to Laurus and in the ordinary course of business), or repurchase, redeem, retire or otherwise acquire any Indebtedness (other than to Laurus and in the ordinary course of business) except to make scheduled payments of principal and interest thereof;

     (viii) enter into any merger, consolidation or other reorganization with or into any other Person or acquire all or a portion of the assets or Stock of any Person or permit any other Person to consolidate with or merge with it, unless (1) such Company is the surviving entity of such merger or consolidation, (2) no Event of Default shall exist immediately prior to and after giving effect to such merger or consolidation, (3) such Company shall have provided Laurus copies of all documentation relating to such merger or consolidation and (4) such Company shall have provided Laurus with at least thirty (30) days’ prior written notice of such merger or consolidation;

     (ix) materially change the nature of the business in which it is presently engaged;

     (x) become subject to (including, without limitation, by way of amendment to or modification of) any agreement or instrument which by its terms would (under any circumstances) restrict its or any of its Subsidiaries’ right to perform the provisions of this Agreement or any of the Ancillary Agreements;

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          (xi) change its fiscal year or make any changes in accounting treatment and reporting practices without prior written notice to Laurus except as required by GAAP or in the tax reporting treatment or except as required by law;

          (xii) enter into any transaction with any executive officer, director or Affiliate, except (A) in the ordinary course or (B) on arms-length terms; or

          (xiii) bill Accounts under any name except the present name of such Company or its trade names.

     (m) Reissuance of Securities. The Parent shall reissue certificates representing the Securities without the legends set forth in Section 44 below at such time as:

          (i) the holder thereof is permitted to dispose of such Securities pursuant to Rule 144(k) under the Securities Act; or

          (ii) upon resale subject to an effective registration statement after such Securities are registered under the Securities Act.

The Parent agrees to cooperate with Laurus in connection with all resales pursuant to Rule 144(d) and Rule 144(k) and provide legal opinions necessary to allow such resales provided the Parent and its counsel receive reasonably requested representations from Laurus and broker, if any.

     (n) Opinion. On the Closing Date, it shall deliver to Laurus an opinion acceptable to Laurus from each Company’s legal counsel. Each Company will provide, at the Companies’ joint and several expense, such other legal opinions in the future as are reasonably necessary for the exercise of the Warrants.

     (o) Legal Name, etc. It shall not, without providing Laurus with 30 days prior written notice, change (i) its name as it appears in the official filings in the state of its organization, (ii) the type of legal entity it is, (iii) its organization identification number, if any, issued by its state of organization, (iv) its state of organization or (v) amend its certificate of incorporation, by-laws or other organizational document if such amendment would have an adverse impact on the rights, remedies or interests of Laurus under this Agreement or any of the Ancillary Agreements.

     (p) Compliance with Laws. The operation of each of its and each of its Subsidiaries’ business is and shall continue to be in compliance in all material respects with all applicable federal, state and local laws, rules and ordinances, including to all laws, rules, regulations and orders relating to taxes, payment and withholding of payroll taxes, employer and employee contributions and similar items, securities, employee retirement and welfare benefits, employee health and safety and environmental matters.

     (q) Notices. It and each of its Subsidiaries shall promptly inform Laurus in writing of: (i) the commencement of all proceedings and investigations by or before and/or the receipt of any notices from, any governmental or nongovernmental body and all actions and proceedings in any court or before any arbitrator against or in any way concerning any event which could reasonably be expected to have singly or in the aggregate, a Material Adverse Effect; (ii) any change which has had, or could reasonably be expected to have, a Material Adverse Effect; (iii) any Event of Default or Default; and (iv) any default or any event which with the passage of time or

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giving of notice or both would constitute a default under any agreement for the payment of money to which it or any of its Subsidiaries is a party or by which it or any of its Subsidiaries or any of its or any such Subsidiary’s properties may be bound the breach of which would have a Material Adverse Effect.

     (r) Margin Stock. It shall not permit any of the proceeds of the Loans made hereunder to be used directly or indirectly to “purchase” or “carry” “margin stock” or to repay Indebtedness incurred to “purchase” or “carry” “margin stock” within the respective meanings of each of the quoted terms under Regulation U of the Board of Governors of the Federal Reserve System as now and from time to time hereafter in effect.

     (s) Offering Restrictions. Except as previously disclosed in the SEC Reports or in the Exchange Act Filings, or stock or stock options granted to its employees or directors, neither it nor any of its Subsidiaries shall, prior to the full exercise by Laurus of the Warrants, (x) enter into any equity line of credit agreement or similar agreement with a floorless pricing feature or (y) issue, or enter into any agreement to issue, any securities with a floorless variable/floating conversion and/or pricing feature which are or could be (by conversion or registration) free-trading securities (i.e. common stock subject to a registration statement).

     (t) Authorization and Reservation of Shares. The Parent shall at all times have authorized and reserved a sufficient number of shares of Common Stock to provide for the exercise of the Warrants.

     (u) FIRPTA. Neither it, nor any of its Subsidiaries, is a “United States real property holding corporation” as such term is defined in Section 897(c)(2) of the Code and Treasury Regulation Section 1.897-2 promulgated thereunder and it and each of its Subsidiaries shall at no time take any action or otherwise acquire any interest in any asset or property to the extent the effect of which shall cause it and/or such Subsidiary, as the case may be, to be a “United States real property holding corporation” as such term is defined in Section 897(c)(2) of the Code and Treasury Regulation Section 1.897-2 promulgated thereunder.

     (v) FAA Filings. Upon the execution and delivery of this Agreement, the Aircraft Security Documents shall be filed for recording with the Federal Aviation Administration.

     (w) Future Stockholders. No Company (other than the Parent) shall issue any shares of Common Stock to any Person (other than Laurus) which is not a Citizen of the United States, nor shall any Company (other than the Parent) recognize the sale, transfer or assignment of any of the currently outstanding shares of the Common Stock of such Company to any Person (other than Laurus) which is not a Citizen of the United States.

     14. Further Assurances. At any time and from time to time, upon the written request of Laurus and at the sole expense of Companies, each Company shall promptly and duly execute and deliver any and all such further instruments and documents and take such further action as Laurus may reasonably request (a) to obtain the full benefits of this Agreement and the Ancillary Agreements, (b) to protect, preserve and maintain Laurus’ rights in the Collateral and under this Agreement or any Ancillary Agreement, and/or (c) to enable Laurus to exercise all or any of the rights and powers herein granted or any Ancillary Agreement.

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     15. Closing Conditions. The obligations of Laurus to make the Loans shall not become effective until the date on which each of the following conditions is satisfied or waived in accordance with Section 26.

     (a) Counterparts of Agreement. Laurus shall have received from each party hereto either (i) a counterpart of this Agreement signed on behalf of such party or (ii) written evidence satisfactory to Laurus (which may include telecopy transmission of a signed signature page of this Agreement) that such party has signed a counterpart of this Agreement.

     (b) Notes. Laurus shall have received the duly completed and executed (i) Note and (ii) Warrant from the Parent.

     (c) Organizational Structure. The organizational structure, capitalization and ownership of the Companies, both before and after giving effect to the Transactions, shall be as set forth on Schedules 12(b) and (c) annexed hereto. Laurus shall have had the opportunity to review, and shall be satisfied with, the Parent’s business plan, state and federal tax assumptions and the ownership, capital, organization and structure of the Companies, both before and after giving effect to the Transactions.

     (d) Existence and Good Standing. Laurus shall have received such documents and certificates as the Laurus or its special counsel may reasonably request relating to the organization, existence and good standing of each Company, the authorization of the Transactions and any other legal matters relating to the Companies, this Agreement, the other Ancillary Agreements or the Transactions, all in form and substance reasonably satisfactory to Laurus and its counsel.

     (e) Security Interests in Personal and Mixed Property. To the extent not otherwise satisfied pursuant to Section 6, Laurus shall have received evidence satisfactory to it that the Companies shall have taken or caused to be taken all such actions, executed and delivered or caused to be executed and delivered all such agreements, documents and instruments, and made or caused to be made all such filings and recordings (other than the filing of the UCC termination statements described in clause (iii) below) that may be necessary or, in the opinion of Laurus, desirable in order to create in favor of Laurus a valid and (upon such filing and recording) perfected first priority security interest in the Collateral; provided, however, that to the extent that Laurus in its sole discretion shall determine that the costs of obtaining a security interest in any item of Collateral is excessive in relation to the value of the security to be afforded thereby, Laurus may waive such requirement with respect to such item. Such actions shall include the following:

     (i) Security Documents. Delivery to Laurus of all the Security Documents, duly executed by the applicable Company, together with accurate and complete schedules to all such Security Documents;

     (ii) Lien Searches and UCC Termination Statements. Delivery to Laurus of (A) the results of recent searches, by one or more Persons satisfactory to Laurus, of all effective Liens filed with the FAA, UCC financing statements and fixture filings and all judgment and tax lien filings which may have been made with respect to any personal or mixed property of the Companies, together with copies of all such filings disclosed by such search, and (B) terminations of Liens filed with the FAA duly executed by all applicable Persons for filing with the FAA and UCC termination statements duly executed by all applicable Persons for filing in all applicable jurisdictions as may be

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necessary to terminate any effective UCC financing statements or fixture filings disclosed in such search (other than any such financing statements or fixture filings in respect of Liens permitted to remain outstanding pursuant to the terms of this Agreement);

          (iii) UCC Financing Statements and Fixture Filings. Delivery to Laurus of UCC financing statements and, where appropriate, fixture filings, duly authorized by the Companies with respect to all the Collateral of each Company, for filing in all jurisdictions as may be necessary or, in the opinion of Laurus, desirable to perfect the security interests created in such Collateral pursuant to the Security Documents;

          (iv) PTO Cover Sheets, Etc. Delivery to Laurus of all cover sheets or other documents or instruments required to be filed with the PTO in order to create or perfect Liens in respect of any Intellectual Property; and

          (v) Stock of Subsidiaries. Delivery to Laurus of certificates evidencing one hundred percent (100%) of the Stock of all Subsidiaries of the Parent, accompanied by stock powers executed in blank.

     (f) Evidence of Insurance. Laurus shall have received a certificate from the Parent’s insurance broker or other evidence satisfactory to it that all insurance required to be maintained pursuant to Section 13(h) is in full force and effect and that Laurus has been named as additional insured and loss payee and mortgagee thereunder to the extent required under Section 13(h).

     (g) Litigation. No litigation by any entity (private or governmental) shall be pending or, to the best knowledge of the Parent, threatened, nor shall there exist, in the judgment of Laurus any action by any governmental authority which restrains, prevents or imposes materially adverse conditions, with respect to this Agreement, any Ancillary Agreement, the Notes or any documentation executed in connection herewith or the transactions contemplated hereby (including, without limitation, the Transactions), or which Laurus shall determine, in its sole discretion, to have a Material Adverse Effect.

     (h) ERISA and Taxes. Each Company shall have fulfilled all of its obligations under the minimum funding standards of ERISA and the Code with respect to each employee pension or other benefit plan and shall be in compliance, in all material respects, with the applicable provisions of ERISA and the Code, and shall not have incurred any material liability to the Pension Benefit Guaranty Corporation or any employee pension or other benefit plan under Title IV of ERISA, all to the reasonable satisfaction of Laurus.

     (i) Registration Rights Agreement. The Parent and Laurus shall have entered into an agreement on terms reasonably satisfactory to Laurus in the form attached hereto as Exhibit C regarding certain rights of Laurus.

     (j) Bank Deposit Account. The Companies and the Lockbox Bank shall have executed and delivered to Laurus the documentation required under Section 8(a) and Laurus shall be satisfied that Laurus has a perfected first priority security interest in the Lockbox.

     (k) Necessary Governmental Authorizations and Consents; Expiration of Waiting Periods, Etc. The Companies shall have obtained all Licenses and all consents of other Persons with

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respect to Liens and agreements listed on Schedule 12(l) (and so identified thereon) annexed hereto, in each case that are necessary or advisable in connection with the Transactions contemplated by this Agreement and the Ancillary Agreements, and each of the foregoing shall be in full force and effect, in each case other than those the failure to obtain or maintain which, either individually or in the aggregate, would not reasonably be expected to have a Material Adverse Effect. Except as expressly provided above, all applicable waiting periods shall have expired or been terminated without any action being taken or threatened by any competent authority which would restrain, prevent or otherwise impose adverse conditions on the Transactions.

     (l) Existing Debt. Laurus shall have received evidence that all principal, interest and other amounts owing in respect of all Existing Indebtedness of the Companies as of the Closing Date (other than Indebtedness permitted to remain outstanding in accordance with Section 13(l)(i) hereof) will be repaid in full.

     (m) Financial Statements; Pro Forma Balance Sheet. Laurus shall have received from the Parent the certified financial statements and pro forma balance sheet referred to in Section 11 hereof and the same shall not be materially inconsistent with the information previously provided to Laurus.

     (n) Aircraft Certificate. On the Closing Date, Laurus shall have received a certificate signed by an authorized officer of each Company to the effect that each Operating Aircraft has been duly certified by the FAA as to type and each such Aircraft has a current certificate of airworthiness, and the applicable Company had good title to the Aircraft free and clear of Liens other than Permitted Liens not of record. To the extent reasonably available, Laurus shall have received copies of the certificates of airworthiness for the Aircraft issued by the FAA.

     (o) Financial Officer Certificate. Laurus shall have received a certificate, dated the Closing Date and signed by the President, a Vice President or a Financial Officer of each Company, confirming compliance with the conditions set forth in paragraphs (a) and (b) of Section 15 on such date.

     (p) Opinions. Laurus shall have received favorable written opinions (addressed to Laurus and dated the Closing Date) of (i) Haynes & Boone, LLP, counsel to the Companies, substantially in the form of Exhibit D annexed hereto and covering such matters relating to the Companies, this Agreement, the other Ancillary Agreements or the Transactions as Laurus shall request, including the perfection of security interests as Laurus and that Laurus is entitled to the benefits of 11 U.S.C. Section 1110 with respect to the Aircraft, and (ii) Daugherty Fowler Peregrin Haught & Jenson, special FAA counsel to Laurus, covering such matters that the Companies own the Aircraft, subject to no Liens other than Liens in favor of Laurus, that the Liens in favor of Laurus are first priority perfected Liens and such other matters as Laurus shall request.

     (q) Fees and Expenses. Laurus shall have received all reasonable fees and other amounts due and payable to such Persons and Laurus’ special counsel at or prior to the Closing Date, including, to the extent invoiced, reimbursement or payment of all out-of-pocket expenses required to be reimbursed or paid by the Companies hereunder.

     16. Additional Borrowing Conditions. The obligation of Laurus to make the Loans at any time (including on the Closing Date) is subject to the satisfaction of the following conditions:

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     (a) Representations and Warranties. The representations and warranties of the Companies set forth in this Agreement and the other Ancillary Agreements shall be true and correct in all material respects on and as of the date of such Loan, both before and after giving effect thereto and to the use of the proceeds thereof (or, if any such representation or warranty is expressly stated to have been made as of a specific date, such representation or warranty shall be or have been true and correct as of such specific date and except to the extent the matters set forth in such representation or warranty has been modified by actions or events that are (i) specifically permitted or authorized by this Agreement or (ii) not prohibited by this Agreement; provided, however, that such action or event referred to in the foregoing clauses (i) and (ii) has not resulted in a Material Adverse Effect); provided, however, nothing in this Section 16(a) shall require that any Company update or supplement any Schedules.

     (b) Covenants. All of each Company’s and its respective Subsidiaries’ covenant requirements under this Agreement and the Ancillary Agreements have been met on and as of the date of such Loan, both before and after giving effect thereto; and

     (c) No Defaults. At the time of and immediately after giving effect to such Loan, no Default shall have occurred and be continuing.

     17. Representations, Warranties and Covenants of Laurus. Laurus hereby represents, warrants and covenants to each Company as follows:

     (a) Requisite Power and Authority. Laurus has all necessary power and authority under all applicable provisions of law to execute and deliver this Agreement and the Ancillary Agreements and to carry out their provisions. All corporate action on Laurus’ part required for the lawful execution and delivery of this Agreement and the Ancillary Agreements have been or will be effectively taken prior to the Closing Date. Upon their execution and delivery, this Agreement and the Ancillary Agreements shall be valid and binding obligations of Laurus, enforceable in accordance with their terms, except (a) as limited by applicable bankruptcy, insolvency, reorganization, moratorium or other laws of general application affecting enforcement of creditors’ rights, and (b) as limited by general principles of equity that restrict the availability of equitable and legal remedies.

     (b) Investment Representations. Laurus understands that the Securities are being offered pursuant to an exemption from registration contained in the Securities Act based in part upon Laurus’ representations contained in this Agreement, including, without limitation, that Laurus is an “accredited investor” within the meaning of Regulation D under the Securities Act. Laurus has received or has had full access to all the information it considers necessary or appropriate to make an informed investment decision with respect to the Note to be issued to it under this Agreement and the Securities acquired by it upon the exercise of the Warrants.

     (c) Laurus Bears Economic Risk. Laurus has substantial experience in evaluating and investing in private placement transactions of securities in companies similar to the Parent so that it is capable of evaluating the merits and risks of its investment in the Parent and has the capacity to protect its own interests. Laurus must bear the economic risk of this investment until the Securities are sold pursuant to (i) an effective registration statement under the Securities Act, or (ii) an exemption from registration is available.

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     (d) Investment for Own Account. The Securities are being issued to Laurus for its own account for investment only, and not as a nominee or agent and not with a view towards or for resale in connection with their distribution.

     (e) Laurus Can Protect Its Interest. Laurus represents that by reason of its, or of its management’s, business and financial experience, Laurus has the capacity to evaluate the merits and risks of its investment in the Note, and the Securities and to protect its own interests in connection with the transactions contemplated in this Agreement, and the Ancillary Agreements. Further, Laurus is aware of no publication of any advertisement in connection with the transactions contemplated in the Agreement or the Ancillary Agreements.

     (f) Accredited Investor. Laurus represents that it is an accredited investor within the meaning of Regulation D under the Securities Act.

     (g) Shorting. Neither Laurus nor any of its Affiliates or investment partners has, will, or will cause any Person, to directly engage in “short sales” of the Parent’s Common Stock during the Term.

     (h) Patriot Act. Laurus certifies that, to the best of Laurus’ knowledge, Laurus has not been designated, and is not owned or controlled, by a “suspected terrorist” as defined in Executive Order 13224. Laurus seeks to comply with all applicable laws concerning money laundering and related activities. In furtherance of those efforts, Laurus hereby represents, warrants and covenants that: (i) none of the cash or property that Laurus will use to make the Loans has been or shall be derived from, or related to, any activity that is deemed criminal under United States law; and (ii) no disbursement by Laurus to any Company to the extent within Laurus’ control, shall cause Laurus to be in violation of the United States Bank Secrecy Act, the United States International Money Laundering Control Act of 1986 or the United States International Money Laundering Abatement and Anti-Terrorist Financing Act of 2001. Laurus shall promptly notify the Company Agent if any of these representations ceases to be true and accurate regarding Laurus. Laurus agrees to provide the Company any additional information regarding Laurus that the Company deems necessary or convenient to ensure compliance with all applicable laws concerning money laundering and similar activities. Laurus understands and agrees that if at any time it is discovered that any of the foregoing representations are incorrect, or if otherwise required by applicable law or regulation related to money laundering similar activities, Laurus may undertake appropriate actions to ensure compliance with applicable law or regulation, including but not limited to segregation and/or redemption of Laurus’ investment in the Parent. Laurus further understands that the Parent may release information about Laurus and, if applicable, any underlying beneficial owners, to proper authorities if the Parent, in its sole discretion, determines that it is in the best interests of the Parent in light of relevant rules and regulations under the laws set forth in subsection (ii) above.

