UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended June 30, 2007

or

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

For the transition period from                      to                     

Commission file number: 0-25202

KITTY HAWK, INC.

(Exact name of registrant as specified in its charter)

Delaware	75-2564006
(State or other jurisdiction of	(I.R.S. Employer
incorporation or organization)	Identification No.)
1515 West 20th Street
P.O. Box 612787
Dallas/Fort Worth International Airport, Texas	75261
(Address of principal executive offices)	(Zip Code)

(972) 456-2200
(Registrant’s telephone number, including area code)

     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 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 of the Exchange Act (check one):

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 Exchange Act). Yes o No þ

     Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 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

     The number of shares of common stock, par value $0.000001 per share, outstanding at August 15, 2007 was 53,545,159.

KITTY HAWK, INC.

INDEX

	PAGE NUMBER
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets at June 30, 2007 and December 31, 2006		3
Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2007 and 2006		4
Condensed Consolidated Statement of Stockholders’ Deficit for the six months ended June 30, 2007		5
Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2007 and 2006		6
Notes to Condensed Consolidated Financial Statements		7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		12
Item 3. Quantitative and Qualitative Disclosures about Market Risk		27
Item 4. Controls and Procedures		27
PART II. OTHER INFORMATION
Item 1. Legal Proceedings		27
Item 1A. Risk Factors		28
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		37
Item 3. Defaults Upon Senior Securities		37
Item 4. Submission of Matters to a Vote of Security Holders		37
Item 5. Other Information		37
Item 6. Exhibits		37
Certificate of Principal Executive Officer Pursuant to Section 302
Certificate of Principal Financial Officer Pursuant to Section 302
Certificate Pursuant to Section 906

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PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

KITTY HAWK, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share data)

	June 30,			December 31,
	2007			2006
	(unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	394		$	9,589
Restricted cash and short-term investments		3,059			250
Trade accounts receivable, net of allowance for doubtful accounts of $500		21,461			26,252
Inventory and aircraft supplies, net of reserve of $200		1,162			2,240
Deposits and prepaid expenses		6,272			3,732
Prepaid aircraft fuel		638			1,171
Other current assets, net		121			282
Total current assets		33,107			43,516
Property and equipment, net		5,789			7,411
Other long-term assets		5,377			2,896
Total assets	$	44,273		$	53,823
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
Liabilities:
Current liabilities:
Accounts payable — trade	$	5,359		$	7,235
Accrued wages and compensation related expenses		2,434			2,293
Other accrued expenses		8,794			15,973
Taxes payable, other than income taxes		935			890
Current debt		14,318			257
Total current liabilities		31,840			26,648
Other long-term liabilities		710			135
Total liabilities		32,550			26,783
Commitments and contingencies
Series B Redeemable Preferred Stock, $0.01 par value: Authorized shares — 15,000; issued and outstanding — 14,550 at June 30, 2007 and December 31, 2006; cumulated dividends of $1,100 at June 30, 2007 and $900 at December 31, 2006, respectively		12,142			12,142
Stockholders’ deficit:
Preferred stock, $0.01 par value: Authorized shares — 9,985,000; none issued		—			—
Common stock, $0.000001 par value: Authorized shares — 100,000,000 at June 30, 2007 and December 31, 2006; issued and outstanding — 53,543,034 and 52,827,853 at June 30, 2007 and December 31, 2006, respectively		—			—
Additional capital		31,399			26,425
Retained deficit		(31,818	)		(11,527	)
Total stockholders’ equity (deficit)		(419	)		14,898
Total liabilities and stockholders’ equity (deficit)	$	44,273		$	53,823

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

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KITTY HAWK, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except share and per share data)
(unaudited)