     (i) Limitation on Acquisition of Common Stock. Notwithstanding anything to the contrary contained in this Agreement, any Ancillary Agreement, or any document, instrument or agreement entered into in connection with any other transaction entered into by and between Laurus and any Company (and/or Subsidiaries or Affiliates of any Company), Laurus shall not acquire stock in the Parent (including, without limitation, pursuant to a contract to purchase, by exercising an option or warrant, by converting any other security or instrument, by acquiring or exercising any other right to acquire, shares of stock or other security convertible into shares of stock in the Parent, or otherwise, and such options, warrants, conversion or other rights shall not be exercisable) to the extent (i) such stock acquisition would cause any interest (including any original issue discount)

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payable by any Company to Laurus not to qualify as portfolio interest, within the meaning of Section 881(c)(2) of the Internal Revenue Code of 1986, as amended (the “Code”) by reason of Section 881(c)(3) of the Code, taking into account the constructive ownership rules under Section 871(h)(3)(C) of the Code or (ii) that such stock acquisition by Laurus or its assignee or right to exercise any such options, warrants, conversions or other rights would result in Kitty Hawk Aircargo, Inc. failing to qualify as a Citizen of the United States.

     18. Reserved.

     19. Term of Agreement. Laurus’ agreement to make Loans and extend financial accommodations under and in accordance with the terms of this Agreement or any Ancillary Agreement shall continue in full force and effect until the expiration of the Term. At Laurus’ election following the occurrence of an Event of Default, Laurus may terminate this Agreement. The termination of the Agreement shall not affect any of Laurus’ rights hereunder or any Ancillary Agreement and the provisions hereof and thereof shall continue to be fully operative until all transactions entered into, rights or interests created and the Obligations have been irrevocably disposed of, concluded or liquidated. Notwithstanding the foregoing, Laurus shall release its security interests at any time after payment to it in immediately available funds of all Obligations if each Company shall have provided Laurus with an executed release of any and all claims which such Company may have or thereafter have under this Agreement and all Ancillary Agreements.

     20. Termination of Lien. The Liens and rights granted to Laurus hereunder and any Ancillary Agreements and the financing statements filed in connection herewith or therewith shall continue in full force and effect, notwithstanding the termination of this Agreement or the fact that any Company’s account may from time to time be temporarily in a zero or credit position, until all of the Obligations have been paid in immediately available funds or performed in full and this Agreement has been terminated in accordance with the terms of this Agreement. Laurus shall not be required to send termination statements to any Company, or to file them with any filing office, unless and until this Agreement and the Ancillary Agreements shall have been terminated in accordance with their terms and all Obligations paid in full in immediately available funds.

     21. Events of Default. The occurrence of any of the following shall constitute an “Event of Default”:

     (a) failure to make payment of any of the Obligations when required hereunder, and, in any such case, such failure shall continue for a period of five (5) days following the date upon which any such payment was due;

     (b) failure by any Company or any of its Subsidiaries to pay any taxes when due unless such taxes are being contested in good faith by appropriate proceedings and with respect to which adequate reserves have been provided on such Company’s and/or such Subsidiary’s books;

     (c) failure to perform under, and/or committing any breach of, in any material respect, this Agreement or any covenant contained herein, which failure or breach shall continue without remedy for a period of thirty (30) days after the occurrence thereof;

     (d) any representation, warranty or statement made by any Company or any of its Subsidiaries hereunder, in any Ancillary Agreement, any certificate, statement or document delivered pursuant to the terms hereof, or in connection with the transactions contemplated by this Agreement

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should prove to be false or misleading in any material respect on the date as of which made or deemed made;

     (e) the occurrence of any default (or similar term) in the observance or performance of any other agreement or condition relating to any Indebtedness in the outstanding principal amount of $1,000,000 or more beyond the period of grace (if any), the effect of which default is to cause, or permit the holder or holders of such Indebtedness to cause, such Indebtedness to become due prior to its stated maturity;

     (f) attachments or levies in excess of $250,000 in the aggregate are made upon any Company’s assets or a judgment is rendered against any Company’s property involving a liability of more than $250,000 which shall not have been vacated, discharged, stayed or bonded within thirty (30) days from the entry thereof;

     (g) except as otherwise permitted hereunder, any Lien on any assets having an aggregate fair market value of $250,000 or more created hereunder or under any Ancillary Agreement for any reason ceases to be or is not a valid and perfected Lien having a first priority interest (subject to Permitted Liens);

     (h) any Lien created hereunder or under any Ancillary Agreement for any reason ceases to be or is not a valid and perfected Lien having a first priority interest;

     (i) any Company or any of its Subsidiaries shall (i) apply for, consent to or suffer to exist the appointment of, or the taking of possession by, a receiver, custodian, trustee or liquidator of itself or of all or a substantial part of its property, (ii) make a general assignment for the benefit of creditors, (iii) commence a voluntary case under the federal bankruptcy laws (as now or hereafter in effect), (iv) be adjudicated a bankrupt or insolvent, (v) file a petition seeking to take advantage of any other law providing for the relief of debtors, (vi) acquiesce to without challenge within ten (10) days of the filing thereof, or failure to have dismissed within thirty (30) days, any petition filed against it in any involuntary case under such bankruptcy laws, or (vii) take any action for the purpose of effecting any of the foregoing;

     (j) any Company or any of its Subsidiaries shall admit in writing its inability, or be generally unable, to pay its debts as they become due or cease operations of its present business;

     (k) any Company or any of its Subsidiaries directly or indirectly sells, assigns, transfers, conveys, or suffers or permits to occur any sale, assignment, transfer or conveyance of any assets of such Company or any interest therein, except as permitted herein;

     (l) any “Person” or “group” (as such terms are defined in Sections 13(d) and 14(d) of the Exchange Act, as in effect on the date hereof), other than the holders of the Series B Preferred Stock as of the date of this Agreement, is or becomes the “beneficial owner” (as defined in Rules 13(d)-3 and 13(d)-5 under the Exchange Act), directly or indirectly, of 35% or more on a fully diluted basis of the then outstanding voting equity interest of the Parent, (ii) the Board of Directors of the Parent shall cease to consist of a majority of the Board of Directors of the Parent on the date hereof (or directors appointed by a majority of the board of directors in effect immediately prior to such appointment) or (iii) the Parent or any of its Subsidiaries merges or consolidates with, or sells all or substantially all of its assets to, any other person or entity;

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     (m) the indictment of any Company or any of its Subsidiaries or any executive officer of any Company or any of its Subsidiaries under any criminal statute, or commencement of criminal or civil proceeding against any Company or any of its Subsidiaries or any executive officer of any Company or any of its Subsidiaries pursuant to which statute or proceeding penalties or remedies sought or available include forfeiture of any of the property of any Company or any of its Subsidiaries;

     (n) an Event of Default shall occur under and as defined in the Note or in any other Ancillary Agreement;

     (o) any Company or any of its Subsidiaries shall breach any term or provision of any Ancillary Agreement to which it is a party (including, without limitation, Section 7(e) of the Registration Rights Agreement), in any material respect which breach is not cured within any applicable cure or grace period provided in respect thereof (if any);

     (p) any Company or any of its Subsidiaries attempts to terminate, challenges the validity of, or its liability under this Agreement or any Ancillary Agreement, or any proceeding shall be brought to challenge the validity, binding effect of any Ancillary Agreement or any Ancillary Agreement ceases to be a valid, binding and enforceable obligation of such Company or any of its Subsidiaries (to the extent such Persons are a party thereto);

     (q) an SEC stop trade order or Principal Market trading suspension of the Common Stock shall be in effect for five (5) consecutive days or five (5) days during a period of ten (10) consecutive days, excluding in all cases a suspension of all trading on a Principal Market, provided that the Parent shall not have been able to cure such trading suspension within thirty (30) days of the notice thereof or list the Common Stock on another Principal Market within sixty (60) days of such notice;

     (r) The Parent’s failure to deliver Common Stock to Laurus pursuant to and in the form required by the Warrants and this Agreement, if such failure to deliver Common Stock shall not be cured within two (2) Business Days or any Company is required to issue a replacement Note to Laurus and such Company shall fail to deliver such replacement Note within seven (7) Business Days;

     (s) The DOT determines that Kitty Hawk Aircargo, Inc. is no longer fit to engage in air transportation; or

     (t) Kitty Hawk Aircargo, Inc. is no longer a Certificated Air Carrier; or the issuance of a show cause order by DOT proposing to revoke, suspend or cancel the authority of Kitty Hawk Aircargo, Inc. to operate as a Certificated Air Carrier or the issuance of a letter or other formal communication from the Office of the Aviation Enforcement and Proceedings Division of DOT alleging that Kitty Hawk Aircargo, Inc. is no longer a Citizen of the United States.

     22. Remedies. Following the occurrence of an Event of Default, Laurus shall have the right to demand repayment in full of all Obligations, whether or not otherwise due. Until all Obligations have been paid in full in immediately available funds, Laurus shall retain its Lien in all Collateral. Laurus shall have, in addition to all other rights provided herein and in each Ancillary Agreement, the rights and remedies of a secured party under the UCC, and under other applicable law, all other legal and equitable rights to which Laurus may be entitled, including the right to take

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immediate possession of the Collateral, to require each Company to assemble the Collateral (other than the Parked Aircraft), at Companies’ joint and several expense, and to make it available to Laurus at a place designated by Laurus which is reasonably convenient to both parties and to enter any of the premises of any Company or wherever the Collateral shall be located, with or without force or process of law, and to keep and store the same on said premises until sold (and if said premises be the property of any Company, such Company agrees not to charge Laurus for storage thereof), and the right to apply for the appointment of a receiver for such Company’s property. Further, Laurus may, at any time or times after the occurrence of an Event of Default, sell and deliver all Collateral held by or for Laurus at public or private sale for cash, upon credit or otherwise, at such prices and upon such terms as Laurus, in Laurus’ sole discretion, deems advisable or Laurus may otherwise recover upon the Collateral in any commercially reasonable manner as Laurus, in its sole discretion, deems advisable. The requirement of reasonable notice shall be met if such notice is mailed postage prepaid to Company Agent at Company Agent’s address as shown in Laurus’ records, at least ten (10) days before the time of the event of which notice is being given. Laurus may be the purchaser at any sale, if it is public. Laurus may, further, at any time after the occurrence of an Event of Default, but need not, perform or observe any of the covenants contained in this Agreement or any Ancillary Agreement on behalf and in the name, place and stead of a Company (or, at the option of Laurus, in Laurus’ name) and may, but need not, take any and all other actions which Laurus may deem necessary to cure or correct such failure (including the payment of taxes, satisfaction of Liens, the performance of obligations owed to Account Debtors, lessors or other obligors, the procurement and maintenance of insurance, the execution of assignments, security agreements and financing statements, and the endorsement of instruments). The amount of all monies expended and all costs and expenses (including attorneys’ fees and legal expenses) incurred by Laurus in connection with or as a result of such performance or observance shall be charged to the Company’s account as a Loan and added to the Obligations. In connection with the exercise of the foregoing remedies, Laurus is granted permission to use all of each Company’s Intellectual Property. The proceeds of sale shall be applied first to all costs and expenses of sale, including attorneys’ fees, and second to the payment (in whatever order Laurus elects) of all Obligations. After the payment in full in immediately available funds of all of the Obligations, and after the payment by Laurus of any other amount required by any provision of law, including Section 9-608(a)(1) of the UCC (but only after Laurus has received what Laurus considers reasonable proof of a subordinate party’s security interest), the surplus, if any, shall be paid to Company Agent (for the benefit of the applicable Companies) or its representatives or to whosoever may be lawfully entitled to receive the same, or as a court of competent jurisdiction may direct. The Companies shall remain jointly and severally liable to Laurus for any deficiency. The parties hereto each hereby agree that the exercise by any party hereto of any right granted to it or the exercise by any party hereto of any remedy available to it (including, without limitation, the issuance of a notice of redemption, a borrowing request and/or a notice of default), in each case, hereunder or under any Ancillary Agreement shall not constitute confidential information and no party shall have any duty to the other party to maintain such information as confidential.

     23. Waivers. To the full extent permitted by applicable law, each Company hereby waives (a) presentment, demand and protest, and notice of presentment, dishonor, intent to accelerate, acceleration, protest, default, nonpayment, maturity, release, compromise, settlement, extension or renewal of any or all of this Agreement and the Ancillary Agreements or any other notes, commercial paper, Accounts, contracts, Documents, Instruments, Chattel Paper and guaranties at any time held by Laurus on which such Company may in any way be liable, and hereby ratifies and confirms whatever Laurus may do in this regard; (b) all rights to notice and a hearing prior to Laurus’ taking possession or control of, or to Laurus’ replevy, attachment or levy upon, any Collateral or any bond or security that might be required by any court prior to allowing Laurus to

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exercise any of its remedies; and (c) the benefit of all valuation, appraisal and exemption laws. Each Company acknowledges that it has been advised by counsel of its choices and decisions with respect to this Agreement, the Ancillary Agreements and the transactions evidenced hereby and thereby.

     24. Expenses. The Companies shall jointly and severally pay all of Laurus’ out-of-pocket costs and expenses, including reasonable fees and disbursements of in-house or outside counsel and appraisers, in connection with (x) subject to the limitations set forth in Section 5(b)(iii), the preparation, execution and delivery of this Agreement and the Ancillary Agreements, and (y) in connection with the prosecution or defense of any action, contest, dispute, suit or proceeding concerning any matter in any way arising out of, related to or connected with this Agreement or any Ancillary Agreement. The Companies shall also jointly and severally pay all of Laurus’ reasonable fees, charges, out-of-pocket costs and expenses, including fees and disbursements of counsel and appraisers, in connection with (a) the preparation, execution and delivery of any waiver, any amendment thereto or consent proposed or executed in connection with the transactions contemplated by this Agreement or the Ancillary Agreements, (b) Laurus’ obtaining performance of the Obligations under this Agreement and any Ancillary Agreements, including, but not limited to, the enforcement or defense of Laurus’ security interests, assignments of rights and Liens hereunder as valid perfected security interests, (c) any attempt to inspect, verify, protect, collect, sell, liquidate or otherwise dispose of any Collateral, (d) any appraisals or re-appraisals of any property (real or personal) pledged to Laurus by any Company or any of its Subsidiaries as Collateral for, or any other Person as security for, the Obligations hereunder and (e) any consultations in connection with any of the foregoing. The Companies shall also jointly and severally pay Laurus’ customary bank charges for all bank services (including wire transfers) performed or caused to be performed by Laurus for any Company or any of its Subsidiaries at any Company’s or such Subsidiary’s request or in connection with any Company’s loan account with Laurus. All such costs and expenses together with all filing, recording and search fees, taxes and interest payable by the Companies to Laurus shall be payable on demand and shall be secured by the Collateral. If any tax by any Governmental Authority is or may be imposed on or as a result of any transaction between any Company and/or any Subsidiary thereof, on the one hand, and Laurus on the other hand, which Laurus is or may be required to withhold or pay (including, without limitation, as a result of a breach by any Company or any of its Subsidiaries of Section 13(u) herein), each of the Companies hereby jointly and severally indemnifies and holds Laurus harmless in respect of such taxes, and the Companies will repay to Laurus the amount of any such taxes which shall be charged to the Companies’ account; and until the Companies shall furnish Laurus with indemnity therefor (or supply Laurus with evidence satisfactory to it that due provision for the payment thereof has been made), Laurus may hold without interest any balance standing to each Company’s credit and Laurus shall retain its Liens in any and all Collateral.

     25. Assignment. Laurus may assign any or all of the Obligations (other than the Warrant, which the Companies acknowledge has its own assignment provisions), together with any or all of the security therefor, to any Person and any such assignee shall succeed to all of Laurus’ rights with respect thereto; provided that Laurus shall not be permitted to effect any such assignment to a competitor of any Company or to any other Person which is not an institutional investor or financial institution which Laurus reasonably believes can fully perform the obligations of Laurus under this Agreement unless an Event of Default has occurred and is continuing. Upon such assignment, Laurus shall be released from all responsibility for the Collateral to the extent same is assigned to any transferee. Laurus may from time to time sell or otherwise grant participations in any of the Obligations and the holder of any such participation shall, subject to the terms of any agreement between Laurus and such holder, be entitled to the same benefits as Laurus with respect to any security for the Obligations in which such holder is a participant. Each Company agrees that

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each such holder may exercise any and all rights of banker’s lien, set-off and counterclaim with respect to its participation in the Obligations as fully as though such Company were directly indebted to such holder in the amount of such participation. No Company may assign any of its rights or obligations hereunder without the prior written consent of Laurus. All of the terms, conditions, promises, covenants, provisions and warranties of this Agreement shall inure to the benefit of each of the undersigned, and shall bind the representatives, successors and permitted assigns of each Company.

     26. No Waiver; Cumulative Remedies. Failure by Laurus to exercise any right, remedy or option under this Agreement, any Ancillary Agreement or any supplement hereto or thereto or any other agreement between or among any Company and Laurus or delay by Laurus in exercising the same, will not operate as a waiver; no waiver by Laurus will be effective unless it is in writing and then only to the extent specifically stated. Laurus’ rights and remedies under this Agreement and the Ancillary Agreements will be cumulative and not exclusive of any other right or remedy which Laurus may have.

     27. Application of Payments. Each Company irrevocably waives the right to direct the application of any and all payments at any time or times hereafter received by Laurus from or on such Company’s behalf and each Company hereby irrevocably agrees that Laurus shall have the continuing exclusive right to apply and reapply any and all payments received at any time or times hereafter against the Obligations hereunder in such manner as Laurus may deem advisable notwithstanding any entry by Laurus upon any of Laurus’ books and records.

     28. Indemnity. Each Company hereby jointly and severally indemnifies and holds Laurus, and its respective affiliates, employees, attorneys and agents (each, an “Indemnified Person”), harmless from and against any and all suits, actions, proceedings, claims, damages, losses, liabilities and expenses of any kind or nature whatsoever (including attorneys’ fees and disbursements and other costs of investigation or defense, including those incurred upon any appeal) which may be instituted or asserted against or incurred by any such Indemnified Person as the result of credit having been extended, suspended or terminated under this Agreement or any of the Ancillary Agreements or with respect to the execution, delivery, enforcement, performance and administration of, or in any other way arising out of or relating to, this Agreement, the Ancillary Agreements or any other documents or transactions contemplated by or referred to herein or therein and any actions or failures to act with respect to any of the foregoing, except to the extent that any such indemnified liability is finally determined by a court of competent jurisdiction to have resulted solely from such Indemnified Person’s gross negligence or willful misconduct. NO INDEMNIFIED PERSON SHALL BE RESPONSIBLE OR LIABLE TO ANY COMPANY OR TO ANY OTHER PARTY OR TO ANY SUCCESSOR, ASSIGNEE OR THIRD PARTY BENEFICIARY OR ANY OTHER PERSON ASSERTING CLAIMS DERIVATIVELY THROUGH SUCH PARTY, FOR INDIRECT, PUNITIVE, EXEMPLARY OR CONSEQUENTIAL DAMAGES WHICH MAY BE ALLEGED AS A RESULT OF CREDIT HAVING BEEN EXTENDED, SUSPENDED OR TERMINATED UNDER THIS AGREEMENT OR ANY ANCILLARY AGREEMENT OR AS A RESULT OF ANY OTHER TRANSACTION CONTEMPLATED HEREUNDER OR THEREUNDER.

     29. Revival. The Companies further agree that to the extent any Company makes a payment or payments to Laurus, which payment or payments or any part thereof are subsequently invalidated, declared to be fraudulent or preferential, set aside and/or required to be repaid to a trustee, receiver or any other party under any bankruptcy act, state or federal law, common law or

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equitable cause, then, to the extent of such payment or repayment, the obligation or part thereof intended to be satisfied shall be revived and continued in full force and effect as if said payment had not been made.