	Three months ended June 30,						Six months ended June 30,
	2007			2006			2007			2006
Revenue:
Scheduled freight network	$	40,780		$	44,263		$	79,708		$	84,350
ACMI		881			930			1,189			930
Miscellaneous		2,764			275			5,493			275
Total revenue		44,425			45,468			86,390			85,555
Cost of revenue:
Flight expense		7,590			8,189			15,347			16,757
Transportation expense		12,887			12,707			26,649			21,815
Fuel expense		12,007			14,150			22,732			27,354
Maintenance expense		3,697			3,877			7,349			7,611
Freight handling expense		7,857			8,953			16,260			16,953
Depreciation and amortization		822			776			1,704			1,529
Operating overhead expense		4,494			3,298			9,138			6,319
Total cost of revenue		49,354			51,950			99,179			98,338
Gross loss		(4,929	)		(6,482	)		(12,789	)		(12,783	)
General and administrative expense		3,007			2,276			6,519			4,578
Operating loss		(7,936	)		(8,758	)		(19,308	)		(17,361	)
Other (income) expense:
Interest expense		625			73			695			142
Other, net		(20	)		(194	)		(115	)		(482	)
Net loss		(8,541	)		(8,637	)		(19,888	)		(17,021	)
Preferred stock dividends accreted		291			296			582			592
Net loss allocable to common stockholders	$	(8,832	)	$	(8,933	)	$	(20,470	)	$	(17,613	)
Basic loss per share	$	(0.16	)	$	(0.17	)	$	(0.38	)	$	(0.34	)
Diluted loss per share	$	(0.16	)	$	(0.17	)	$	(0.38	)	$	(0.34	)
Weighted average common shares outstanding — basic		54,543,740			52,024,419			54,269,435			51,849,914
Weighted average common shares outstanding — diluted		54,543,740			52,024,419			54,269,435			51,849,914

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

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KITTY HAWK, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ DEFICIT

(in thousands, except share data)
(unaudited)

	Common Stock
	Number of				Additional		Retained
	Shares		Amount		Capital		Deficit			Total
Balance at December 31, 2006		52,827,853	$	—	$	26,425	$	(11,527	)	$	14,898
Net loss		—		—		—		(19,888	)		(19,888	)
Dividends declared for Series B Redeemable Preferred Stock		375,167		—		319		(403	)		(84	)
Compensation expense associated with stock option and restricted stock unit grants		—		—		315		—			315
Issuance of warrants associated with revolving facility		—		—		4,298		—			4,298
Issuance of common stock related to exercise of options to acquire stock and conversion of restricted stock units		340,014		—		42		—			42
Balance at June 30, 2007		53,543,034	$	—	$	31,399	$	(31,818	)	$	(419	)

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

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KITTY HAWK, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)
(unaudited)

	Six months ended June 30,
	2007			2006
Operating activities:
Net loss	$	(19,888	)	$	(17,021	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization expense		1,945			1,689
Gain on disposal of property and equipment		(266	)		(570	)
Compensation expense related to stock options and restricted stock units		315			388
Write off debt issuance costs		470			—
Provision for allowance for doubtful accounts		54			42
Changes in operating assets and liabilities:
Trade accounts receivable		4,736			(4,974	)
Inventory and aircraft supplies		(268	)		(240	)
Prepaid expenses and other		768			(698	)
Accounts payable and accrued expenses		(9,303	)		5,461
Net cash used in operating activities		(21,437	)		(15,923	)
Investing activities:
Proceeds from sale of assets		3,631			1,006
Assets acquired from Air Container Transport, Inc.		(530	)		(2,987	)
Change in restricted cash		(2,809	)		—
Capital expenditures		(263	)		(1,170	)
Net cash provided by (used in) investing activities		29			(3,151	)
Financing activities:
Dividends paid on Series B Redeemable Preferred Stock		(84	)		(407	)
Net borrowing on revolving facility		13,490			—
Debt issuance costs		(1,604	)		—
Borrowings on current debt		924			—
Payments on current debt		(555	)		(75	)
Proceeds from exercise of stock options		42			71
Net cash provided by (used in) financing activities		12,213			(411	)
Net decrease in cash and cash equivalents		(9,195	)		(19,485	)
Cash and cash equivalents at beginning of period		9,589			26,650
Cash and cash equivalents at end of period	$	394		$	7,165
Non-cash activities:
Common stock issued in lieu of cash dividends	$	319		$	—