     30. Borrowing Agency Provisions.

     (a) Each Company hereby irrevocably designates Company Agent to be its attorney and agent and in such capacity to borrow, sign and endorse notes, and execute and deliver all instruments, documents, writings and further assurances now or hereafter required hereunder, on behalf of such Company, and hereby authorizes Laurus to pay over or credit all loan proceeds hereunder in accordance with the request of Company Agent.

     (b) The handling of this credit facility as a co-borrowing facility with a borrowing agent in the manner set forth in this Agreement is solely as an accommodation to the Companies and at their request. Laurus shall not incur any liability to any Company as a result thereof. To induce Laurus to do so and in consideration thereof, each Company hereby indemnifies Laurus and holds Laurus harmless from and against any and all liabilities, expenses, losses, damages and claims of damage or injury asserted against Laurus by any Person arising from or incurred by reason of the handling of the financing arrangements of the Companies as provided herein, reliance by Laurus on any request or instruction from Company Agent or any other action taken by Laurus with respect to this Paragraph 30.

     (c) All Obligations shall be joint and several, and the Companies shall make payment upon the maturity of the Obligations by acceleration or otherwise, and such obligation and liability on the part of the Companies shall in no way be affected by any extensions, renewals and forbearance granted by Laurus to any Company, failure of Laurus to give any Company notice of borrowing or any other notice, any failure of Laurus to pursue to preserve its rights against any Company, the release by Laurus of any Collateral now or thereafter acquired from any Company, and such agreement by any Company to pay upon any notice issued pursuant thereto is unconditional and unaffected by prior recourse by Laurus to any Company or any Collateral for such Company’s Obligations or the lack thereof.

     (d) Each Company expressly waives any and all rights of subrogation, reimbursement, indemnity, exoneration, contribution or any other claim which such Company may now or hereafter have against the other or other Person directly or contingently liable for the Obligations, or against or with respect to any other’s property (including, without limitation, any property which is Collateral for the Obligations), arising from the existence or performance of this Agreement, until all Obligations have been indefeasibly paid in full and this Agreement has been irrevocably terminated.

     (e) Each Company represents and warrants to Laurus that (i) Companies have one or more common stockholders, directors and officers, (ii) the businesses and corporate activities of Companies are closely related to, and substantially benefit, the business and corporate activities of Companies, (iii) the financial and other operations of Companies are performed on a combined basis as if Companies constituted a consolidated corporate group, (iv) Companies will receive a substantial economic benefit from entering into this Agreement and will receive a substantial economic benefit from the application of each Loan hereunder, in each case, whether or not such amount is used directly by any Company and (v) all requests for Loans hereunder by the Company Agent are for the

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exclusive and indivisible benefit of the Companies as though, for purposes of this Agreement, the Companies constituted a single entity.

     31. Cape Town Convention. The Companies jointly and severally agree to facilitate any registration of an International Interest required by Laurus. If requested by Laurus, the Company shall initiate and consent to the filing of a prospective Contract of Sale. The Companies shall be a “Registry User Entity” no less than ten (10) days before the Closing Date and, if different, on a date of acceptance and delivery of any aircraft.

     32. Notices. Any notice or request hereunder may be given to any Company, Company Agent or Laurus at the respective addresses set forth below or as may hereafter be specified in a notice designated as a change of address under this Section. Any notice or request hereunder shall be given by registered or certified mail, return receipt requested, hand delivery, overnight mail or telecopy (confirmed by mail). Notices and requests shall be, in the case of those by hand delivery, deemed to have been given when delivered to any officer of the party to whom it is addressed, in the case of those by mail or overnight mail, deemed to have been given five (5) Business Days after the date when deposited in the mail or with the overnight mail carrier, and, in the case of a telecopy, when confirmed.

Notices shall be provided as follows:

If to Laurus:	Laurus Master Fund, Ltd.
	c/o M&C Corporate Services Limited
	P.O. Box 309 GT
	Ugland House
	George Town
	South Church Street
	Grand Cayman, Cayman Islands
	Facsimile: 345-949-8080
With a copy to:	Laurus Capital Management, LLC
	335 Madison Avenue, 10th Floor
	New York, New York 10017
	Attention: Portfolio Services
	Telephone: (212) 541-5800
	Telecopier: (212) 541-4410
If to any Company, or Company Agent:	Kitty Hawk, Inc.
	1515 West 20th Street
	DFW Airport, Texas 75261
	Attention: James Kupferschmid
	Telephone: (972) 456-2000
	Facsimile: (972) 456-2350

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With a copy to:	Haynes and Boone, LLP
	901 Main Street, Suite 3100
	Dallas, Texas 75202
	Attention: Garrett DeVries
	Telephone: (214) 651-5614
	Facsimile: (214) 200-0428

or such other address as may be designated in writing hereafter in accordance with this Section 32 by such Person.

          33. Governing Law, Jurisdiction and Waiver of Jury Trial.

          (a) THIS AGREEMENT AND THE ANCILLARY AGREEMENTS SHALL BE GOVERNED BY AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK APPLICABLE TO CONTRACTS MADE AND PERFORMED IN SUCH STATE, WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAW.

          (b) EACH COMPANY HEREBY CONSENTS AND AGREES THAT THE STATE OR FEDERAL COURTS LOCATED IN THE COUNTY OF NEW YORK, STATE OF NEW YORK SHALL HAVE EXCLUSIVE JURISDICTION TO HEAR AND DETERMINE ANY CLAIMS OR DISPUTES BETWEEN ANY COMPANY, ON THE ONE HAND, AND LAURUS, ON THE OTHER HAND, PERTAINING TO THIS AGREEMENT OR ANY OF THE ANCILLARY AGREEMENTS OR TO ANY MATTER ARISING OUT OF OR RELATED TO THIS AGREEMENT OR ANY OF THE ANCILLARY AGREEMENTS; PROVIDED, THAT LAURUS AND EACH COMPANY ACKNOWLEDGE THAT ANY APPEALS FROM THOSE COURTS MAY HAVE TO BE HEARD BY A COURT LOCATED OUTSIDE OF THE COUNTY OF NEW YORK, STATE OF NEW YORK; AND FURTHER PROVIDED, THAT NOTHING IN THIS AGREEMENT SHALL BE DEEMED OR OPERATE TO PRECLUDE LAURUS FROM BRINGING SUIT OR TAKING OTHER LEGAL ACTION IN ANY OTHER JURISDICTION TO COLLECT THE OBLIGATIONS, TO REALIZE ON THE COLLATERAL OR ANY OTHER SECURITY FOR THE OBLIGATIONS, OR TO ENFORCE A JUDGMENT OR OTHER COURT ORDER IN FAVOR OF LAURUS. EACH COMPANY EXPRESSLY SUBMITS AND CONSENTS IN ADVANCE TO SUCH JURISDICTION IN ANY ACTION OR SUIT COMMENCED IN ANY SUCH COURT, AND EACH COMPANY HEREBY WAIVES ANY OBJECTION THAT IT MAY HAVE BASED UPON LACK OF PERSONAL JURISDICTION, IMPROPER VENUE OR FORUM NON CONVENIENS. EACH COMPANY HEREBY WAIVES PERSONAL SERVICE OF THE SUMMONS, COMPLAINT AND OTHER PROCESS ISSUED IN ANY SUCH ACTION OR SUIT AND AGREES THAT SERVICE OF SUCH SUMMONS, COMPLAINT AND OTHER PROCESS MAY BE MADE BY REGISTERED OR CERTIFIED MAIL ADDRESSED TO COMPANY AGENT AT THE ADDRESS SET FORTH IN SECTION 29 AND THAT SERVICE SO MADE SHALL BE DEEMED COMPLETED UPON THE EARLIER OF COMPANY AGENT’S ACTUAL RECEIPT THEREOF OR THREE (3) DAYS AFTER DEPOSIT IN THE U.S. MAILS, PROPER POSTAGE PREPAID.

          (c) THE PARTIES DESIRE THAT THEIR DISPUTES BE RESOLVED BY A JUDGE APPLYING SUCH APPLICABLE LAWS. THEREFORE, TO ACHIEVE THE BEST COMBINATION OF THE BENEFITS OF THE JUDICIAL SYSTEM AND OF ARBITRATION, THE PARTIES HERETO WAIVE ALL RIGHTS TO TRIAL BY JURY IN ANY ACTION, SUIT, OR PROCEEDING BROUGHT TO RESOLVE ANY DISPUTE, WHETHER ARISING IN

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CONTRACT, TORT, OR OTHERWISE BETWEEN LAURUS, AND/OR ANY COMPANY ARISING OUT OF, CONNECTED WITH, RELATED OR INCIDENTAL TO THE RELATIONSHIP ESTABLISHED BETWEEN THEM IN CONNECTION WITH THIS AGREEMENT, ANY ANCILLARY AGREEMENT OR THE TRANSACTIONS RELATED HERETO OR THERETO.

     34. Limitation of Liability. Each Company acknowledges and understands that in order to assure repayment of the Obligations hereunder Laurus may be required to exercise any and all of Laurus’ rights and remedies hereunder and agrees that, except as limited by applicable law, neither Laurus nor any of Laurus’ agents shall be liable for acts taken or omissions made in connection herewith or therewith except for actual bad faith.

     35. Miscellaneous. It is the intention of the parties hereto that Laurus will be entitled to the benefits of 11 U.S.C. Section 1110 in the event of any reorganization of each Company under Chapter 11 of the Bankruptcy Code.

     36. Entire Understanding; Maximum Interest. This Agreement and the Ancillary Agreements contain the entire understanding among each Company and Laurus as to the subject matter hereof and thereof and any promises, representations, warranties or guarantees not herein contained shall have no force and effect unless in writing, signed by each Company’s and Laurus’ respective officers. Neither this Agreement, the Ancillary Agreements, nor any portion or provisions thereof may be changed, modified, amended, waived, supplemented, discharged, cancelled or terminated orally or by any course of dealing, or in any manner other than by an agreement in writing, signed by the party to be charged. Nothing contained in this Agreement, any Ancillary Agreement or in any document referred to herein or delivered in connection herewith shall be deemed to establish or require the payment of a rate of interest or other charges in excess of the maximum rate permitted by applicable law. In the event that the rate of interest or dividends required to be paid or other charges hereunder exceed the maximum rate permitted by such law, any payments in excess of such maximum shall be credited against amounts owed by the Companies to Laurus and thus refunded to the Companies.

     37. Severability. Wherever possible each provision of this Agreement or the Ancillary Agreements shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement or the Ancillary Agreements shall be prohibited by or invalid under applicable law such provision shall be ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions thereof.

     38. Survival. The representations, warranties, covenants and agreements made herein shall survive any investigation made by Laurus and the closing of the transactions contemplated hereby to the extent provided therein. All statements as to factual matters contained in any certificate or other instrument delivered by or on behalf of the Companies pursuant hereto in connection with the transactions contemplated hereby shall be deemed to be representations and warranties by the Companies hereunder solely as of the date of such certificate or instrument. All indemnities set forth herein shall survive the execution, delivery and termination of this Agreement and the Ancillary Agreements and the making and repaying of the Obligations.

     39. Captions. All captions are and shall be without substantive meaning or content of any kind whatsoever.

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     40. Counterparts; Telecopier Signatures. This Agreement may be executed in one or more counterparts, each of which shall constitute an original and all of which taken together shall constitute one and the same agreement. Any signature delivered by a party via telecopier transmission shall be deemed to be any original signature hereto.

     41. Construction. The parties acknowledge that each party and its counsel have reviewed this Agreement and that the normal rule of construction to the effect that any ambiguities are to be resolved against the drafting party shall not be employed in the interpretation of this Agreement or any amendments, schedules or exhibits thereto.

     42. Publicity. Each Company hereby authorizes Laurus to make appropriate announcements of the financial arrangement entered into by and among each Company and Laurus, including, without limitation, announcements which are commonly known as tombstones, in such publications and to such selected parties as Laurus shall in its sole and absolute discretion deem appropriate, or as required by applicable law.

     43. Joinder. It is understood and agreed that any Person that desires to become a Company hereunder, or is required to execute a counterpart of this Agreement after the date hereof pursuant to the requirements of this Agreement or any Ancillary Agreement, shall become a Company hereunder by (a) executing a Joinder Agreement in form and substance satisfactory to Laurus, (b) delivering supplements to such exhibits and annexes to this Agreement and the Ancillary Agreements as Laurus shall reasonably request and (c) taking all actions as specified in this Agreement as would have been taken by such Company had it been an original party to this Agreement, in each case with all documents required above to be delivered to Laurus and with all documents and actions required above to be taken to the reasonable satisfaction of Laurus.

     44. Legends. The Securities shall bear legends as follows;

     (a) The Note shall bear substantially the following legend:

“THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY APPLICABLE, STATE SECURITIES LAWS. THIS NOTE MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS TO THIS NOTE UNDER SAID ACT AND APPLICABLE STATE SECURITIES LAWS OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO KITTY HAWK, INC. THAT SUCH REGISTRATION IS NOT REQUIRED.”

     (b) Any shares of Common Stock issued pursuant to exercise of the Warrants, shall bear a legend which shall be in substantially the following form until such shares are covered by an effective registration statement filed with the SEC:

“THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY APPLICABLE, STATE SECURITIES LAWS. THESE SHARES MAY NOT BE SOLD,

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OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH SECURITIES ACT AND APPLICABLE STATE SECURITIES LAWS OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO KITTY HAWK, INC. THAT SUCH REGISTRATION IS NOT REQUIRED.”

     (c) The Warrants shall bear substantially the following legend:

     “THIS WARRANT AND THE COMMON SHARES ISSUABLE UPON EXERCISE OF THIS WARRANT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY APPLICABLE STATE SECURITIES LAWS. THIS WARRANT AND THE COMMON SHARES ISSUABLE UPON EXERCISE OF THIS WARRANT MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS TO THIS WARRANT OR THE UNDERLYING SHARES OF COMMON STOCK UNDER SAID ACT AND APPLICABLE STATE SECURITIES LAWS OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO KITTY HAWK, INC. THAT SUCH REGISTRATION IS NOT REQUIRED.”

[Balance of page intentionally left blank; signature page follows.]

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     IN WITNESS WHEREOF, the parties have executed this Security Agreement as of the date first written above.

KITTY HAWK, INC.
By:	/s/ James Kupferschmid
Name:	James Kupferschmid
Title:	Chief Financial Officer
KITTY HAWK AIRCARGO, INC.
By:	/s/ James Kupferschmid
Name:	James Kupferschmid
Title:	Treasurer
KITTY HAWK CARGO, INC.
By:	/s/ James Kupferschmid
Name:	James Kupferschmid
Title:	Treasurer
KITTY HAWK GROUND, INC.
By:	/s/ James Kupferschmid
Name:	James Kupferschmid
Title:	Treasurer
KH GROUND, INC.
By:	/s/ James Kupferschmid
Name:	James Kupferschmid
Title:	Treasurer
LAURUS MASTER FUND, LTD.
By:	/s/ David Grin
Name:	David Grin
Title:	Director

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Annex A — Definitions

     “Account Debtor” means any Person who is or may be obligated with respect to, or on account of, an Account.

     “Accountants” has the meaning given to such term in Section 11(a).

     “Accounts” means all “accounts”, as such term is defined in the UCC, now owned or hereafter acquired by any Person, including: (a) all accounts receivable, other receivables, book debts and other forms of obligations (other than forms of obligations evidenced by Chattel Paper or Instruments) (including any such obligations that may be characterized as an account or contract right under the UCC); (b) all of such Person’s rights in, to and under all purchase orders or receipts for goods or services; (c) all of such Person’s rights to any goods represented by any of the foregoing (including unpaid sellers’ rights of rescission, replevin, reclamation and stoppage in transit and rights to returned, reclaimed or repossessed goods); (d) all rights to payment due to such Person for Goods or other property sold, leased, licensed, assigned or otherwise disposed of, for a policy of insurance issued or to be issued, for a secondary obligation incurred or to be incurred, for energy provided or to be provided, for the use or hire of a vessel under a charter or other contract, arising out of the use of a credit card or charge card, or for services rendered or to be rendered by such Person or in connection with any other transaction (whether or not yet earned by performance on the part of such Person); and (e) all collateral security of any kind given by any Account Debtor or any other Person with respect to any of the foregoing.

     “Accounts Availability” means ninety percent (90%) of the net face amount of Eligible Accounts.

     “Affiliate” means, with respect to any Person, (a) any other Person (other than a Subsidiary) which, directly or indirectly, is in control of, is controlled by, or is under common control with such Person, (b) any other Person that, directly or indirectly, owns or controls, whether beneficially, or as trustee, guardian or other fiduciary, 25% or more of the Stock having ordinary voting power in the election of directors of such Person, (c) any other Person who is a director, officer, joint venturer or partner (i) of such Person, (ii) of any Subsidiary of such Person or (iii) of any Person described in clause (a) above or (d) in the case of the Companies, the immediate family members, spouses and lineal descendants of individuals who are Affiliates of such Companies. For the purposes of this definition, control of a Person shall mean the power (direct or indirect) to direct or cause the direction of the management and policies of such Person whether by contract or otherwise; provided however, that the term “Affiliate” shall specifically exclude Laurus.

     “Aircraft” means the Aircraft identified on Schedule A-1 hereto and includes aircraft, airframes, engines and related parts that the Parent and/or the Subsidiaries own.

     “Aircraft Mortgage” has the meaning given such term on Schedule A-2 annexed hereto.

     “Aircraft Protocol” means the official English language text of the Protocol to the Convention on International Interests in Mobile Equipment on Matters Specific to Aircraft Equipment, adopted on 16 November 2001 at a diplomatic conference held in Cape Town, as the same may be amended or modified from time to time.

     “Aircraft Security Documents” means the documents described and set forth on Schedule A-2 annexed hereto, including without limitation, the Aircraft Mortgage.

     “Ancillary Agreements” means the Note, the Warrants, the Registration Rights Agreements, each Security Document and all other agreements, instruments, documents, mortgages, pledges, powers of attorney, consents, assignments, contracts, notices, security agreements, trust agreements and guarantees whether heretofore, concurrently, or hereafter executed by or on behalf of any Company, any of its Subsidiaries or any other Person or delivered to Laurus, relating to this Agreement or to the transactions contemplated by this Agreement or otherwise relating to the relationship between or among any Company and Laurus, as each of the same may be amended, supplemented, restated or otherwise modified from time to time.

     “Balance Sheet Date” has the meaning given such term in Section 12(f)(ii).

     “Books and Records” means all books, records, board minutes, contracts, licenses, insurance policies, environmental audits, business plans, files, computer files, computer discs and other data and software storage and media devices, accounting books and records, financial statements (actual and pro forma), filings with Governmental Authorities and any and all records and instruments relating to the Collateral or otherwise necessary or helpful in the collection thereof or the realization thereupon.

     “Business Day” means a day on which Laurus is open for business and that is not a Saturday, a Sunday or other day on which banks are required or permitted to be closed in the State of New York.

     “Cape Town Convention” means, collectively, the Aircraft Protocol, the Convention, the International Registry Procedures and the International Registry Regulations.

     “Capital Availability Amount” means $25,000,000.

     “Certificated Air Carrier” has the meaning given that term in the Aircraft Mortgage.

     “Charter” has the meaning given such term in Section 12(c)(iv).

     “Chattel Paper” means all “chattel paper,” as such term is defined in the UCC, including electronic chattel paper, now owned or hereafter acquired by any Person.

     “Citizen of the United States” has the meaning specified in Section 40102(a)(15) of Title 49 of the United States Code or any legislation of the United States of America enacted in substitution or replacement therefore, as amended from time to time and as then interpreted and applied by the DOT and/or the FAA, as the case may be.

     “Closing Date” means the date on which any Company shall first receive proceeds of the initial Loans or the date hereof, if no Loan is made under the facility on the date hereof.

     “Code” has the meaning given such term in Section 17(i).

     “Collateral” means all of each Company’s property and assets, whether real or personal, tangible or intangible, and whether now owned or hereafter acquired, or in which it now

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has or at any time in the future may acquire any right, title or interests including all of the following property in which it now has or at any time in the future may acquire any right, title or interest:

          (a) all Inventory;

          (b) all Equipment;

          (c) all Fixtures;

          (d) all Goods;

          (e) all General Intangibles;

          (f) all Accounts;

          (g) all Deposit Accounts, other bank accounts and all funds on deposit therein;

          (h) all Investment Property;

          (i) all Stock;

          (j) all Chattel Paper;

          (k) all Letter-of-Credit Rights;

          (l) all Instruments;

          (m) all Commercial Tort Claims set forth on Schedule A-3;

          (n) all Books and Records;

          (o) all Intellectual Property;

          (p) all Supporting Obligations including letters of credit and guarantees issued in support of Accounts, Chattel Paper, General Intangibles and Investment Property;

          (q) the Aircraft;

          (r) (i) all money, cash and cash equivalents and (ii) all cash held as cash collateral to the extent not otherwise constituting Collateral, all other cash or property at any time on deposit with or held by Laurus for the account of any Company (whether for safekeeping, custody, pledge, transmission or otherwise); and

          (s) all products and Proceeds of all or any of the foregoing, tort claims and all claims and other rights to payment including (i) insurance claims against third parties for loss of, damage to, or destruction of, the foregoing Collateral and (ii) payments due or to become due under leases, rentals and hires of any or all of the foregoing and Proceeds payable under, or unearned premiums with respect to policies of insurance in whatever form.

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     “Commercial Tort Claims” means the claims described and set forth on Schedule A-3 annexed hereto.

     “Common Stock” means the shares of stock representing the Parent’s common equity interests.

     “Company Agent” means Kitty Hawk, Inc.

     “Contract Rate” has the meaning given such term in the Note.

     “Convention” means, the official English language text of the Convention on International Interests in Mobile Equipment, adopted on 16 November 2001 at a diplomatic conference held in Cape Town, South Africa, as the same may be amended or modified from time to time.

     “Default” means an Event of Default or any act or event that, with the giving of notice or passage of time or both, would constitute an Event of Default.

     “Department of Transportation” and “DOT” means the Office of the Secretary of the United States Department of Transportation and any agent or instrumentality of the United States government succeeding to its functions.

     “Deposit Accounts” means all “deposit accounts” as such term is defined in the UCC, now or hereafter held in the name of any Person, including, without limitation, the Lockboxes.

     “Disclosure Controls” has the meaning given such term in Section 12(f)(iv).

     “Documents” means all “documents”, as such term is defined in the UCC, now owned or hereafter acquired by any Person, wherever located, including all bills of lading, dock warrants, dock receipts, warehouse receipts, and other documents of title, whether negotiable or non-negotiable.

     “Eligible Accounts” means each Account of each Company which conforms to the following criteria: (a) shipment of the merchandise or the rendition of services has been completed; (b) no return, rejection or repossession of the merchandise has occurred; (c) merchandise or services shall not have been rejected or disputed by the Account Debtor and there shall not have been asserted any offset, defense or counterclaim; (d) continues to be in full conformity with the representations and warranties made by such Company to Laurus with respect thereto; (e) Laurus is, and continues to be, satisfied with the credit standing of the Account Debtor in relation to the amount of credit extended; (f) there are no facts existing or threatened which are likely to result in any adverse change in an Account Debtor’s financial condition and such Account has been classified as doubtful by the Parent; (g) is documented by an invoice in a form approved by Laurus and shall not be unpaid more than ninety (90) days from invoice date; (h) not more than twenty-five percent (25%) of the unpaid amount of invoices due from such Account Debtor remains unpaid more than ninety (90) days from invoice date; (i) is not evidenced by chattel paper or an instrument of any kind with respect to or in payment of the Account unless such instrument is duly endorsed to and in possession of Laurus or represents a check in payment of an Account; (j) the Account Debtor is located in the United States; provided, however, Laurus may, from time to time, in the exercise of its sole discretion and based upon satisfaction of certain conditions to be determined at such time by Laurus, deem certain

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Accounts as Eligible Accounts notwithstanding that such Account is due from an Account Debtor located outside of the United States; (k) Laurus has a first priority perfected Lien in such Account and such Account is not subject to any Lien other than Permitted Liens; (l) does not arise out of transactions with any employee, officer, director, stockholder or Affiliate of any Company; (m) is payable to such Company; (n) does not arise out of a bill and hold sale prior to shipment and does not arise out of a sale to any Person to which such Company is indebted, but only to the extent of such indebtedness; (o) is net of any returns, discounts, claims, credits and allowances; (p) if the Account arises out of contracts between such Company, on the one hand, and the United States, on the other hand, any state, or any department, agency or instrumentality of any of them, such Company has so notified Laurus, in writing, prior to the creation of such Account, and there has been compliance with any governmental notice or approval requirements, including compliance with the Federal Assignment of Claims Act; (q) is a good and valid account representing an undisputed bona fide indebtedness incurred by the Account Debtor therein named, for a fixed sum as set forth in the invoice relating thereto with respect to an unconditional sale and delivery upon the stated terms of goods sold by such Company or work, labor and/or services rendered by such Company; (r) does not arise out of progress billings prior to completion of the order; (s) such Account, when aggregated with all other Accounts of such Account Debtor does not exceed twenty-five percent (25%) of all Eligible Accounts; provided, however, so long as the USPS has acknowledged the security interest of Laurus pursuant to the Federal Assignment of Claims Act, as to USPS, such percentage shall be forty percent (40%); (t) such Company’s right to payment is absolute and not contingent upon the fulfillment of any condition whatsoever; (u) such Company is able to bring suit and enforce its remedies against the Account Debtor through judicial process; (v) does not represent interest payments, late or finance charges owing to such Company, and (w) is otherwise satisfactory to Laurus as determined by Laurus in the exercise of its reasonable business discretion. In the event any Company requests that Laurus include within Eligible Accounts certain Accounts of one or more of such Company’s acquisition targets, Laurus shall at the time of such request consider such inclusion, but any such inclusion shall be at the sole option of Laurus and shall at all times be subject to the execution and delivery to Laurus of all such documentation (including, without limitation, guaranty and security documentation) as Laurus may require in its sole discretion.

     “Eligible Subsidiary” means each Subsidiary of the Parent set forth on Exhibit A hereto, as the same may be updated from time to time with Laurus’ written consent.

     “Equipment” means all “equipment” as such term is defined in the UCC, now owned or hereafter acquired by any Person, wherever located, including any and all machinery, apparatus, equipment, fittings, furniture, Fixtures, motor vehicles and other tangible personal property (other than Inventory) of every kind and description that may be now or hereafter used in such Person’s operations or that are owned by such Person or in which such Person may have an interest, and all parts, accessories and accessions thereto and substitutions and replacements therefor.

     “ERISA” has the meaning given such term in Section 12(bb).

     “Event of Default” means the occurrence of any of the events set forth in Section 21.

     “Excess Availability” means, for the thirty (30)- days prior to any proposed sale or other disposition of Collateral pursuant to Section 7(e)(ii), the average amount by which the Formula Amount exceeds the average outstanding balance of the Loans.

     “Exchange Act” means the Securities Exchange Act of 1934, as amended.

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     “Exchange Act Filings” means the Parent’s filings under the Exchange Act made prior to the date of this Agreement.

     “Existing Indebtedness” means the indebtedness described on Exhibit E.

     “Federal Aviation Act” means that portion of the United States Code comprising those provisions formerly referred to as the Federal Aviation Act of 1958, as amended, or any subsequent legislation that amends, supplements or supersedes such provisions.

     “Federal Aviation Administration” and “FAA” means the United States Federal Aviation Administration and any agent or instrumentality of the United States government succeeding to its functions.

     “Financial Reporting Controls” has the meaning given such term in Section 12(i)(v).

     “Fixtures” means all “fixtures” as such term is defined in the UCC, now owned or hereafter acquired by any Person.

     “Formula Amount” has the meaning given such term in Section 2(a)(i).

     “GAAP” means generally accepted accounting principles, practices and procedures in effect from time to time in the United States of America.

     “General Intangibles” means all “general intangibles” as such term is defined in the UCC, now owned or hereafter acquired by any Person including all right, title and interest that such Person may now or hereafter have in or under any contract, all Payment Intangibles, customer lists, Licenses, Intellectual Property, interests in partnerships, joint ventures and other business associations, permits, proprietary or confidential information, inventions (whether or not patented or patentable), technical information, procedures, designs, knowledge, know-how, Software, data bases, data, skill, expertise, experience, processes, models, drawings, materials, Books and Records, Goodwill (including the Goodwill associated with any Intellectual Property), all rights and claims in or under insurance policies (including insurance for fire, damage, loss, and casualty, whether covering personal property, real property, tangible rights or intangible rights, all liability, life, key-person, and business interruption insurance, and all unearned premiums), uncertificated securities, choses in action, deposit accounts, rights to receive tax refunds and other payments, rights to received dividends, distributions, cash, Instruments and other property in respect of or in exchange for pledged Stock and Investment Property, and rights of indemnification.

     “Goods” means all “goods”, as such term is defined in the UCC, now owned or hereafter acquired by any Person, wherever located, including embedded software to the extent included in “goods” as defined in the UCC, manufactured homes, fixtures, standing timber that is cut and removed for sale and unborn young of animals.

     “Goodwill” means all goodwill, trade secrets, proprietary or confidential information, technical information, procedures, formulae, quality control standards, designs, operating and training manuals, customer lists, and distribution agreements now owned or hereafter acquired by any Person.

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     “Governmental Authority” means any nation or government, any state or other political subdivision thereof, and any agency, department or other entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government.

     “Indebtedness” of a Person at a particular date means all obligations of such Person for borrowed money (including the Obligations hereunder) and all obligations evidenced by bonds, debentures, notes, loan agreements or other similar instruments, and all purchase money indebtedness which in accordance with GAAP would be classified upon a balance sheet as liabilities (except capital stock and surplus earned or otherwise) and in any event, without limitation by reason of enumeration and without duplication, shall include all indebtedness, debt and other similar monetary obligations for borrowed money of such Person whether direct or guaranteed, and all premiums, if any, due at the required prepayment dates of such indebtedness, and all indebtedness secured by a Lien on assets owned by such Person, whether or not such indebtedness actually shall have been created, assumed or incurred by such Person, but shall exclude, all monetary obligations of such Person due under any operating lease and accounts payable in the ordinary course of business. Any indebtedness of such Person resulting from the acquisition by such Person of any assets subject to any Lien shall be deemed, for the purposes hereof, to be the equivalent of the creation, assumption and incurring of the indebtedness secured thereby, whether or not actually so created, assumed or incurred. Notwithstanding anything to the contrary contained herein, the Series B Preferred Stock shall not constitute Indebtedness.

     “Instruments” means all “instruments”, as such term is defined in the UCC, now owned or hereafter acquired by any Person, wherever located, including all certificated securities and all promissory notes and other evidences of indebtedness, other than instruments that constitute, or are a part of a group of writings that constitute, Chattel Paper.

     “Intellectual Property” means any and all patents, trademarks, service marks, trade names, copyrights, trade secrets, Licenses, information and other proprietary rights and processes.

     “International Interest” shall have the meaning ascribed thereto in the Cape Town Convention.

     “International Registry” means the International Registry of Mobile Assets located in Dublin, Ireland and established pursuant to the Cape Town Convention, along with any successor registry thereto.

     “International Registry Procedures” means the official English language text of the procedures for the International Registry issued by the supervisory authority thereof pursuant to the Convention and the Aircraft Protocol, as the same may be amended or modified from time to time.

     “International Registry Regulations” means the official English language text of the regulations for the International Registry issued by the supervisory authority thereof pursuant to the Convention and the Aircraft Protocol, as the same may be amended or modified from time to time.

     “Inventory” means all “inventory”, as such term is defined in the UCC, now owned or hereafter acquired by any Person, wherever located, including all inventory, merchandise, goods and other personal property that are held by or on behalf of such Person for sale or lease or are furnished or are to be furnished under a contract of service or that constitute raw materials, work in process, finished goods, returned goods, or materials or supplies of any kind, nature or description

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used or consumed or to be used or consumed in such Person’s business or in the processing, production, packaging, promotion, delivery or shipping of the same, including all supplies and embedded software.

     “Investment Property” means all “investment property”, as such term is defined in the UCC, now owned or hereafter acquired by any Person, wherever located.

     “Letter-of-Credit Rights” means “letter-of-credit rights” as such term is defined in the UCC, now owned or hereafter acquired by any Person, including rights to payment or performance under a letter of credit, whether or not such Person, as beneficiary, has demanded or is entitled to demand payment or performance.

     “License” means any rights under any written agreement now or hereafter acquired by any Person to use any trademark, trademark registration, copyright, copyright registration or invention for which a patent is in existence or other license of rights or interests now held or hereafter acquired by any Person.

     “Lien” means any mortgage, security deed, deed of trust, pledge, hypothecation, assignment, security interest, lien (whether statutory or otherwise), charge, claim or encumbrance, or preference, priority or other security agreement or preferential arrangement held or asserted in respect of any asset of any kind or nature whatsoever including any conditional sale or other title retention agreement, any lease having substantially the same economic effect as any of the foregoing, and the filing of, or agreement to give, any financing statement under the UCC or comparable law of any jurisdiction.

     “Loans” has the meaning given such term in Section 2(a)(i) and shall include all other extensions of credit hereunder and under any Ancillary Agreement.

     “Lockboxes” has the meaning given such term in Section 8(a).

     “Material Adverse Effect” means a material adverse effect on (a) the business, assets, liabilities, condition (financial or otherwise), properties, operations or prospects of the Companies and their Subsidiaries (taken as a whole), (b) the Companies’ ability to pay or perform the Obligations in accordance with the terms hereof or any Ancillary Agreement, (c) the sufficiency and/or value of the Collateral, the Liens on the Collateral or the priority of any such Lien or (d) the practical realization of the benefits of Laurus’ rights and remedies under this Agreement and the Ancillary Agreements.

     “NASD” has the meaning given such term in Section 13(b).

     “Note” means the Secured Revolving Note.

     “Obligations” means all Loans, all advances, debts, liabilities, obligations, covenants and duties owing by each Company and each of its Subsidiaries to Laurus (or any corporation that directly or indirectly controls or is controlled by or is under common control with Laurus) of every kind and description (whether or not evidenced by any note or other instrument and whether or not for the payment of money or the performance or non-performance of any act), direct or indirect, absolute or contingent, due or to become due, contractual or tortious, liquidated or unliquidated, whether existing by operation of law or otherwise now existing or hereafter arising including any

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debt, liability or obligation owing from any Company and/or each of its Subsidiaries to others which Laurus may have obtained by assignment or otherwise and further including all interest (including interest accruing at the then applicable rate provided in this Agreement after the maturity of the Loans and interest accruing at the then applicable rate provided in this Agreement after the filing of any petition in bankruptcy, or the commencement of any insolvency, reorganization or like proceeding, whether or not a claim for post-filing or post-petition interest is allowed or allowable in such proceeding), charges or any other payments each Company and each of its Subsidiaries is required to make by law or otherwise arising under or as a result of this Agreement, the Ancillary Agreements or otherwise, together with all reasonable expenses and reasonable attorneys’ fees chargeable to the Companies’ or any of their Subsidiaries’ accounts or incurred by Laurus in connection therewith.

     “Operating Aircraft” shall have the meaning assigned thereto in the Aircraft Mortgage and Security Agreement dated the date hereof between Kitty Hawk Aircargo, Inc. and Laurus.

     “Parked Aircraft” has the meaning given such term in the Aircraft Mortgage.

     “Payment Intangibles” means all “payment intangibles” as such term is defined in the UCC, now owned or hereafter acquired by any Person, including, a General Intangible under which the Account Debtor’s principal obligation is a monetary obligation.

     “Permitted Indebtedness” means (a) any Purchase Money Indebtedness not in excess of $2,000,000 in the aggregate outstanding at any one time, (b) intercompany loans and advances among the Parent and the Subsidiaries and (c) financing of insurance premiums not in excess of $1,000,000 in the aggregate outstanding at any one time.

     “Permitted Liens” means (a) Liens of carriers, warehousemen, artisans, bailees, mechanics and materialmen incurred in the ordinary course of business securing sums not overdue; (b) Liens incurred in the ordinary course of business in connection with worker’s compensation, unemployment insurance or other forms of governmental insurance or benefits, relating to employees, securing sums (i) not overdue or (ii) being diligently contested in good faith provided that adequate reserves with respect thereto are maintained on the books of the Companies and their Subsidiaries, as applicable, in conformity with GAAP; (c) Liens in favor of Laurus; (d) Liens for taxes (i) not yet due or (ii) being diligently contested in good faith by appropriate proceedings, provided that adequate reserves with respect thereto are maintained on the books of the Companies and their Subsidiaries, as applicable, in conformity with GAAP; and which have no effect on the priority of Liens in favor of Laurus or the value of the assets in which Laurus has a Lien; (e) Purchase Money Liens securing Purchase Money Indebtedness to the extent permitted in this Agreement and (f) Liens specified on Schedule 12(l) hereto.

     “Person” means any individual, sole proprietorship, partnership, limited liability partnership, joint venture, trust, unincorporated organization, association, corporation, limited liability company, institution, public benefit corporation, entity or government (whether federal, state, county, city, municipal or otherwise, including any instrumentality, division, agency, body or department thereof), and shall include such Person’s successors and assigns.

     “Principal Market” means the NASD Over The Counter Bulletin Board, NASDAQ Capital Market, NASDAQ National Market System, American Stock Exchange or New York Stock

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Exchange (whichever of the foregoing is at the time the principal trading exchange or market for the Common Stock).

     “Proceeds” means “proceeds”, as such term is defined in the UCC and, in any event, shall include: (a) any and all proceeds of any insurance, indemnity, warranty or guaranty payable to any Company or any other Person from time to time with respect to any Collateral; (b) any and all payments (in any form whatsoever) made or due and payable to any Company from time to time in connection with any requisition, confiscation, condemnation, seizure or forfeiture of any Collateral by any governmental body, governmental authority, bureau or agency (or any person acting under color of governmental authority); (c) any claim of any Company against third parties (i) for past, present or future infringement of any Intellectual Property or (ii) for past, present or future infringement or dilution of any trademark or trademark license or for injury to the goodwill associated with any trademark, trademark registration or trademark licensed under any trademark License; (d) any recoveries by any Company against third parties with respect to any litigation or dispute concerning any Collateral, including claims arising out of the loss or nonconformity of, interference with the use of, defects in, or infringement of rights in, or damage to, Collateral; (e) all amounts collected on, or distributed on account of, other Collateral, including dividends, interest, distributions and Instruments with respect to Investment Property and pledged Stock; and (f) any and all other amounts, rights to payment or other property acquired upon the sale, lease, license, exchange or other disposition of Collateral and all rights arising out of Collateral.

     “Purchase Money Indebtedness” means (a) any Indebtedness incurred for the payment of all or any part of the purchase price of any fixed asset, including indebtedness under capitalized leases, (b) any indebtedness incurred for the sole purpose of financing or refinancing all or any part of the purchase price of any fixed asset, and (c) any renewals, extensions or refinancings thereof (but not any increases in the principal amounts thereof outstanding at that time).

     “Purchase Money Lien” means any Lien upon any fixed assets that secures the Purchase Money Indebtedness related thereto but only if such Lien shall at all times be confined solely to the asset the purchase price of which was financed or refinanced through the incurrence of the Purchase Money Indebtedness secured by such Lien and only if such Lien secures only such Purchase Money Indebtedness.

     “Registration Rights Agreements” means that certain Registration Rights Agreement dated as of the Closing Date by and between the Parent and Laurus and each other registration rights agreement by and between the Parent and Laurus, as each of the same may be amended, modified and supplemented from time to time.