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

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KITTY HAWK, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

1. BASIS OF PRESENTATION

     The accompanying condensed consolidated financial statements, which should be read in conjunction with the consolidated financial statements and footnotes included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission for the year ended December 31, 2006, are unaudited (except for the December 31, 2006 condensed consolidated balance sheet, which was derived from the Company’s audited consolidated balance sheet included in the aforementioned Form 10-K) and have been prepared in accordance with accounting principles generally accepted in the United States of America, or U.S. GAAP, for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation have been included.

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

2. LEGAL PROCEEDINGS

     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.

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 RSUs 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 RSUs 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.

7

     Stock-based compensation expense for the three and six months ended June 30, 2007 and 2006 is included in the statements of operations as follows:

	Three months ended June 30,				Six months ended June 30,
	2007		2006		2007		2006
	(in thousands)
Flight expense	$	33	$	29	$	65	$	60
Maintenance expense		4		6		7		13
Freight handling expense		13		21		28		43
Operating overhead expense		28		29		59		57
General and administrative expense		65		110		156		215
Total compensation expense	$	143	$	195	$	315	$	388

4. OTHER ACCRUED EXPENSES

     Other accrued expenses consist of the following:

	June 30, 2007		December 31, 2006
	(In thousands)
Freight handling expense	$	1,765	$	8,235
Deferred gain on sale of assets		905		—
Trucking expense		1,919		863
Maintenance expense		753		771
Landing and parking expenses		906		714
Equipment lease expense		90		1,990
Other		2,456		3,400
Total other accrued expenses	$	8,794	$	15,973

     The other accrued expenses category includes miscellaneous expenses related to, among other things, insurance, diesel fuel, travel, claims for damaged freight and aircraft and facility leases.

5. BUSINESS SEGMENT DATA

     As of June 30, 2007, the Company’s operations were comprised of three segments — a scheduled freight 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 level.

     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.

8

				Ground
	Scheduled			Transportation
	Freight			Services			Cargo									Consolidated
	Network			Company			Airline			Other			Eliminations			Balance
	(In thousands)
Three months ended June 30, 2007:
Revenue from external customers	$	40,780		$	2,620		$	1,025		$	—		$	—		$	44,425
Revenue from intersegment operations		—			13,734			10,568			—			(24,302	)		—
Depreciation and amortization		143			372			307			107			—			929
Operating income (loss)		(7,634	)		(362	)		129			(69	)		—			(7,936	)
Interest expense		4			20			—			601			—			625
Other (income) loss		—			4			—			(24	)		—			(20	)
Net income (loss)	$	(7,638	)	$	(386	)	$	129		$	(646	)	$	—		$	(8,541	)
Total assets	$	14,456		$	6,649		$	8,250		$	57,240		$	(42,322	)	$	44,273
Three months ended June 30, 2006:
Revenue from external customers	$	44,263		$	275		$	930		$	—		$	—		$	45,468
Revenue from intersegment operations		—			895			12,763			—			(13,658	)		—
Depreciation and amortization		134			—			642			81			—			857
Operating income (loss)		(9,103	)		16			329			—			—			(8,758	)
Interest expense		10			—			—			63			—			73
Other income		—			—			(32	)		(162	)		—			(194	)
Net income (loss)	$	(9,113	)	$	16		$	361		$	99		$	—		$	(8,637	)
Total assets	$	24,952		$	6,290		$	9,734		$	37,387		$	(28,120	)	$	50,243
Six months ended June 30, 2007:
Revenue from external customers	$	79,708		$	5,114		$	1,568		$	—		$	—		$	86,390
Revenue from intersegment operations		—			26,682			22,004			—			(48,686	)		—
Depreciation and amortization		287			724			693			241			—			1,945
Operating income (loss)		(18,509	)		(1,198	)		468			(69	)		—			(19,308	)
Interest expense		9			23			—			663			—			695
Other income		—			1			—			(116	)		—			(115	)
Net income (loss)	$	(18,518	)	$	(1,222	)	$	468		$	(616	)	$	—		$	(19,888	)
Total assets	$	14,456		$	6,649		$	8,250		$	57,240		$	(42,322	)	$	44,273
Six months ended June 30, 2006:
Revenue from external customers	$	84,350		$	275		$	930		$	—		$	—		$	85,555
Revenue from intersegment operations		—			895			26,235			—			(27,130	)		—
Depreciation and amortization		263			—			1,266			160			—			1,689
Operating income (loss)		(17,868	)		16			513			(22	)		—			(17,361	)
Interest expense		21			—			—			121			—			142
Other income		—			—			(32	)		(450	)		—			(482	)
Net income (loss)	$	(17,889	)	$	16		$	545		$	307		$	—		$	(17,021	)
Total assets	$	24,952		$	6,290		$	9,734		$	37,387		$	(28,120	)	$	50,243