     “Registry User Entity” shall have the meaning ascribed thereto in the Cape Town Convention.

     “SEC” means the Securities and Exchange Commission.

     “SEC Reports” has the meaning given such term in Section 12(x).

     “Secured Revolving Note” means that certain Secured Revolving Note dated as of the Closing Date made by the Companies in favor of Laurus in the original face amount of $25,000,000, as the same may be amended, supplemented, restated and/or otherwise modified from time to time.

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     “Securities” means the Note and the Warrants and the shares of Common Stock, which may be issued pursuant to exercise of such Warrants.

     “Securities Act” has the meaning given such term in Section 12(u).

     “Security Documents” means the Aircraft Security Documents, all other security agreements, mortgages, lockbox agreements, cash collateral deposit letters, pledges and other agreements which are executed by any Company or any of its Subsidiaries in favor of Laurus.

     “Series B Preferred Stock” means the 15,000 shares of the Parent’s preferred stock, $0.01 par value, which have been designated as Series B redeemable preferred stock.

     “Software” means all “software” as such term is defined in the UCC, now owned or hereafter acquired by any Person, including all computer programs and all supporting information provided in connection with a transaction related to any program.

     “Solvent” means, with respect to any Person on a particular date, that on such date (a) the fair value of the property of such Person is greater than the total amount of liabilities, including contingent liabilities, of such Person; (b) the present fair salable value of the assets of such Person is not less than the amount that will be required to pay the probable liability of such Person on its debts as they become absolute and matured; (c) such Person does not intend to, and does not believe that it will, incur debts or liabilities beyond such Person’s ability to pay as such debts and liabilities mature; and (d) such Person is not engaged in a business or transaction, and is not about to engage in a business or transaction, for which such Person’s property would constitute and unreasonably small capital. The amount of contingent liabilities (such as litigation, guaranties and pension plan liabilities) at any time shall be computed as the amount that, in light of all the facts and circumstances existing at the time, represents the amount that can reasonably be expected to become an actual or matured liability.

     “Stock” means all certificated and uncertificated shares, options, warrants, membership interests, general or limited partnership interests, participation or other equivalents (regardless of how designated) of or in a corporation, partnership, limited liability company or equivalent entity whether voting or nonvoting, including common stock, preferred stock, or any other “equity security” (as such term is defined in Rule 3a11-1 of the General Rules and Regulations promulgated by the SEC under the Securities Exchange Act of 1934).

     “Subsidiary” means, with respect to any Person, (i) any other Person whose shares of stock or other ownership interests having ordinary voting power (other than stock or other ownership interests having such power only by reason of the happening of a contingency) to elect a majority of the directors or other governing body of such other Person, are owned, directly or indirectly, by such Person or (ii) any other Person in which such Person owns, directly or indirectly, more than 50% of the equity interests at such time.

     “Supporting Obligations” means all “supporting obligations” as such term is defined in the UCC.

     “Term” means the Closing Date through September 30, 2010, subject to acceleration at the option of Laurus upon the occurrence of an Event of Default hereunder or other termination hereunder.

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     “Transactions” means, with respect to the Companies, the execution, delivery and performance by the Companies of this Agreement and the Ancillary Agreements to which such Company is a party to such documents, and all transactions contemplated by the foregoing documents.

     “Transportation Security Administration” and “TSA” means the United States Transportation Security Administration and any agent or instrumentality of the United States government succeeding to its functions.

     “UCC” means the Uniform Commercial Code as the same may, from time to time be in effect in the State of New York; provided, that in the event that, by reason of mandatory provisions of law, any or all of the attachment, perfection or priority of, or remedies with respect to, Laurus’ Lien on any Collateral is governed by the Uniform Commercial Code as in effect in a jurisdiction other than the State of New York, the term “UCC” shall mean the Uniform Commercial Code as in effect in such other jurisdiction for purposes of the provisions of this Agreement relating to such attachment, perfection, priority or remedies and for purposes of definitions related to such provisions; provided further, that to the extent that UCC is used to define any term herein or in any Ancillary Agreement and such term is defined differently in different Articles or Divisions of the UCC, the definition of such term contained in Article or Division 9 shall govern.

     “USPS” means the United States Postal Service, or any agency or subsidiary thereof, or any successor thereto.

     “Warrant Shares” has the meaning given such term in Section 12(a).

     “Warrants” means that certain Common Stock Purchase Warrant dated as of the Closing Date made by the Parent in favor of Laurus and each other warrant made by the Parent in favor Laurus, as each of the same may be amended, restated, modified and/or supplemented from time to time.

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EX-10.5

Exhibit 10.5

THIS WARRANT AND THE SHARES OF COMMON STOCK ISSUABLE UPON EXERCISE OF THIS WARRANT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES LAWS. THIS WARRANT AND THE COMMON STOCK ISSUABLE UPON EXERCISE OF THIS WARRANT MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS TO THIS WARRANT UNDER SAID ACT AND ANY APPLICABLE STATE SECURITIES LAWS OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO KITTY HAWK, INC. THAT SUCH REGISTRATION IS NOT REQUIRED.

Right to Purchase up to 8,216,657 Shares of Common Stock of
Kitty Hawk, Inc.
(subject to adjustment as provided herein)

COMMON STOCK PURCHASE WARRANT

No. L - 1 Issue Date: March 29, 2007

     KITTY HAWK, INC., a corporation organized under the laws of the State of Delaware (the “Company”), hereby certifies that, for value received, LAURUS MASTER FUND, LTD., or assigns (the “Holder”), is entitled, subject to the terms set forth below, to purchase from the Company (as defined herein) from and after the Issue Date of this Warrant and at any time or from time to time before 5:00 p.m., New York time, through the close of business March 29, 2012 (the “Expiration Date”), up to 8,216,657 fully paid and nonassessable shares of Common Stock (as hereinafter defined), $0.000001 par value per share, at the applicable Exercise Price per share (as defined below). The number and character of such shares of Common Stock and the applicable Exercise Price per share are subject to adjustment as provided herein.

     As used herein the following terms, unless the context otherwise requires, have the following respective meanings:

     (a) The term “Affiliated Transferee” as used in Section 7 shall include (i) a partner, member or stockholder of the Transferor, (ii) an entity majority owned or controlled (as such term is defined in Rule 12b-2 of the Securities Exchange Act of 1934, as amended) by the Transferor or by the partners, members or stockholders of the Transferor, and (iii) a fund or account managed by the same management company as the Transferor or by an affiliate of such management company.

     (b) The term “Common Stock” includes (i) the Company’s Common Stock, par value $0.000001 per share; and (ii) any other securities into which or for which any of the securities described in the preceding clause (i) may be converted or exchanged pursuant to a plan of recapitalization, reorganization, merger, sale of assets or otherwise.

     (c) The term “Company” shall include Kitty Hawk, Inc. and any person or entity which shall succeed, or assume the obligations of, Kitty Hawk, Inc. hereunder.

     (d) The term “Event of Default” shall have the meaning given thereto in the Security Agreement.

     (e) The “Exercise Price” applicable under this Warrant shall be a price of $0.91.

     (f) The term “Other Securities” refers to any stock (other than Common Stock) and other securities of the Company or any other person (corporate or otherwise) which the holder of the Warrant at any time shall be entitled to receive, or shall have received, on the exercise of the Warrant, in lieu of or in addition to Common Stock, or which at any time shall be issuable or shall have been issued in exchange for or in replacement of Common Stock or Other Securities pursuant to Section 3 or otherwise.

     (g) The term “Security Agreement” means the Security Agreement dated as of March 29, 2007 among the Holder, the Company and various Subsidiaries of the Company party thereto, as amended, modified, restated and/or supplemented from time to time.

     1. Exercise of Warrant.

          1.1 Number of Shares Issuable upon Exercise. From and after the date hereof through and including the Expiration Date, the Holder shall be entitled to receive, upon exercise of this Warrant in whole or in part (but in increments of no less than 10,000 shares of Common Stock issuable upon exercise of this Warrant), by delivery of an original or fax copy of an exercise notice in the form attached hereto as Exhibit A (the “Exercise Notice”), shares of Common Stock of the Company, subject to adjustment pursuant to Section 4.

          1.2 Fair Market Value. For purposes hereof, the “Fair Market Value” of a share of Common Stock as of a particular date (the “Determination Date”) shall mean:

     (a) If the Company’s Common Stock is traded on the American Stock Exchange or another national exchange or is quoted on the National or Capital Market of The Nasdaq Stock Market, Inc. (“Nasdaq”), then the closing or last sale price, respectively, reported for the last trading day immediately preceding the Determination Date.

     (b) If the Company’s Common Stock is not traded on the American Stock Exchange or another national exchange or on the Nasdaq but is traded on the NASD Over The Counter Bulletin Board, then the mean of the average of the closing bid and asked prices reported for the last trading day immediately preceding the Determination Date.

     (c) Except as provided in clause (d) below, if the Company’s Common Stock is not publicly traded, then as the Holder and the Company agree or in the absence of agreement by arbitration in accordance with the rules then in effect of the American Arbitration Association, before a single arbitrator to be chosen from a panel of persons qualified by education and training to pass on the matter to be decided.

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     (d) If the Determination Date is the date of a liquidation, dissolution or winding up, or any event deemed to be a liquidation, dissolution or winding up pursuant to the Company’s charter, then all amounts to be payable per share to holders of the Common Stock pursuant to the charter in the event of such liquidation, dissolution or winding up, plus all other amounts to be payable per share in respect of the Common Stock in liquidation under the charter, assuming for the purposes of this clause (d) that all of the shares of Common Stock then issuable upon exercise of the Warrant are outstanding at the Determination Date.

          1.3 Company Acknowledgment. The Company will, at the time of the exercise of this Warrant, upon the request of the holder hereof acknowledge in writing its continuing obligation to afford to such holder any rights to which such holder shall continue to be entitled after such exercise in accordance with the provisions of this Warrant. If the holder shall fail to make any such request, such failure shall not affect the continuing obligation of the Company to afford to such holder any such rights.

          1.4 Trustee for Warrant Holders. In the event that a bank or trust company shall have been appointed as trustee for the holders of this Warrant pursuant to Section 3.2, such bank or trust company shall have all the powers and duties of a warrant agent (as hereinafter described) and shall accept, in its own name for the account of the Company or such successor person as may be entitled thereto, all amounts otherwise payable to the Company or such successor, as the case may be, on exercise of this Warrant pursuant to this Section 1.

     2. Procedure for Exercise.

          2.1 Delivery of Stock Certificates, Etc., on Exercise. The Company agrees that the shares of Common Stock purchased upon exercise of this Warrant shall be deemed to be issued to the Holder as the record owner of such shares as of the close of business on the date on which this Warrant shall have been surrendered and payment made for such shares in accordance herewith. As soon as practicable after the exercise of this Warrant in full or in part, and in any event within three (3) trading days thereafter, the Company at its expense (including the payment by it of any applicable issue taxes) will cause to be issued in the name of and delivered to the Holder, or as such Holder (upon payment by such Holder of any applicable transfer taxes) may direct in compliance with applicable securities laws, a certificate or certificates for the number of duly and validly issued, fully paid and nonassessable shares of Common Stock (or Other Securities) to which such Holder shall be entitled on such exercise, plus, in lieu of any fractional share to which such holder would otherwise be entitled, cash equal to such fraction multiplied by the then Fair Market Value of one full share, together with any other stock or other securities and property (including cash, where applicable) to which such Holder is entitled upon such exercise pursuant to Section 1 or otherwise.

          2.2 Exercise. (a) Payment may be made either (i) in cash by wire transfer of immediately available funds or by certified or official bank check payable to the order of the Company equal to the applicable Exercise Price multiplied by the number of shares of Common Stock being acquired upon exercise of this Warrant, (ii) by delivery of this Warrant, or shares of Common Stock and/or Common Stock receivable upon exercise of this Warrant in accordance with the formula set forth in Section 2.2(b) below, or (iii) by a combination of any of the

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foregoing methods, for the number of shares of Common Stock specified in such Exercise Notice (as such exercise number shall be adjusted to reflect any adjustment in the total number of shares of Common Stock issuable to the Holder per the terms of this Warrant) and the Holder shall thereupon be entitled to receive the number of duly authorized, validly issued, fully-paid and non-assessable shares of Common Stock (or Other Securities) determined as provided herein.

     (b) Notwithstanding any provisions herein to the contrary, if the Fair Market Value of one share of Common Stock is greater than the Exercise Price (at the date of calculation as set forth below), in lieu of exercising this Warrant for cash, the Holder may elect to receive shares equal to the value (as determined below) of this Warrant (or the portion thereof being exercised) by surrender of this Warrant at the principal office of the Company together with the properly endorsed Exercise Notice in which event the Company shall issue to the Holder a number of shares of Common Stock computed using the following formula:

X=	Y(A-B) A
Where X =	the number of shares of Common Stock to be issued to the Holder
Y =	the number of shares of Common Stock purchasable under this Warrant or, if only a portion of this Warrant is being exercised, the portion of this Warrant being exercised (at the date of such calculation)
A =	the Fair Market Value of one share of the Company’s Common Stock (at the date of such calculation)
B =	the Exercise Price per share (as adjusted to the date of such calculation)

     3. Effect of Reorganization, Etc.

          3.1 Reorganization, Consolidation, Merger, Etc. (a) In case at any time or from time to time, the Company shall (i) effect a reorganization, (ii) consolidate with or merge into any other person (other than as contemplated in Section 3.1(b) below), or (iii) transfer all or substantially all of its properties or assets to any other person under any plan or arrangement contemplating the dissolution of the Company, then, in each such case, as a condition to the consummation of such a transaction, proper and adequate provision shall be made by the Company whereby the Holder, on the exercise hereof as provided in Section 1 at any time after the consummation of such reorganization, consolidation or merger or the effective date of such dissolution, as the case may be, shall receive, in lieu of the Common Stock (or Other Securities) issuable on such exercise prior to such consummation or such effective date, the stock and other securities and property (including cash, where applicable) to which such Holder would have been entitled upon such consummation or in connection with such dissolution, as the case may be, if such Holder had so exercised this Warrant immediately prior thereto, all subject to further adjustment thereafter as provided in Section 4.

     (b) Notwithstanding anything to the contrary contained in Section 3.1(a) above, the Holder agrees that, in the event of a consolidation or merger of the Company with or into any other person in which the sole consideration is cash, the Holder shall, upon the written request of

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the Company, elect either (i) to exercise this Warrant, in which event such exercise will be deemed effective immediately prior to the consummation of such transaction or (ii) not to exercise this Warrant, in which event this Warrant will expire upon the consummation of such transaction. The Company shall provide the Holder with written notice of its request relating to the foregoing (together with such reasonable information as the Holder may request in connection with the contemplated transaction giving rise to such notice), which is to be delivered to the Holder not less than ten (10) days prior to the closing of the proposed transaction.

          3.2 Dissolution. In the event of any dissolution of the Company following the transfer of all or substantially all of its properties or assets, the Company, concurrently with any distributions made to holders of its Common Stock, shall at its expense deliver or cause to be delivered to the Holder the stock and other securities and property (including cash, where applicable) receivable by the Holder pursuant to Section 3.1, or, if the Holder shall so instruct the Company, to a bank or trust company specified by the Holder and having its principal office in New York, NY as trustee for the Holder.

          3.3 Continuation of Terms. Upon any reorganization, consolidation, merger or transfer (and any dissolution following any transfer) referred to in this Section 3 (but other than any consolidation or merger referred to in Section 3.1(b)), this Warrant shall continue in full force and effect and the terms hereof shall be applicable to the shares of stock and other securities and property receivable on the exercise of this Warrant after the consummation of such reorganization, consolidation or merger or the effective date of dissolution following any such transfer, as the case may be, and shall be binding upon the issuer of any such stock or other securities, including, in the case of any such transfer, the person acquiring all or substantially all of the properties or assets of the Company, whether or not such person shall have expressly assumed the terms of this Warrant. In the event this Warrant does not continue in full force and effect after the consummation of the transactions described in this Section 3 (other than under the circumstances set forth in Section 3.1(b)), then the Company’s securities and property (including cash, where applicable) receivable by the Holder will be delivered to the Holder or the Trustee as contemplated by Section 3.2.

     4. Extraordinary Events Regarding Common Stock; Adjustment of Exercise Price and Number of Shares Issuable Upon Exercise. In the event that the Company shall (a) issue additional shares of the Common Stock as a dividend or other distribution on (i) outstanding Common Stock or (ii) any preferred stock issued by the Company, (b) subdivide its outstanding shares of Common Stock, (c) combine its outstanding shares of the Common Stock into a smaller number of shares of Common Stock, then, in each such event, the Exercise Price shall, simultaneously with the happening of such event, be adjusted by multiplying the then Exercise Price by a fraction, the numerator of which shall be the number of shares of Common Stock outstanding immediately prior to such event and the denominator of which shall be the number of shares of Common Stock outstanding immediately after such event, and the product so obtained shall thereafter be the Exercise Price then in effect. The Exercise Price, as so adjusted, shall be readjusted in the same manner upon the happening of any successive event or events described herein in this Section 4. The number of shares of Common Stock that the Holder shall thereafter, on the exercise hereof as provided in Section 1, be entitled to receive shall be adjusted to a number determined by multiplying the number of shares of Common Stock that would otherwise (but for the provisions of this Section 4) be issuable on such exercise by a fraction of

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which (a) the numerator is the Exercise Price that would otherwise (but for the provisions of this Section 4) be in effect, and (b) the denominator is the Exercise Price in effect on the date of such exercise (taking into account the provisions of this Section 4). Notwithstanding the foregoing, in no event shall the Exercise Price be less than the par value of the Common Stock.

     5. Certificate as to Adjustments. In each case of any adjustment or readjustment in the shares of Common Stock (or Other Securities) issuable on the exercise of this Warrant, the Company at its expense will promptly cause its Chief Financial Officer or other appropriate designee to compute such adjustment or readjustment in accordance with the terms of this Warrant and prepare a certificate setting forth such adjustment or readjustment and showing in detail the facts upon which such adjustment or readjustment is based, including a statement of (a) the consideration received or receivable by the Company for any additional shares of Common Stock (or Other Securities) issued or sold or deemed to have been issued or sold, (b) the number of shares of Common Stock (or Other Securities) outstanding or deemed to be outstanding, and (c) the Exercise Price and the number of shares of Common Stock to be received upon exercise of this Warrant, in effect immediately prior to such adjustment or readjustment and as adjusted or readjusted as provided in this Warrant. The Company will forthwith mail a copy of each such certificate to the holder and any Warrant agent of the Company (appointed pursuant to Section 11 hereof).

     6. Reservation of Stock, Etc., Issuable on Exercise of Warrant. The Company will at all times reserve and keep available, solely for issuance and delivery on the exercise of this Warrant, shares of Common Stock (or Other Securities) from time to time issuable on the exercise of this Warrant.

     7. Assignment; Exchange of Warrant. (a) Subject to compliance with applicable securities laws and Section 7(b) below, this Warrant, and the rights evidenced hereby, may be transferred by any registered holder hereof (a “Transferor”) in whole or in part; provided, that, so long as no Event of Default shall have occurred and be continuing, the Transferor may make no more than 10 transfers (except for transfers to Affiliated Transferees). On the surrender for exchange of this Warrant, with the Transferor’s endorsement in the form of Exhibit B attached hereto (the “Transferor Endorsement Form”) and together with evidence reasonably satisfactory to the Company demonstrating compliance with applicable securities laws, which shall include, without limitation, a legal opinion from the Transferor’s counsel that such transfer is exempt from the registration requirements of applicable securities laws, the Company at its expense (but with payment by the Transferor of any applicable transfer taxes) will issue and deliver to or on the order of the Transferor thereof a new Warrant of like tenor, in the name of the Transferor and/or the transferee(s) specified in such Transferor Endorsement Form (each a “Transferee”), calling in the aggregate on the face or faces thereof for the number of shares of Common Stock called for on the face or faces of the Warrant so surrendered by the Transferor.

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     (b) If, at any time when no Event of Default shall have occurred and be continuing, any Transferor shall propose to sell all or any portion of this Warrant and the rights evidenced hereby (the “Offered Warrant Rights”) to any Person (a “Proposed Transferee”), other than to an Affiliated Transferee, such sale shall be conditioned upon the satisfaction of the following conditions precedent:

     (i) The Transferor shall first offer to sell the Offered Warrant Rights to the Company, at the same price and on terms identical to those terms that the Transferor intends to sell the Offered Warrant Rights to the Proposed Transferee; provided that the Company shall have no right to acquire the Offered Warrant Rights unless the Company acquires all of the Offered Warrant Rights. If such proposed sale involves consideration other than cash, the Company shall have the right to elect to pay, in lieu of such non-cash consideration, cash in an amount equal to the fair market value of such non-cash consideration. Such offer shall be made by a written notice (the “Notice of Proposed Sale”) delivered to the Company not less than 15 days prior to the proposed sale. Such Notice of Proposed Sale shall set forth the identity of the Proposed Transferee, the portion of this Warrant proposed to be sold (which may be all of this Warrant) and the terms and conditions of the proposed sale, including price and any other material terms and conditions of the proposed sale.

     (ii) If the Company does not accept the offer made by the Transferor with respect to all of the Offered Warrant Rights within the 15-day period provided above, then the Transferor shall have the right for a period of 90 days following the 15^th day after the Company shall have received the Notice of Proposed Sale in accordance with Section 7(b)(i) above, to sell up to all of the Offered Warrant Rights to the Proposed Transferee and/or any other transferee, but at not less than the price, and upon terms not more favorable to the Proposed Transferee or other transferee, than were contained in the Notice of Proposed Sale. Any Offered Warrant Rights not sold within such 90-day period shall continue to be subject to the requirements of this Section 7.

     8. Replacement of Warrant. On receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of this Warrant and, in the case of any such loss, theft or destruction of this Warrant, on delivery of a customary affidavit and an indemnity agreement or security reasonably satisfactory in form and amount to the Company or, in the case of any such mutilation, on surrender and cancellation of this Warrant, the Company at its expense (but with payment by the Holder of any applicable taxes or charges, if any) will execute and deliver, in lieu thereof, a new Warrant of like tenor.

     9. Registration Rights; Lock-Up. (a) The Holder has been granted certain registration rights by the Company. These registration rights are set forth in a Registration Rights Agreement entered into by the Company and Holder dated as of March 29, 2007, as the same may be amended, modified and/or supplemented from time to time.

     (b) Provided that no Event of Default shall have occurred and be continuing, the Holder agrees that it will not, without the prior written consent of the Company, sell any shares of Common Stock received upon exercise of this Warrant prior to March 29, 2008 (the “Initial Lock-Up”). Additionally, following the Initial Lock-Up and provided that no Event of Default

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shall have occurred and be continuing, the Holder agrees that it will not, without the prior written consent of the Company, sell shares of Common Stock received upon exercise of this Warrant during a twenty two (22) day trading period in a number that exceeds twenty percent (20%) of the aggregate dollar trading volume of the Common Stock for the twenty two (22) day trading period immediately preceding such sales by the Holder, inclusive of the day of such sales. Such restriction shall in no way affect the Holder’s right to exercise all or any portion of this Warrant as provided in this Warrant.

     10. Maximum Exercise. Notwithstanding anything herein to the contrary, in no event shall the Holder be entitled to exercise any portion of this Warrant in excess of that portion of this Warrant upon exercise of which the sum of (1) the number of shares of Common Stock beneficially owned by the Holder and its Affiliates (other than shares of Common Stock which may be deemed beneficially owned through the ownership of the unexercised portion of the Warrant or the unexercised or unconverted portion of any other security of the Holder subject to a limitation on conversion analogous to the limitations contained herein) and (2) the number of shares of Common Stock issuable upon the exercise of the portion of this Warrant with respect to which the determination of this proviso is being made, would result in beneficial ownership by the Holder and its Affiliates of any amount greater than 9.99% of the then outstanding shares of Common Stock (whether or not, at the time of such exercise, the Holder and its Affiliates beneficially own more than 9.99% of the then outstanding shares of Common Stock). As used herein, the term “Affiliate” means any person or entity that, directly or indirectly through one or more intermediaries, controls or is controlled by or is under common control with a person or entity, as such terms are used in and construed under Rule 144 under the Securities Act. For purposes of the second preceding sentence, beneficial ownership shall be determined in accordance with Section 13(d) of the Securities Exchange Act of 1934, as amended, and Regulations 13D-G thereunder, except as otherwise provided in clause (1) of such sentence. For any reason at any time, upon written or oral request of the Holder, the Company shall within two (2) business days confirm orally and in writing to the Holder the number of shares of Common Stock outstanding as of any given date. The limitations set forth herein (x) may be waived by the Holder upon provision of no less than sixty-one (61) days prior written notice to the Company and (y) shall automatically become null and void following notice to the Company upon the occurrence and during the continuance of an Event of Default, except that at no time shall the Company be obligated to issue any shares of Common Stock pursuant to the terms of this Warrant, the Security Agreement or any Ancillary Agreement (as defined in the Security Agreement) if the issuance of such shares of Common Stock would exceed the aggregate number of shares of Common Stock which the Company may issue pursuant to the terms of this Warrant, the Security Agreement or such Ancillary Agreement without violating the rules or regulations of the Principal Market (as defined in the Security Agreement), except that such limitation shall not apply in the event that the Company obtains the approval of its stockholders as required by the applicable rules or regulations of the Principal Market for issuances of Common Stock in excess of such amount.

     11. Warrant Agent. The Company may, by written notice to the each Holder of the Warrant, appoint an agent for the purpose of issuing Common Stock (or Other Securities) on the exercise of this Warrant pursuant to Section 1, exchanging this Warrant pursuant to Section 7, and replacing this Warrant pursuant to Section 8, or any of the foregoing, and thereafter any such

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issuance, exchange or replacement, as the case may be, shall be made at such office by such agent.

     12. Transfer on the Company’s Books. Until this Warrant is transferred on the books of the Company, the Company may treat the registered holder hereof as the absolute owner hereof for all purposes, notwithstanding any notice to the contrary.

     13. Rights of Shareholders. No Holder shall be entitled to vote or receive dividends or be deemed the holder of the shares of Common Stock or any other securities of the Company which may at any time be issuable upon exercise of this Warrant for any purpose (the “Warrant Shares”), nor shall anything contained herein be construed to confer upon the Holder, as such, any of the rights of a shareholder of the Company or any right to vote for the election of directors or upon any matter submitted to shareholders at any meeting thereof, or to give or withhold consent to any corporate action (whether upon the recapitalization, issuance of shares, reclassification of shares, change of nominal value, consolidation, merger, conveyance or otherwise) or to receive notice of meetings, or to receive dividends or subscription rights or otherwise, in each case, until the earlier to occur of (x) the date of actual delivery to Holder (or its designee) of the Warrant Shares issuable upon the exercise hereof or (y) the third business day following the date such Warrant Shares first become deliverable to Holder, as provided herein.

     14. Notices, Etc. All notices and other communications from the Company to the Holder shall be mailed by first class registered or certified mail, postage prepaid, at such address as may have been furnished to the Company in writing by such Holder or, until any such Holder furnishes to the Company an address, then to, and at the address of, the last Holder who has so furnished an address to the Company.

     15. Miscellaneous. This Warrant and any term hereof may be changed, waived, discharged or terminated only by an instrument in writing signed by the party against which enforcement of such change, waiver, discharge or termination is sought. THIS WARRANT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAWS. ANY ACTION BROUGHT CONCERNING THE TRANSACTIONS CONTEMPLATED BY THIS WARRANT SHALL BE BROUGHT ONLY IN STATE COURTS OF NEW YORK OR IN THE FEDERAL COURTS LOCATED IN THE STATE OF NEW YORK; PROVIDED, HOWEVER, THAT THE HOLDER MAY CHOOSE TO WAIVE THIS PROVISION AND BRING AN ACTION OUTSIDE THE STATE OF NEW YORK. The individuals executing this Warrant on behalf of the Company agree to submit to the jurisdiction of such courts and waive trial by jury. The prevailing party shall be entitled to recover from the other party its reasonable attorneys’ fees and costs. In the event that any provision of this Warrant is invalid or unenforceable under any applicable statute or rule of law, then such provision shall be deemed inoperative to the extent that it may conflict therewith and shall be deemed modified to conform with such statute or rule of law. Any such provision which may prove invalid or unenforceable under any law shall not affect the validity or enforceability of any other provision of this Warrant. The headings in this Warrant are for purposes of reference only, and shall not limit or otherwise affect any of the terms hereof. The invalidity or unenforceability of any provision hereof shall in no way affect the validity or enforceability of any other provision hereof. The Company acknowledges that legal counsel participated in the preparation of this

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Warrant and, therefore, stipulates that the rule of construction that ambiguities are to be resolved against the drafting party shall not be applied in the interpretation of this Warrant to favor any party against the other party.

[BALANCE OF PAGE INTENTIONALLY LEFT BLANK;
SIGNATURE PAGE FOLLOWS]

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     IN WITNESS WHEREOF, the Company has executed this Warrant as of the date first written above.

	KITTY HAWK, INC.
WITNESS:
/s/ Helen Manning	By:	/s/ James Kupferschmid
	Name:	James Kupferschmid
	Title:	Chief Financial Officer

EXHIBIT A

FORM OF SUBSCRIPTION
(To Be Signed Only On Exercise Of Warrant)

TO: Kitty Hawk, Inc.
1515 West 20^th Street
P.O. Box 612787
DFW International Airport, Texas 75261
Attention: Chief Financial Officer

     The undersigned, pursuant to the provisions set forth in the attached Warrant (No.                    ), hereby irrevocably elects to purchase (check applicable box):

                                shares of the common stock covered by such warrant; or

the maximum number of shares of common stock covered by such warrant pursuant to the cashless exercise procedure set forth in Section 2.

     The undersigned herewith makes payment of the full Exercise Price for such shares at the price per share provided for in such Warrant, which is $                    . Such payment takes the form of (check applicable box or boxes):

$                     in lawful money of the United States; and/or

the cancellation of such portion of the attached Warrant as is exercisable for a total of                      shares of Common Stock (using a Fair Market Value of $                     per share for purposes of this calculation); and/or

the cancellation of such number of shares of Common Stock as is necessary, in accordance with the formula set forth in Section 2.2, to exercise this Warrant with respect to the maximum number of shares of Common Stock purchasable pursuant to the cashless exercise procedure set forth in Section 2.

     The undersigned requests that the certificates for such shares be issued in the name of, and delivered to                                                       whose address is                                                                                 .

     The undersigned represents and warrants that all offers and sales by the undersigned of the securities issuable upon exercise of the within Warrant shall be made pursuant to registration of the Common Stock under the Securities Act of 1933, as amended (the “Securities Act”) or pursuant to an exemption from registration under the Securities Act.

Dated:
	(Signature must conform to name of holder as specified on the face of the Warrant)
	Address:

EXHIBIT B

FORM OF TRANSFEROR ENDORSEMENT
(To Be Signed Only On Transfer Of Warrant)

     For value received, the undersigned hereby sells, assigns, and transfers unto the person(s) named below under the heading “Transferees” the right represented by the within Warrant to purchase the percentage and number of shares of Common Stock of Kitty Hawk, Inc. into which the within Warrant relates specified under the headings “Percentage Transferred” and “Number Transferred,” respectively, opposite the name(s) of such person(s) and appoints each such person Attorney to transfer its respective right on the books of Kitty Hawk, Inc. with full power of substitution in the premises.

		Percentage	Number
Transferees	Address	Transferred	Transferred

Dated:
	(Signature must conform to name of holder as specified on the face of the Warrant)
	Address:
	SIGNED IN THE PRESENCE OF:
	(Name)
ACCEPTED AND AGREED: [TRANSFEREE]
(Name)

EX-10.6

Exhibit 10.6

REGISTRATION RIGHTS AGREEMENT

     This Registration Rights Agreement (this “Agreement”) is made and entered into as of March 29, 2007, by and between Kitty Hawk, Inc., a Delaware corporation (the “Company”), and Laurus Master Fund, Ltd. (the “Purchaser”).

     This Agreement is made pursuant to the Security Agreement, dated as of March ___, 2007, by and among the Purchaser, the Company and various subsidiaries of the Company party thereto (as amended, modified or supplemented from time to time, the “Security Agreement”), and pursuant to the Note and the Warrants referred to therein.

     The Company and the Purchaser hereby agree as follows:

     1. Definitions. Capitalized terms used and not otherwise defined herein that are defined in the Security Agreement shall have the meanings given such terms in the Security Agreement. As used in this Agreement, the following terms shall have the following meanings:

          “Closing Date” means the date of the issuance by the Company of the Note and Warrants referred to in the Security Agreement.

          “Commission” means the Securities and Exchange Commission.

          “Common Stock” means shares of the Company’s common stock, par value $0.000001 per share.

          “Effectiveness Date” means (i) with respect to the initial Registration Statement required to be filed hereunder, a date no later than one hundred eighty (180) days following the Closing Date, and (ii) with respect to each additional Registration Statement required to be filed hereunder, a date no later than one hundred eighty (180) days following the applicable Filing Date.

          “Effectiveness Period” has the meaning set forth in Section 2(a).

          “Exchange Act” means the Securities Exchange Act of 1934, as amended, and any successor statute.

          “Filing Date” means, with respect to (i) the Registration Statement required to be filed hereunder in respect of the shares of Common Stock issuable upon exercise of the Warrants issued as of the Closing Date, a date no later than ninety (90) days following the Closing Date, (ii) the shares of Common Stock issuable upon exercise of any Warrant issued after the Closing Date, the date which is ninety (90) days after the date of the issuance of such Warrant, and (iii) the shares of Common Stock issuable to the Holder as a result of adjustments to the Exercise Price made pursuant to the Warrant or otherwise, thirty (30) days after the occurrence such event or the date of the adjustment of the Exercise Price.

          “Holder” or “Holders” means the Purchaser or any of its affiliates or transferees to the extent any of them hold Registrable Securities, other than those purchasing Registrable Securities in a market transaction.

          “Indemnified Party” has the meaning set forth in Section 5(c).

          “Indemnifying Party” has the meaning set forth in Section 5(c).

          “Note” has the meaning set forth in the Security Agreement.

          “Proceeding” means an action, claim, suit, investigation or proceeding (including, without limitation, an investigation or partial proceeding, such as a deposition), whether commenced or threatened.

          “Prospectus” means the prospectus included in the Registration Statement (including, without limitation, a prospectus that includes any information previously omitted from a prospectus filed as part of an effective registration statement in reliance upon Rule 430A promulgated under the Securities Act), 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 the Registration Statement, and all other amendments and supplements to the Prospectus, including post-effective amendments, and all material incorporated by reference or deemed to be incorporated by reference in such Prospectus.

          “Registrable Securities” means the shares of Common Stock issuable upon exercise of the Warrants.

          “Registration Statement” means each registration statement required to be filed hereunder, including the Prospectus therein, amendments and supplements to such registration statement or Prospectus, including pre- and post-effective amendments, all exhibits thereto, and all material incorporated by reference or deemed to be incorporated by reference in such registration statement.

          “Rule 144” means Rule 144 promulgated by the Commission pursuant to the Securities Act, as such Rule may be amended from time to time, or any similar rule or regulation hereafter adopted by the Commission having substantially the same effect as such Rule.

          “Rule 415” means Rule 415 promulgated by the Commission pursuant to the Securities Act, as such Rule may be amended from time to time, or any similar rule or regulation hereafter adopted by the Commission having substantially the same effect as such Rule.

          “Securities Act” means the Securities Act of 1933, as amended, and any successor statute.

          “Security Agreement” has the meaning given to such term in the Preamble hereto.

          “Trading Market” the NASD Over The Counter Bulletin Board, NASDAQ Capital Market, NASDAQ National Market System, American Stock Exchange or New York Stock

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Exchange (whichever of the foregoing is at the time the principal trading exchange or market for the Common Stock).

          “Warrants” means the Common Stock purchase warrants issued in connection with the Security Agreement, whether on the Closing Date or thereafter.

     2. Registration.

     (a) On or prior to the Filing Date the Company shall prepare and file with the Commission a Registration Statement covering the Registrable Securities for a selling stockholder resale offering to be made on a continuous basis pursuant to Rule 415. The Registration Statement shall be on Form S-3 (except if the Company is not then eligible to register for resale the Registrable Securities on Form S-3, in which case such registration shall be on another appropriate form in accordance herewith). The Company shall use its best efforts to cause each Registration Statement to become effective and remain effective as provided herein. The Company shall use its best efforts to cause each Registration Statement to be declared effective under the Securities Act as promptly as possible after the filing thereof, but in any event no later than the Effectiveness Date. The Company shall use its reasonable commercial efforts to keep each Registration Statement continuously effective under the Securities Act until the date which is the earlier date of when (i) all Registrable Securities have been sold or (ii) all Registrable Securities covered by such Registration Statement may be sold immediately without registration under the Securities Act and without volume restrictions pursuant to Rule 144(k), as determined by the counsel to the Company pursuant to a written opinion letter to such effect, addressed and acceptable to the Company’s transfer agent and the affected Holders (the “Effectiveness Period”).

     (b) Within three business days of the Effectiveness Date, the Company shall cause its counsel (which may be in-house counsel) to issue a blanket opinion in the form attached hereto as Exhibit A, to the transfer agent stating that the shares are subject to an effective registration statement and can be reissued free of restrictive legend upon notice of a sale by the Purchaser and confirmation by the Purchaser that it has complied with the prospectus delivery requirements, provided that the Company has not advised the transfer agent orally or in writing that the opinion has been withdrawn. Copies of the blanket opinion required by this Section 2(c) shall be delivered to the Purchaser within the time frame set forth above.

     3. Registration Procedures. If and whenever the Company is required by the provisions hereof to effect the registration of any Registrable Securities under the Securities Act, the Company will, as expeditiously as possible:

     (a) prepare and file with the Commission a Registration Statement with respect to such Registrable Securities, respond as promptly as possible to any comments received from the Commission, and use its best efforts to cause the Registration Statement to become and remain effective for the Effectiveness Period with respect thereto, and promptly provide to the Purchaser copies of all filings and Commission letters of comment relating thereto;

3

     (b) prepare and file with the Commission such amendments and supplements to the Registration Statement and the Prospectus used in connection therewith as may be necessary to comply with the provisions of the Securities Act with respect to the disposition of all Registrable Securities covered by such Registration Statement and to keep such Registration Statement effective until the expiration of the Effectiveness Period applicable to such Registration Statement;

     (c) furnish to the Purchaser such number of copies of the Registration Statement and the Prospectus included therein (including each preliminary Prospectus) as the Purchaser reasonably may request to facilitate the public sale or disposition of the Registrable Securities covered by the Registration Statement;

     (d) use its best efforts to register or qualify the Purchaser’s Registrable Securities covered by such Registration Statement under the securities or “blue sky” laws of such jurisdictions within the United States as the Purchaser may reasonably request, provided, however, that the Company shall not for any such purpose be required to qualify generally to transact business as a foreign corporation in any jurisdiction where it is not so qualified or to consent to general service of process in any such jurisdiction;

     (e) list the Registrable Securities covered by such Registration Statement with any securities exchange on which the Common Stock of the Company is then listed;

     (f) promptly notify the Purchaser at any time when a Prospectus relating thereto is required to be delivered under the Securities Act, of the happening of any event of which the Company has knowledge as a result of which the Prospectus contained in such Registration Statement, as then in effect, includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading in light of the circumstances then existing; and

     (g) make available for inspection by the Purchaser and any attorney, accountant or other agent retained by the Purchaser, all publicly available, non-confidential financial and other records, pertinent corporate documents and properties of the Company, and cause the Company’s officers, directors and employees to supply all publicly available, non-confidential information reasonably requested by the attorney, accountant or agent of the Purchaser.