6. EARNINGS PER SHARE

     In March 2003, the Company issued common stock 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. These 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. As of June 30, 2007, warrants to purchase 1,076,605 shares of common stock remain outstanding. These warrants expire in 2013.

9

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

	Three months ended June 30,				Six months ended June 30,
	2007		2006		2007		2006
Weighted average shares outstanding — basic		54,543,740		52,024,419		54,269,435		51,849,914
Effect of dilutive securities		—		—		—		—
Weighted average shares outstanding — diluted		54,543,740		52,024,419		54,269,435		51,849,914
Securities excluded from computation due to antidilutive effect:
Due to net loss		2,656,352		6,117,986		2,711,615		21,573,231
Due to out-of-the-money		28,606,780		17,100,578		28,551,517		1,645,333

7. ASSET ACQUISITION

     On June 22, 2006, the Company, through its wholly-owned subsidiary Kitty Hawk Ground, acquired substantially all of the operating assets of Air Container Transport, Inc., or 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.

     The following table presents unaudited supplemental pro forma information for the three and six months period ended June 30, 2006 as if the ACT assets had been acquired as of January 1, 2006:

	Three months ended			Six months ended
	June 30, 2006			June 30, 2006
	(in thousands, except per share data)
Revenue	$	56,077		$	107,319
Net loss	$	(9,792	)	$	(18,899	)
Basic and diluted loss per share	$	(0.18	)	$	(0.36	)

8. RELATED PARTY TRANSACTIONS

     The Company has various agreements and relationships with beneficial owners of 5% or more of the Company’s common stock. See “Item 13. Certain Relationships and Related Transactions” of the Company’s Annual Report on Form 10-K and Form 10-K/A for the year ended December 31, 2006 for information on these agreements and relationships.

9. 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. In connection therewith, the Company issued to Laurus a five year warrant to purchase up to 8,216,657 shares of Kitty Hawk, Inc. common stock, or the Original Warrant. The exercise price of the Original Warrant was $0.91 per share. On June 29, 2007, as an inducement to Laurus to release its liens on six Boeing 727-200 airframes and eleven JT8D aircraft engines, the Company agreed to cancel the Original Warrant and replace the Original Warrant with two new warrants.

     The first warrant provides a right to purchase 4,000,000 shares of common stock at $0.55 per share, or the First Warrant. The second warrant provides a right to purchase 4,216,657 shares of common stock at the original exercise price of $0.91 per share, collectively with the First Warrant, the New Warrants. All other terms of the Original Warrant remain unchanged, including the requirement that Laurus will not sell any shares for which it has exercised either of the New Warrants prior to March 29, 2008. Laurus also will not sell shares for which it has exercised either of the New Warrants 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.

     The Company determined the aggregate fair value of the New Warrants exceeded the fair value of the Original

10

Warrant by approximately $0.1 million, which was recorded as additional capital and debt issuance costs and will be amortized over the remaining term of the Revolving Facility.

10. SALE OF AIRFRAMES, ENGINES AND PARTS, LEASEBACK OF AIRFRAMES AND ENGINES AND MAINTENANCE AGREEMENT WITH AIRLEASE

     On June 27, 2007, the Company, through its wholly owned subsidiary, Kitty Hawk Aircargo, Inc., or Aircargo, entered into various agreements with AirLease International, Inc., or AirLease, to sell to AirLease certain parts, sell and leaseback airframes and engines and for AirLease to provide power by the hour maintenance for the airframes. Under the sale agreements, Aircargo sold to AirLease: (1) six Boeing 727-200 airframes, or the Airframes; (2) eleven JT8D aircraft engines, or the Engines; and (3) certain Boeing 727-200 aircraft parts, or the Parts. The aggregate sales price for the Airframes, Engines and Parts was $3.5 million. The Company used the net proceeds of the sale of the Airframes, Engines and Parts to pay down indebtedness. In addition, the Company agreed with Laurus to maintain $1.0 million of the net proceeds as reserves under the Revolving Facility as consideration for the release of Laurus’ security interest in the Airframes, Engines and Parts.

     Under the Airframe Lease Agreement, AirLease will lease the Airframes back to Aircargo effective as of May 1, 2007. The initial maturity date of each Airframe lease ranges from April 2008 to August 2008. The term of each Airframe lease may be extended at the option of Aircargo. In the event Aircargo extends the lease for an Airframe and a “C Check” comes due for such Airframe, AirLease is responsible for the first $850,000 of the expenses for such “C Check,” and Aircargo is responsible for the balance. Aircargo is responsible for maintaining insurance on the Airframes. Additionally, Aircargo and AirLease entered into eleven Aircraft Engine Lease Agreements for the JT8D aircraft engines, under which AirLease will lease the Engines back to Aircargo effective as of May 1, 2007. The leases expire in April 2008, but could end sooner if the Engines must be removed from service for events defined in the agreement, including scheduled airworthiness directives removal dates. The airframe and engine leases are operating leases.

     In connection with the sale of the Parts, Aircargo and AirLease entered into a power by the hour maintenance agreement, under which AirLease would provide maintenance services on certain aircraft parts used on the Airframes effective as of May 1, 2007.

     The sales price of the Airframes, Engines and Parts exceeded book value by approximately $0.9 million which was deferred at June 30, 2007 and will be amortized in proportion to the lease and maintenance payments over the expected term of the leases and the power by the hour maintenance agreement.

11. INCOME TAXES

     The Company adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, or FIN 48, on January 1, 2007. The Company has analyzed all filing positions in federal and state tax jurisdictions where it is required to file income tax returns. Major tax jurisdictions of the Company include the federal jurisdiction and the states of Texas, Indiana, California, Pennsylvania and Florida. Tax years open to examination include 2003 through 2006 for the federal return. A federal audit for 2004 has been completed with no change to the Company’s tax liability. State tax returns are open to examination for years 2002 through 2006. The Company believes that it is more likely than not that all income tax positions and deductions will be sustained on audit. Accordingly, no reserves for uncertain income tax positions have been recorded in the financial statements pursuant to FIN 48.

     Following the adoption of FIN 48, the Company will recognize interest and penalties related to unrecognized tax benefits in income tax expense.

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

     The information in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Form 10-Q complements the information in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended December 31, 2006. Please refer to the information in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended December 31, 2006 for additional information regarding our financial condition, changes in financial condition and results of operations.

Recent Developments

     We continued to suffer losses during the first six months of 2007 which has affected our liquidity. Based on current projections, will need to raise additional capital in the form of equity or debt to fund our operations during the second quarter of 2008. See “— Capital Requirements, Capital Resources and Liquidity” for further information.

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 August 15, 2007, our scheduled freight network offered an expedited overnight and second-morning air freight product to 52 business centers and an expedited time-definite ground freight product to 61 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. 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.