     4. Registration Expenses. All expenses relating to the Company’s compliance with Sections 2 and 3 hereof, including, without limitation, all registration and filing fees, printing expenses, fees and disbursements of counsel and independent public accountants for the Company, fees and expenses (including reasonable counsel fees) incurred in connection with complying with state securities or “blue sky” laws, fees of the NASD, and fees of transfer agents and registrars, are called “Registration Expenses”. All selling commissions applicable to the sale of Registrable Securities, including any fees and disbursements of any counsel to the Holders are called “Selling Expenses”. The Company shall only be responsible for all Registration Expenses.

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     5. Indemnification.

     (a) In the event of a registration of any Registrable Securities under the Securities Act pursuant to this Agreement, the Company will indemnify and hold harmless the Purchaser, and its officers, directors and each other person, if any, who controls the Purchaser within the meaning of the Securities Act, against any losses, claims, damages or liabilities, joint or several, to which the Purchaser, or such persons may become subject under the Securities Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in any Registration Statement under which such Registrable Securities were registered under the Securities Act pursuant to this Agreement, any preliminary Prospectus or final Prospectus contained therein, or any amendment or supplement thereof, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, and will reimburse the Purchaser, and each such person for any reasonable legal or other expenses incurred by them in connection with investigating or defending any such loss, claim, damage, liability or action; provided, however, that the Company will not be liable in any such case if and to the extent that any such loss, claim, damage or liability arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission so made in conformity with information furnished by or on behalf of the Purchaser or any such person in writing specifically for use in any such document.

     (b) In the event of a registration of the Registrable Securities under the Securities Act pursuant to this Agreement, the Purchaser will indemnify and hold harmless the Company, and its officers, directors and each other person, if any, who controls the Company within the meaning of the Securities Act, against all losses, claims, damages or liabilities, joint or several, to which the Company or such persons may become subject under the Securities Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact which was furnished in writing by the Purchaser to the Company expressly for use in (and such information is contained in) the Registration Statement under which such Registrable Securities were registered under the Securities Act pursuant to this Agreement, any preliminary Prospectus or final Prospectus contained therein, or any amendment or supplement thereof, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, and will reimburse the Company and each such person for any reasonable legal or other expenses incurred by them in connection with investigating or defending any such loss, claim, damage, liability or action, provided, however, that the Purchaser will be liable in any such case if and only to the extent that any such loss, claim, damage or liability arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission so made in conformity with information furnished in writing to the Company by or on behalf of the Purchaser specifically for use in any such document. Notwithstanding the provisions of this paragraph, the Purchaser shall not be required to indemnify any person or entity in excess of the amount of the aggregate net

5

proceeds received by the Purchaser in respect of Registrable Securities in connection with any such registration under the Securities Act.

     (c) Promptly after receipt by a party entitled to claim indemnification hereunder (an “Indemnified Party”) of notice of the commencement of any action, such Indemnified Party shall, if a claim for indemnification in respect thereof is to be made against a party hereto obligated to indemnify such Indemnified Party (an “Indemnifying Party”), notify the Indemnifying Party in writing thereof, but the omission so to notify the Indemnifying Party shall not relieve it from any liability which it may have to such Indemnified Party other than under this Section 5(c) and shall only relieve it from any liability which it may have to such Indemnified Party under this Section 5(c) if and to the extent the Indemnifying Party is prejudiced by such omission. In case any such action shall be brought against any Indemnified Party and it shall notify the Indemnifying Party of the commencement thereof, the Indemnifying Party shall be entitled to participate in and, to the extent it shall wish, to assume and undertake the defense thereof with counsel reasonably satisfactory to such Indemnified Party, and, after notice from the Indemnifying Party to such Indemnified Party of its election so to assume and undertake the defense thereof, the Indemnifying Party shall not be liable to such Indemnified Party under this Section 5(c) for any legal expenses subsequently incurred by such Indemnified Party in connection with the defense thereof; if the Indemnified Party retains its own counsel, then the Indemnified Party shall pay all fees, costs and expenses of such counsel, provided, however, that, if the defendants in any such action include both the Indemnified Party and the Indemnifying Party and the Indemnified Party shall have reasonably concluded based on the advice of counsel that there may be reasonable defenses available to it which are different from or additional to those available to the Indemnifying Party or if the interests of the Indemnified Party reasonably may be deemed to conflict with the interests of the Indemnifying Party, the Indemnified Party shall have the right to select one separate counsel and to assume such legal defenses and otherwise to participate in the defense of such action, with the reasonable expenses and fees of such separate counsel and other expenses related to such participation to be reimbursed by the Indemnifying Party as incurred.

     (d) In order to provide for just and equitable contribution in the event of joint liability under the Securities Act in any case in which either (i) the Purchaser, or any officer, director or controlling person of the Purchaser, makes a claim for indemnification pursuant to this Section 5 but it is judicially determined (by the entry of a final judgment or decree by a court of competent jurisdiction and the expiration of time to appeal or the denial of the last right of appeal) that such indemnification may not be enforced in such case notwithstanding the fact that this Section 5 provides for indemnification in such case, or (ii) contribution under the Securities Act may be required on the part of the Purchaser or such officer, director or controlling person of the Purchaser in circumstances for which indemnification is provided under this Section 5; then, and in each such case, the Company and the Purchaser will contribute to the aggregate losses, claims, damages or liabilities to which they may be subject (after contribution from others) in such proportion so that the Purchaser is responsible only for the portion represented by the percentage that the public offering price of its securities offered by the Registration Statement bears to the public offering price of all securities offered by such Registration

6

Statement, provided, however, that, in any such case, (A) the Purchaser will not be required to contribute any amount in excess of the public offering price of all such securities offered by it pursuant to such Registration Statement; and (B) no person or entity guilty of fraudulent misrepresentation (within the meaning of Section 10(f) of the Act) will be entitled to contribution from any person or entity who was not guilty of such fraudulent misrepresentation.

     6. Representations and Warranties.

     (a) The Common Stock is registered pursuant to Section 12(b) or 12(g) of the Exchange Act and, except with respect to certain matters which the Company has disclosed to the Purchaser on Schedule 12(x) to the Security Agreement or which are excluded pursuant to the terms of Section 12(x) of the Security Agreement, the Company has timely filed all proxy statements, reports, schedules, forms, statements and other documents required to be filed by it under the Exchange Act since January 1, 2006. The Company has filed (i) its Annual Report on Form 10-K for its fiscal year ended December 31, 2005 and (ii) its Quarterly Report on Form 10-Q for the fiscal quarters ended September 30, 2006, June 30, 2006 and March 31, 2006 (collectively, the “SEC Reports”). Each SEC Report was, at the time of its filing, in substantial compliance with the requirements of its respective form and none of the SEC Reports, nor the financial statements (and the notes thereto) included in the SEC Reports, as of their respective filing dates, contained any untrue statement of a material fact or omitted to state 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. The financial statements of the Company included in the SEC Reports comply as to form in all material respects with applicable accounting requirements and the published rules and regulations of the Commission or other applicable rules and regulations with respect thereto. Such financial statements have been prepared in accordance with generally accepted accounting principles (“GAAP”) applied on a consistent basis during the periods involved (except (i) as may be otherwise indicated in such financial statements or the notes thereto or (ii) in the case of unaudited interim statements, to the extent they may not include footnotes or may be condensed) and fairly present in all material respects the financial condition, the results of operations and the cash flows of the Company and its subsidiaries, on a consolidated basis, as of, and for, the periods presented in each such SEC Report.

     (b) The Common Stock is listed or quoted, as applicable, for trading on the American Stock Exchange and satisfies all requirements for the continuation of such listing or quotation, as applicable; and the Company shall do all things necessary so that the Common Stock continues to be listed or quoted, as applicable, on a Trading Market. The Company has not received any notice that its Common Stock will be delisted from or no longer be quoted on, as applicable, the American Stock Exchange (except for prior notices which have been fully remedied) or that the Common Stock does not meet all requirements for the continuation of such listing or quotation, as applicable.

     (c) Neither the Company, nor any of its affiliates, nor any person acting on its or their behalf, has directly or indirectly made any offers or sales of any security or

7

solicited any offers to buy any security under circumstances that would cause the offering of the Securities pursuant to the Security Agreement to be integrated with prior offerings by the Company for purposes of the Securities Act which would prevent the Company from selling the Common Stock pursuant to Rule 506 under the Securities Act, or any applicable exchange-related stockholder approval provisions, nor will the Company or any of its affiliates or subsidiaries take any action or steps that would cause the offering of the Securities to be integrated with other offerings.

     (d) The Warrants and the shares of Common Stock issuable upon exercise of the Warrants are all restricted securities under the Securities Act as of the date of this Agreement. The Company will not issue any stop transfer order or other order impeding the sale and delivery of any of the Registrable Securities at such time as such Registrable Securities are registered for public sale or an exemption from registration is available, except as required by federal or state securities laws or as permitted under the provisions of Section 7(d) below.

     (e) The Company understands the nature of the Registrable Securities issuable upon exercise of the Warrant and recognizes that the issuance of such Registrable Securities may have a potential dilutive effect. The Company specifically acknowledges that its obligation to issue the Registrable Securities is binding upon the Company and enforceable regardless of the dilution such issuance may have on the ownership interests of other shareholders of the Company.

     (f) Except for agreements made in the ordinary course of business, there is no agreement that has not been filed with the Commission as an exhibit to a registration statement or to a form required to be filed by the Company under the Exchange Act as set forth in Item 601 of Regulation S-K, the breach of which could reasonably be expected to have a material and adverse effect on the Company and its subsidiaries, or would prohibit or otherwise interfere with the ability of the Company to enter into and perform any of its obligations under this Agreement in any material respect.

     (g) The Company will at all times have authorized and reserved a sufficient number of shares of Common Stock for the full exercise of the Warrants.

     (h) The Company shall provide written notice to each Holder of (i) the occurrence of each Discontinuation Event (as defined below) and (ii) the declaration of effectiveness by the SEC of each Registration Statement required to be filed hereunder, in each case within three (3) business days of the date of each such occurrence and/or declaration.

     7. Miscellaneous.

     (a) Remedies. In the event of a breach by the Company or by a Holder, of any of their respective obligations under this Agreement, each Holder or the Company, as the case may be, in addition to being entitled to exercise all rights granted by law and under this Agreement, including recovery of damages, will be entitled to specific performance of its rights under this Agreement.

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     (b) No Piggyback on Registrations. Neither the Company nor any of its security holders (other than the Holders in such capacity pursuant hereto) may include securities of the Company in any Registration Statement other than the Registrable Securities, and the Company shall not after the Closing Date enter into any agreement providing any such right for inclusion of shares in the Registration Statement to any of its security holders. Except as disclosed on Schedule 12(c) to the Security Agreement, the Company has not previously entered into any agreement granting any registration rights with respect to any of its securities to any person or entity that have not been fully satisfied.

     (c) Compliance. Each Holder covenants and agrees that it will comply with the prospectus delivery requirements of the Securities Act and the manner of sale provisions set forth in the Registration Statement, in each case as applicable to it in connection with sales of Registrable Securities pursuant to the Registration Statement.

     (d) Discontinued Disposition. Each Holder agrees by its acquisition of such Registrable Securities that, upon receipt of a notice from the Company of the occurrence of a Discontinuation Event (as defined below), such Holder will forthwith discontinue disposition of such Registrable Securities under the applicable Registration Statement until such Holder’s receipt of the copies of the supplemented Prospectus and/or amended Registration Statement or until it is advised in writing (the “Advice”) by the Company that the use of the applicable Prospectus may be resumed, and, in either case, has received copies of any additional or supplemental filings that are incorporated or deemed to be incorporated by reference in such Prospectus or Registration Statement. The Company may provide appropriate stop orders to enforce the provisions of this paragraph. For purposes of this Agreement, a “Discontinuation Event” shall mean (i) when the Commission notifies the Company whether there will be a “review” of such Registration Statement and whenever the Commission comments in writing on such Registration Statement (the Company shall provide true and complete copies thereof and all written responses thereto to each of the Holders); (ii) any request by the Commission or any other Federal or state governmental authority for amendments or supplements to such Registration Statement or Prospectus or for additional information; (iii) the issuance by the Commission of any stop order suspending the effectiveness of such Registration Statement covering any or all of the Registrable Securities or the initiation of any Proceedings for that purpose; (iv) the receipt by the Company of any notification with respect to the suspension of the qualification or exemption from qualification of any of the Registrable Securities for sale in any jurisdiction, or the initiation or threatening of any Proceeding for such purpose; (v) any request by the Company to suspend the filing of a Registration Statement or require that the Purchaser suspend further offers and sales of Registrable Securities for a period not to exceed an aggregate of thirty (30) days in any six (6) month period or an aggregate of sixty (60) days in any twelve (12) month period for valid business reasons (not including avoidance of its obligations hereunder) to avoid premature public disclosure of a pending corporate transaction, including pending acquisitions or divestitures of assets, mergers and combinations and similar events; and/or (vi) the occurrence of any event or passage of time that makes the financial statements included in such Registration Statement ineligible for inclusion therein or any statement made in such Registration Statement or Prospectus or any document

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incorporated or deemed to be incorporated therein by reference untrue in any material respect or that requires any revisions to such Registration Statement, Prospectus or other documents so that, in the case of such Registration Statement or Prospectus, as the case may be, it 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, in light of the circumstances under which they were made, not misleading.

     (e) Piggy-Back Registrations. If at any time after the Closing Date there is not an effective Registration Statement covering all of the Registrable Securities required to be covered hereunder and the Company shall determine to prepare and file with the Commission a registration statement relating to an offering for its own account or the account of others under the Securities Act of any of its equity securities, other than on Form S-4 or Form S-8 (each as promulgated under the Securities Act) or their then equivalents relating to equity securities to be issued solely in connection with any acquisition of any entity or business or equity securities issuable in connection with stock option or other employee benefit plans, then the Company shall send to each Holder written notice of such determination and, if within fifteen (15) days after receipt of such notice, any such Holder shall so request in writing, the Company shall include in such registration statement all or any part of such Registrable Securities such Holder requests to be registered to the extent the Company may do so without violating registration rights of others which exist as of the date of this Agreement, subject to customary underwriter cutbacks applicable to all holders of registration rights and subject to obtaining any required consent of any selling stockholder(s) to such inclusion under such registration statement.

     (f) Amendments and Waivers. The provisions of this Agreement, including the provisions of this sentence, may not be amended, modified or supplemented, and waivers or consents to departures from the provisions hereof may not be given, unless the same shall be in writing and signed by the Company and the Holders of the then outstanding Registrable Securities. Notwithstanding the foregoing, a waiver or consent to depart from the provisions hereof with respect to a matter that relates exclusively to the rights of certain Holders and that does not directly or indirectly affect the rights of other Holders may be given by Holders of at least a majority of the Registrable Securities to which such waiver or consent relates; provided, however, that the provisions of this sentence may not be amended, modified, or supplemented except in accordance with the provisions of the immediately preceding sentence.

     (g) Notices. Any notice or request hereunder may be given to the Company or the Purchaser at the respective addresses set forth below or as may hereafter be specified in a notice designated as a change of address under this Section 7(g). Any notice or request hereunder shall be given by registered or certified mail, return receipt requested, hand delivery, overnight mail, Federal Express or other national overnight next day carrier (collectively, “Courier”) or telecopy (confirmed by mail). Notices and requests shall be, in the case of those by hand delivery, deemed to have been given when delivered to any party to whom it is addressed, in the case of those by mail or overnight mail, deemed to have been given three (3) business days after the date when deposited in the mail or with the overnight mail carrier, in the case of a Courier, the next business day

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following timely delivery of the package with the Courier, and, in the case of a telecopy, when confirmed. The address for such notices and communications shall be as follows:

If to the Company:	Kitty Hawk, Inc. 1515 West 20th Street P.O. Box 612787 DFW International Airport, Texas 75261 Attention: Chief Financial Officer Facsimile: (972) 456-2309
	with a copy to: Haynes and Boone, LLP 901 Main Street, Suite 3100 Dallas, TX 75202 Attention: Garrett DeVries Facsimile: (214) 200-0428
If to a Purchaser:	To the address set forth under such Purchaser’s name on the signature pages hereto
	with a copy to: Edwards Angell Palmer & Dodge LLP 2800 Financial Plaza Providence, RI 02903 Attention: Edward Kammerer Facsimile: (401) 276-6611
If to any other Person who is then the registered Holder:	To the address of such Holder as it appears in the stock transfer books of the Company

or such other address as may be designated in writing hereafter in accordance with this Section 7(g) by such Person.

     (h) Successors and Assigns. This Agreement shall inure to the benefit of and be binding upon the successors and permitted assigns of each of the parties and shall inure to the benefit of each Holder. The Company may not assign its rights or obligations hereunder without the prior written consent of each Holder. Each Holder may assign their respective rights hereunder in the manner and to the persons and entities as permitted under the Warrants.

     (i) Execution and Counterparts. This Agreement may be executed in any number of counterparts, each of which when so executed shall be deemed to be an original and, all of which taken together shall constitute one and the same agreement. In the event that any signature is delivered by facsimile transmission, such signature shall create a valid binding obligation of the party executing (or on whose behalf such

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signature is executed) the same with the same force and effect as if such facsimile signature were the original thereof.

     (j) Governing Law, Jurisdiction and Waiver of Jury Trial. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK APPLICABLE TO CONTRACTS MADE AND PERFORMED IN SUCH STATE, WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAW. The Company hereby consents and agrees that the state or federal courts located in the County of New York, State of New York shall have exclusion jurisdiction to hear and determine any Proceeding between the Company, on the one hand, and the Purchaser, on the other hand, pertaining to this Agreement or to any matter arising out of or related to this Agreement; provided, that the Purchaser and the Company acknowledge that any appeals from those courts may have to be heard by a court located outside of the County of New York, State of New York, and further provided, that nothing in this Agreement shall be deemed or operate to preclude the Purchaser from bringing a Proceeding in any other jurisdiction to collect the obligations, to realize on the Collateral or any other security for the obligations, or to enforce a judgment or other court order in favor of the Purchaser. The Company expressly submits and consents in advance to such jurisdiction in any Proceeding commenced in any such court, and the Company hereby waives any objection which it may have based upon lack of personal jurisdiction, improper venue or forum non conveniens. The Company hereby waives personal service of the summons, complaint and other process issued in any such Proceeding and agrees that service of such summons, complaint and other process may be made by registered or certified mail addressed to the Company at the address set forth in Section 7(g) and that service so made shall be deemed completed upon the earlier of the Company’s actual receipt thereof or three (3) days after deposit in the U.S. mails, proper postage prepaid. The parties hereto desire that their disputes be resolved by a judge applying such applicable laws. Therefore, to achieve the best combination of the benefits of the judicial system and of arbitration, the parties hereto waive all rights to trial by jury in any Proceeding brought to resolve any dispute, whether arising in contract, tort, or otherwise between the Purchaser and/or the Company arising out of, connected with, related or incidental to the relationship established between then in connection with this Agreement. If either party hereto shall commence a Proceeding to enforce any provisions of this Agreement, the Security Agreement or any other Ancillary Agreement, then the prevailing party in such Proceeding shall be reimbursed by the other party for its reasonable attorneys’ fees and other costs and expenses incurred with the investigation, preparation and prosecution of such Proceeding.

     (k) Cumulative Remedies. The remedies provided herein are cumulative and not exclusive of any remedies provided by law.

     (l) Severability. If any term, provision, covenant or restriction of this Agreement is held by a court of competent jurisdiction to be invalid, illegal, void or unenforceable, the remainder of the terms, provisions, covenants and restrictions set forth herein shall remain in full force and effect and shall in no way be affected, impaired or invalidated, and the parties hereto shall use their reasonable efforts to find and employ an

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alternative means to achieve the same or substantially the same result as that contemplated by such term, provision, covenant or restriction. It is hereby stipulated and declared to be the intention of the parties that they would have executed the remaining terms, provisions, covenants and restrictions without including any of such that may be hereafter declared invalid, illegal, void or unenforceable.

     (m) Headings. The headings in this Agreement are for convenience of reference only and shall not limit or otherwise affect the meaning hereof.

     (n) Termination of Agreement. Upon the expiration of the Effectiveness Period, this Agreement shall terminate; provided, however, that the provisions of Section 5 hereof shall survive any such termination.

[Balance of page intentionally left blank;
signature page follows]

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     IN WITNESS WHEREOF, the parties have executed this Registration Rights Agreement as of the date first written above.

KITTY HAWK, INC.		LAURUS MASTER FUND, LTD.
By:	/s/ James Kupferschmid	By:	/s/ David Grin
	James Kupferschmid Chief Financial Officer		David Grin Director
		Address for Notices: Laurus Master Fund, Ltd. c/o M&C Corporate Services Limited P.O. Box 309 GT Ugland House George Town South Church Street Grand Cayman, Cayman Islands Facsimile: 345-949-8080 with copy to: Laurus Capital Management, LLC 825 Third Avenue, 17th Floor New York, NY 10022 Attention: Portfolio Services Facsimile: 212-541-4410

EX-10.8

Exhibit 10.8

AMENDMENT NO. 1 TO RIGHTS AGREEMENT

     AMENDMENT NO. 1 TO RIGHTS AGREEMENT (this “Amendment”) dated as of November 9, 2005 by and between Kitty Hawk, Inc., a Delaware corporation (the “Company”), and American Stock Transfer & Trust Company (the “Rights Agent”).

     WHEREAS, the Company and the Rights Agent have previously entered into that certain Rights Agreement dated as of January 21, 2004 (the “Rights Agreement”); and

     WHEREAS, Section 27 of the Rights Agreement provides that, for so long as the Rights (as defined in the Rights Agreement) are redeemable, the Company may from time to time supplement or amend any provision of the Rights Agreement as the Company may deem necessary or desirable without the approval of any holders of certificates representing shares of Common Stock (as defined in the Rights Agreement); and

     WHEREAS, the Rights are currently redeemable; and

     WHEREAS, the Board of Directors has determined in good faith that the amendment to the Rights Agreement set forth herein is desirable and, pursuant to the terms of the Rights Agreement, has duly authorized such amendment to the Rights Agreement;

     NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereby agree as follows:

     1. Amendment to the Definition of “Acquiring Person”. The definition of “Acquiring Person” set forth in Section 1(a) of the Rights Agreement is hereby amended and restated in its entirety as follows:

     (a) “Acquiring Person” shall mean any Person (as such term is hereinafter defined) who or which, together with all Affiliates and Associates of such Person, shall be the Beneficial Owner (as such term is hereinafter defined) of 15% or more of the shares of Common Stock then outstanding, but shall not include (i) the Company, (ii) any Subsidiary of the Company, (iii) any employee benefit plan of the Company or of any Subsidiary of the Company, or any Person or entity organized, appointed or established by the Company for or pursuant to the terms of any such plan, (iv) any Person who becomes an Acquiring Person solely as a result of a reduction in the number of shares of Common Stock outstanding due to the repurchase of shares of Common Stock by the Company, unless and until such Person shall purchase or otherwise become (as a result of actions taken by such Person or its Affiliates or Associates) the Beneficial Owner of additional shares of Common Stock constituting 1% or more of the then outstanding shares of Common Stock, or (v) an Exempted Person (as such term is hereinafter defined). Notwithstanding the foregoing, if (i) the Board of Directors of the Company determines in good faith that a Person who would otherwise be an Acquiring Person, as defined pursuant to the foregoing provisions of this paragraph, has become such inadvertently (including, without limitation, because (A) such Person was unaware that it beneficially owned a percentage of Common Stock that would otherwise cause such Person to be an Acquiring Person, or (B) such Person was aware of the extent of its Beneficial Ownership of Common Stock but had no actual knowledge of the consequences of such Beneficial Ownership under this Agreement) and without any intention of changing or influencing control of the Company, and (ii) within ten Business Days of being requested by the Company to advise it regarding the same, such Person certifies to the Company that such Person acquired shares of Common Stock in excess of 14.99%

inadvertently or without knowledge of the terms of the Rights and who, together with all Affiliates and Associates, thereafter does not acquire additional shares of Common Stock and within ten Business Days of being requested by the Company to do so disposes of the portion of such shares of Common Stock in excess of 14.99%, then such Person shall not be deemed to be or to have become an Acquiring Person for any purposes of this Agreement; provided, however, that if the Person requested to so certify fails to do so within ten Business Days of the Company’s request or such Person fails to dispose of such shares of Common Stock in excess of 14.99% within ten Business Days of the Company’s request, then such Person shall become an Acquiring Person immediately after such ten Business Day period. The phrase “then outstanding,” when used with reference to a Person’s Beneficial Ownership of securities of the Company, shall mean the number of such securities then issued and outstanding together with the number of such securities not then actually issued and outstanding which such Person would be deemed to own beneficially hereunder.

     2. Amendment to the Definition of “Beneficial Owner”. The definition of “Beneficial Owner” set forth in Section 1(f) of the Rights Agreement is hereby amended and restated in its entirety as follows:

     (f) A Person shall be deemed the “Beneficial Owner” of, and shall be deemed to “beneficially own,” any securities:

          (i) which such Person or any of such Person’s Affiliates or Associates, directly or indirectly, has the right to acquire (whether such right is exercisable immediately or only after the passage of time) pursuant to any agreement, arrangement or understanding (whether or not in writing) or upon the exercise of conversion rights, exchange rights, rights, warrants or options, or otherwise; provided, however, that a Person shall not, for purposes of this paragraph (i), be deemed the “Beneficial Owner” of or to “beneficially own,” (A) securities tendered pursuant to a tender or exchange offer made by such Person or any of such Person’s Affiliates or Associates until such tendered securities are accepted for purchase or exchange, or (B) securities issuable upon exercise of Rights at any time prior to the occurrence of a Triggering Event, or (C) securities issuable upon exercise of Rights from and after the occurrence of a Triggering Event, which Rights were acquired by such Person or any of such Person’s Affiliates or Associates prior to the Distribution Date or pursuant to Section 3(a) (Issuance of Rights Certificates — Distribution Date; Rights Certificates) or Section 22 (Issuance of New Rights Certificates) (the “Original Rights”) or pursuant to Section 11(i) (Adjustment of Purchase Price; Number and Kind of Shares or Number of Rights — Adjustment of Number of Rights) in connection with an adjustment made with respect to any Original Rights;

          (ii) which such Person or any of such Person’s Affiliates or Associates, directly or indirectly, has the right to vote or dispose of or has “beneficial ownership” of (as determined pursuant to Rule 13d-3 of the General Rules and Regulations under the Exchange Act), including pursuant to any agreement, arrangement or understanding, whether or not in writing; provided, however, that a Person shall not be deemed the “Beneficial Owner” of, or to “beneficially own,” any security under this subparagraph (ii) as a result of an agreement, arrangement or understanding to vote such security if such agreement, arrangement or understanding: (A) arises solely from a revocable proxy given in response to a public proxy or consent solicitation made pursuant to, and in accordance with, the applicable provisions of the General Rules and Regulations under the Exchange Act, and (B) is not also then reportable by such Person on a Schedule 13D under the Exchange Act (or any comparable or successor report); or

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          (iii) which are “beneficially owned,” directly or indirectly, by any other Person (or any Affiliate or Associate thereof) with which such Person (or any of such Person’s Affiliates or Associates) has any agreement, arrangement or understanding (whether or not in writing), for the purpose of acquiring, holding, voting (except pursuant to a revocable proxy as described in the proviso to subparagraph (ii) of this paragraph (f)) or disposing of any voting securities of the Company;

provided, however, that nothing in this paragraph (f) shall cause a Person engaged in business as an underwriter of securities to be the “Beneficial Owner” of or to “beneficially own,” any securities acquired through such Person’s participation in good faith in a firm commitment underwriting until the expiration of forty (40) calendar days after the date of such acquisition.

     3. Amendment to the Definition of “Exempted Person”. The definition of “Exempted Person” set forth in Section 1(t) of the Rights Agreement is hereby amended and restated in its entirety as follows:

     (t) “Exempted Person” shall mean Miller, unless and until the earlier of such time as (i) Miller, directly or indirectly, and together with its Affiliates and Associates, becomes the Beneficial Owner of 23.50% or more of the shares of Common Stock then outstanding (other than under circumstances described in Section 1(a)(iv) and in the second sentence of Section 1(a) (replacing for purposes of this clause (i) all references in Section 1(a) to 14.99% with 23.49%)), (ii) Miller, directly or indirectly, and together with its Affiliates and Associates, becomes the Beneficial Owner of less than 15% of the shares of Common Stock then outstanding, or (iii) Miller breaches the terms of the Standstill Agreement. Upon the occurrence of (i), (ii) or (iii) above, Miller immediately shall cease to be an Exempted Person.

     4. Deletion of Definitions. Section 1 of the Rights Agreement shall be amended as follows:

     (a) Section 1(q) of the Rights Agreement shall be amended and restated in its entirety as follows:

     “(q) [INTENTIONALLY DELETED]”

     (b) Section 1(z) of the Rights Agreement shall be amended and restated in its entirety as follows:

     “(z) [INTENTIONALLY DELETED]”

     (c) Section 1(ii) of the Rights Agreement shall be amended and restated in its entirety as follows:

     “(ii) [INTENTIONALLY DELETED]”

     (d) Section 1(pp) of the Rights Agreement shall be amended and restated in its entirety as follows:

     “(pp) [INTENTIONALLY DELETED]”

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     5. Additional Definitions. Section 1 of the Rights Agreement shall be amended to include the following definitions:

     (uu) “Miller” shall mean collectively, Lloyd I. Miller, III and any of his Affiliates and Associates.

     (vv) “Standstill Agreement” shall mean that certain Standstill Agreement, dated as of November 10, 2005, by and among the Company, Miller, and the other parties thereto.

     6. Amendment to Section 3(a). Section 3(a) of the Rights Agreement is hereby amended and restated in its entirety as follows:

     (a) Distribution Date; Rights Certificates. Until the earlier of (i) the Close of Business on the tenth Business Day after the Stock Acquisition Date (or, if the tenth Business Day after the Stock Acquisition Date occurs before the Record Date, the Close of Business on the Record Date), or (ii) the Close of Business on the tenth Business Day (or such later date as the Board shall determine prior to such time as any Person becomes an Acquiring Person) after the date that a tender or exchange offer by any Person (other than the Company, any Subsidiary of the Company, any employee benefit plan of the Company or of any Subsidiary of the Company, or any Person or entity organized, appointed or established by the Company for or pursuant to the terms of any such plan) is first published or sent or given within the meaning of Rule 14d-2(a) of the General Rules and Regulations under the Exchange Act, if upon consummation thereof such Person would be the Beneficial Owner of 15% (or, in the case of Miller, 23.50%, for so long as Miller is an Exempted Person) or more of the shares of Common Stock then outstanding (the earlier of (i) and (ii) being herein referred to as the “Distribution Date”), (x) the Rights will be evidenced (subject to the provisions of paragraph (b) of this Section 3) by the certificates for the Common Stock registered in the names of the holders of the Common Stock (which certificates for Common Stock shall be deemed also to be certificates for Rights) and not by separate certificates, and (y) the Rights will be transferable only in connection with the transfer of the underlying shares of Common Stock (including a transfer to the Company, except pursuant to the provision of Section 23 (Redemption and Termination)). As soon as practicable after the Distribution Date, the Rights Agent will send by first-class, insured, postage prepaid mail, to each record holder of the Common Stock as of the Close of Business on the Distribution Date, at the address of such holder shown on the records of the Company, one or more rights certificates, in substantially the form of Exhibit 2 hereto (the “Rights Certificates”), evidencing one Right for each share of Common Stock so held, subject to adjustment as provided herein. In the event that an adjustment in the number of Rights per share of Common Stock has been made pursuant to Section 11(p) (Adjustment of Purchase Price; Number and Kind of Shares or Number of Rights — Common Stock Adjustments) at the time of distribution of the Rights Certificates, the Company shall make the necessary and appropriate rounding adjustments (in accordance with Section 14(a) (Fractional Rights and Fractional Shares — Fractional Rights)) so that Rights Certificates representing only whole numbers of Rights are distributed and cash is paid in lieu of any fractional Rights. As of and after the Distribution Date, the Rights will be evidenced solely by such Rights Certificates.

     7. Amendment to Section 27. Section 27 of the Rights Agreement is hereby amended and restated in its entirety as follows:

     Section 27. Supplements and Amendments. For so long as the Rights are redeemable, and subject to the penultimate sentence of this Section 27, the Company may, and the Rights Agent shall, if the Company so directs, supplement or amend any provision of this Agreement without the approval of any holders of certificates representing shares of Common Stock or, on and after the Distribution Date, the

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holders of Rights Certificates. At any time when the Rights are no longer redeemable and subject to the penultimate sentence of this Section 27, the Company and the Rights Agent shall, if the Company so directs, supplement or amend this Agreement without the approval of any holders of Rights Certificates; provided, however, that no such supplement or amendment may (i) adversely affect the interests of the holders of Rights Certificates (other than an Acquiring Person or an Affiliate or Associate of any such Person) or, prior to the Distribution Date, holders of certificates representing shares of Common Stock; (ii) cause this Agreement again to become amendable other than in accordance with this sentence; or (iii) cause the Rights again to become redeemable. Upon the delivery of a certificate from an appropriate officer of the Company which states that the proposed supplement or amendment is in compliance with the terms of this Section 27, the Rights Agent shall execute such supplement or amendment. Notwithstanding anything contained in this Agreement to the contrary, no supplement or amendment shall be made which changes the Redemption Price, the Final Expiration Date, the Purchase Price, or the number of one one-thousandths of a share of Preferred Stock for which a right is exercisable; provided, however, that at any time prior to (i) a Stock Acquisition Date or (ii) the date that a tender or exchange offer by any Person (other than the Company, any Subsidiary of the Company, any employee benefit plan of the Company or any Subsidiary of the Company, or any Person or entity organized, appointed or established by the Company for or pursuant to the terms of any such plan) is first published or sent or given within the meaning of Rule 14d-2(a) of the General Rules and Regulations under the Exchange Act, if upon consummation thereof, such Person would be the Beneficial Owner of 15% (or, in the case of Miller, 23.50%, for so long as Miller is an Exempted Person) or more of the shares of Common Stock then outstanding the Board may amend this Agreement to increase the Purchase Price or extend the Final Expiration Date. Prior to the Distribution Date, the interests of the holders of Rights shall be deemed coincident with the interests of the holders of Common Stock.

     8. Effectiveness. This Amendment shall be effective as of November 9, 2005, as if executed by both parties on such date. Except as expressly amended by this Amendment, the Rights Agreement shall remain in full force and effect, and all references to the Rights Agreement from and after such time shall be deemed to be references to the Rights Agreement as amended hereby.

     9. Governing Law. This Amendment shall be deemed to be a contract made under the laws of the State of Delaware and for all purposes shall be governed by and construed in accordance with the laws of such state applicable to contracts made and to be performed entirely within such state.

     10. Counterparts. This Amendment may be executed in any number of counterparts and each of such counterparts shall for all purposes be deemed to be an original, and all such counterparts shall together constitute but one and the same instrument.

     11. Severability. If any term, provision, covenant or restriction of this Amendment is held by a court of competent jurisdiction or other authority to be invalid, void or unenforceable, the remainder of the terms, provisions, covenants and restrictions of this Amendment shall remain in full force and effect and shall in no way be affected, impaired or invalidated.

     12. Descriptive Headings. Descriptive headings of the several Sections of this Amendment are inserted for convenience only and shall not control or affect the meaning or construction of any of the provisions of this Amendment.

     13. Exhibits. Exhibit 2 to the Rights Agreement shall be deemed amended in a manner consistent with this Amendment.

* * * * *

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     IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed as of the day and year first above written.

KITTY HAWK, INC.
By:	/s/ Robert W. Zoller, Jr.
Name: Robert W. Zoller, Jr. Title: President and Chief Executive Officer

AGREED AND ACCEPTED:

AMERICAN STOCK TRANSFER & TRUST COMPANY

By:

Name:

Title:

{Signature Page to the Amendment No. 1 to Rights Agreement}

EX-23.1

Exhibit 23.1

Consent of Independent Registered Public Accounting Firm

We have issued our report dated March 31, 2007, accompanying the consolidated financial statements of Kitty Hawk, Inc. and Subsidiaries appearing in the Annual Report of Kitty Hawk, Inc. on Form 10-K for the year ended December 31, 2006. We hereby consent to the incorporation by reference of the aforementioned report in the Registration Statements of Kitty Hawk, Inc. on Forms S-3 (File No. 333-136792, effective September 15, 2006, File No. 333-130995, effective April 6, 2006 and File No. 333-119302, effective November 18, 2004) and Forms S-8 (File No. 333-139723, effective December 29, 2006, File No. 333-127117, effective August 2, 2005, and File No. 333-109084, effective September 24, 2003).

GRANT THORNTON LLP
 

Dallas, Texas
March 31, 2007

EX-31.1

EXHIBIT 31.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER

     I, Robert W. Zoller, Jr., certify that:

1. I have reviewed this annual report on Form 10-K of Kitty Hawk, Inc.;

2. Based on my knowledge, this 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 report;

3. Based on my knowledge, the financial statements, and other financial information included in this 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 report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

(a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared;
(b)	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(c)	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

(a)	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

April 2, 2007	By:	/s/ ROBERT W. ZOLLER, JR.
		Robert W. Zoller, Jr.
		Chief Executive Officer and President

EX-31.2

EXHIBIT 31.2

CERTIFICATION OF CHIEF FINANCIAL OFFICER

I, James R. Kupferschmid, certify that:

1. I have reviewed this annual report on Form 10-K of Kitty Hawk, Inc.;

2. Based on my knowledge, this 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 report;

3. Based on my knowledge, the financial statements, and other financial information included in this 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 report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

(a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared;
(b)	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(c)	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

(a)	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

April 2, 2007	By:	/s/ JAMES R. KUPFERSCHMID
		James R. Kupferschmid
		Vice President and Chief Financial Officer

EX-32.1

EXHIBIT 32.1

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

     Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code), each of the undersigned officers of Kitty Hawk, Inc. (the “Company”), does hereby certify, to such officer’s knowledge, that:

     The annual report on Form 10-K for the year ended December 31, 2006 (the “Form 10-K”) of the Company fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934 and the information contained in the Form 10-K fairly presents, in all material respects, the financial condition and results of operations of the Company as of, and for, the periods presented in the Form 10-K.

Date: April 2, 2007	By:	/s/ ROBERT W. ZOLLER, JR.
		Robert W. Zoller, Jr.
		Chief Executive Officer and President
Date: April 2, 2007	By:	/s/ JAMES R. KUPFERSCHMID
		James R. Kupferschmid
		Vice President and Chief Financial Officer

     The foregoing certification is being furnished as an exhibit to the Form 10-K pursuant to Item 601(b)(32) of Regulation S-K and Section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code) and, accordingly, is not being filed as part of the Form 10-K for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and is not incorporated by reference into any filing of the Company, whether made before or after the date hereof, regardless of any general incorporation language in such filing.