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     For the six months ended June 30, 2007, we generated significant losses due to, among other things, high fuel expenses and weakness in demand for our air and ground freight products. We believe the reduction in demand for our air and ground freight products is attributable to our customers seeking less expensive transportation alternatives due to the continued high cost of fuel which we pass on to our customers in the form of a fuel surcharge, as do other freight transportation companies. We also believe the reduction in demand for our air and ground freight products is attributable to weak economic conditions in the sectors that we serve. We believe other domestic freight transportation companies are also experiencing similar weaker than historical demand during this period. In response to these developments, we have rationalized and continue to adjust our air and ground transportation schedules to better match capacity to demand and have reduced and continue to review our infrastructure costs, including staffing. While we have experienced some improvements from the first half of 2007, we continue to experience weak demand for our air and ground products during the third quarter of 2007 as compared to the third quarter of 2006.

     Ground Transportation. With the June 2006 acquisition of the Air Container Transport, Inc., or 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 exclusive use vehicles, or EUVs, for the dedicated transportation of truckload freight 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 services for movement of freight within cities included in our network. For the six months ended June 30, 2007, ground transportation service revenue from external customers was 6.4% of our total revenue. As of August 15, 2007, Kitty Hawk Ground managed 200 owner operators, owned and leased trucks and contracted trucks.

     Cargo Airline. Kitty Hawk Aircargo, our all-cargo airline, primarily provides dedicated air transportation services for Kitty Hawk Cargo’s scheduled freight network. During the six months ended June 30, 2007, Kitty Hawk Aircargo flew 94.9% of its block hours in Kitty Hawk Cargo’s scheduled freight network. As of August 15, 2007, Kitty Hawk Aircargo operated seven Boeing 737-300SF and six Boeing 727-200 cargo aircraft under operating leases and one Boeing 727-200 cargo aircraft available under an aircraft and engine use agreement. Kitty Hawk Aircargo also generates revenue from external customers through ACMI (air transportation service consisting of the aircraft, crew, maintenance and insurance on a contractual basis) and ad-hoc charter (transportation service consisting of the aircraft, crew, maintenance and insurance on an on-demand basis that may also include other costs to operate the aircraft, including aircraft fuel and aircraft handling charges) arrangements and performing airframe maintenance activities for other air carriers. For the six months ended June 30, 2007, approximately 1.4% of our revenue was from ACMI and ad-hoc charter 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 we are unable to continue to maintain or raise our fuel surcharge or our prices sufficiently and/or customers seek lower cost freight transportation alternatives due to continued high fuel surcharges, 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 generally 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

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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 six months ended June 30, 2007, our aircraft fuel averaged $2.10 per gallon as compared to $2.12 per gallon for the six months ended June 30, 2006, a decrease of 0.9%. 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 number of flights operated and 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 six months ended June 30, 2007, we used between 1.5 million and 1.9 million gallons of aircraft fuel per month as compared to between 1.9 million and 2.4 million gallons for the six months ended June 30, 2006 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 $200,000.

     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 2006 and 2007, 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, 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 tied to the economic trends of the U.S. economy, we may also incur additional working capital needs throughout the year, if we experience negative economic trends.

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 $1.5 million. Our working capital is also affected by the rising cost of aircraft fuel because we generally 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.

     Capital Resources. At June 30, 2007, our net working capital was $1.3 million as compared to $16.9 million at December 31, 2006. The decrease in net working capital was primarily due to funding the $19.9 million of losses incurred in the first six months of 2007 due to weakness in demand for our products and high fuel expenses.

     Revolving Facility. On March 29, 2007, we entered into the Revolving Facility with Laurus. This Revolving Facility replaced the prior $20 million credit facility with PNC Bank, National Association, or PNC. The Revolving Facility provides for borrowings up to $25 million, subject to a borrowing base of up to 90% of eligible receivables

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and a liquidity reserve of $1.0 million. 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 August 15, 2007, we had a borrowing base of $15.2 million, outstanding borrowings of $13.0 million and $2.2 million of availability, net of the $1.0 million liquidity reserve. Our outstanding borrowings include $2.7 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 Original Warrant. The exercise price of the Original Warrant was $0.91 per share. The exercise price was not subject to adjustment or reset, other than to reflect stock splits, stock dividends and similar transactions. Pursuant to the terms of the Original Warrant, Laurus agreed not to sell any shares for which it exercised the Original Warrant prior to March 29, 2008. Laurus also agreed not to sell shares for which it exercised the Original 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. The issuance of the Original Warrant was similar to an up front fee paid to the lender for entering into the Revolving Facility. We determined the aggregate fair value of the Original Warrant was approximately $4.2 million, which was recorded as additional capital and debt issuance cost. Debt issuance cost was included in other long-term assets and other current assets and is amortized over the term of the Revolving Facility.

     On June 29, 2007, as an inducement to Laurus to release its liens on six Boeing 727-200 airframes and eleven JT8D aircraft engines, we agreed to cancel the Original Warrant and replace the Original Warrant with two new warrants. The first warrant provides a right to purchase 4,000,000 shares of common stock at $0.55 per share, or the First Warrant. The second warrant provides a right to purchase 4,216,657 shares of common stock at the original exercise price of $0.91 per share, collectively with the First Warrant, the New Warrants. All other terms of the Original Warrant remain unchanged, including the requirement that Laurus will not sell any shares for which it has exercised either of the New Warrants prior to March 29, 2008. Laurus also will not sell shares for which it has exercised either of the New Warrants 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.

     We determined the aggregate fair value of the New Warrants exceeded the fair value of the Original Warrant by approximately $0.1 million, which was recorded as additional capital and debt issuance costs and will be amortized over the remaining term of the Revolving Facility.

     Liquidity. Our primary source of liquidity is our cash and cash equivalents, cash flow from operations, sales of assets and utilization of our Revolving Facility.

     At June 30, 2007, cash and cash equivalents were $0.4 million as compared to $9.6 million at December 31, 2006, and we had $4.1 million of unused availability under the Laurus Revolving Facility, net of a $1.0 million liquidity reserve, compared to $13.6 million of unused availability under the prior credit facility with PNC, net of a $2.0 million liquidity reserve, at December 31, 2006. The decrease in cash and cash equivalents of $9.2 million is a result of using $21.4 million to fund our operations. Offsetting this decrease was generating $0.1 million in investing activities and $12.2 million provided by financing activities. Our investing activities generated $3.6 million of proceeds from the sale of our assets offset by placing $2.8 million in restricted cash to secure our outstanding letters of credit, paying $0.5 million for the final installment of the June 2006 acquisition of the operating assets from ACT and spending $0.3 million for capital expenditures. Our financing activities included net borrowings of $13.5 million on the Revolving Facility and $0.4 million on notes payable to finance our insurance premiums offset by spending $1.6 million in debt issuance costs related to the Revolving Facility. At August 15, 2007, we had $0.6 million of cash on hand and $2.2 million of unused availability, net of the $1.0 million liquidity reserve, under our Revolving

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Facility with Laurus.

     On June 27, 2007, the Company, through its wholly owned subsidiary, Kitty Hawk Aircargo, Inc., or Aircargo, entered into various agreements with AirLease International, Inc., or AirLease, to sell to AirLease certain parts, sell and leaseback all of the Company’s owned airframes and engines and for AirLease to provide power by the hour maintenance for the airframes. The aggregate sales price for the Airframes, Engines and Parts was $3.5 million. We used the net proceeds of the sale of the Airframes, Engines and Parts to pay down indebtedness. In addition, we agreed with Laurus to maintain $1.0 million of the net proceeds as reserves under the Revolving Facility as consideration for the release of Laurus’ security interest in the Airframes, Engines and Parts.

     Under these new lease agreements, we will incur additional flight expense of approximately $1.9 million, prior to the amortization of the $0.9 million deferred gain, over the term of the airframe and engine leases based on the minimum lease payments. We do not expect to incur additional maintenance expense under the power by the hour agreement as the minimum payments under the agreement of approximately $0.5 million is not expected to exceed the maintenance expense we would have incurred if the parts had not been sold.

     During the first six months of 2007, we continued to experience weakness in demand for our air and ground freight products and suffered significant losses. We believe the weakness in demand was caused by high fuel prices and economic conditions affecting the electronics, telecom and related infrastructure equipment, automotive, other durable goods and equipment industries in which our primary customers operate. We have taken actions throughout 2007 to reduce our network capacity in line with reduced demand expectations and significantly reduced costs in general, including, but not limited to, flying less block hours in the network, transitioning from purchased ground transportation to owner operators and company drivers and a reduction in staffing. We have also taken actions to strengthen our presence in the marketplace and expand our sales efforts. We believe these actions have been effective in reducing costs, maximizing revenues in a weak demand environment and positioning the Company for improved results if the economic conditions affecting the industries in which our customers operate and demand for our products improve; however, there is no assurance that such improvements will occur.

     At August 15, 2007, based on current forecasts that anticipate continued high fuel costs and limited improvements in demand for our products, we will require additional debt or equity financing to fund our operations during the second quarter of 2008. In July 2007, we retained Raymond James & Associates as our investment banker to work with the Board of Directors and senior management to assist in evaluating our strategic alternatives that may include, but are not limited, to raising additional capital, altering operations or a sale of the Company. However, there is no assurance that our forecasts will prove to be accurate or that our efforts to raise additional debt or equity financing will be successful. The inability to secure additional funding when and as needed will likely have a material adverse effect on our operations and cash flows.

Explanation of Statement of Operations Items

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

• Scheduled Freight Network 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 our schedules. 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;

• 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 or contracted service to third parties and local transportation trucking services.

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     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.

• 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; and

• costs of aircraft and truck parts and supplies.

• 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 expense for our previously owned airframes and aircraft engines, trucks, trailers, freight-handling equipment and capitalized software as

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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; and

• general operational office expenses.

     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

     For a discussion of our critical accounting policies refer to “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Policies” included in our Annual Report on Form 10-K for the year ended December 31, 2006. There have been no material changes to the critical accounting policies discussed in our Annual Report on Form 10-K for the year ended December 31, 2006. During 2007, we have added the following critical accounting policy:

     Valuation of Long-Lived Assets

     In accordance with SFAS No. 144, we periodically monitor the carrying values of long-lived assets for potential impairment based on whether events have occurred that suggest the value of the long-lived assets may be impaired. These events include current period losses combined with a history of losses or a projection of continuing losses or a significant decrease in the market value of an asset. When a trigger event occurs, an impairment calculation is performed, comparing projected undiscounted cash flows, utilizing current cash flow information and expected growth rates related to our products, to the respective carrying values. If potential impairment is identified for long- lived assets to be held and used, we compare the fair value of the long-lived assets to the current carrying values of the related assets. We record impairment when the carrying values exceed the fair value.

     Due to the losses allocable to our ground freight product since acquiring the operating assets of ACT, we have performed an assessment as to whether our long-lived assets are impaired as of June 30, 2007. As allowed by SFAS No. 144, long-lived assets are grouped with other assets and liabilities at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. Since the intangible assets acquired as a result of acquiring the operating assets of ACT, specifically, the non-compete agreements, customer relationships and trade names, do not have separately identifiable cash flows within our operations, we believe the lowest level for which there are separately identifiable cash flows for such long-lived assets is the operations of our ground freight product.

     We estimated our future cash flows related to our ground freight product through 2010 using our estimates of growth in revenues, growth in operating income, and market competition. We believe that over the next 24 months our ground freight product revenues will continue to grow and begin to produce positive cash flows. Based on our estimates of future undiscounted cash flows for our ground freight product through 2010, we have concluded there is

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no impairment to our long-lived assets. Any changes in the estimates used could have an effect upon our assessment. There can be no assurance that our estimates will prove to be correct.

     The long-lived assets of our ground freight product have a carrying value of $4.5 million at June 30, 2007. If our cumulative revenues through 2010 are more than $24.8 million below our forecast of $281.0 million, our long-lived assets will likely be considered impaired.

Results of Operations

QUARTER ENDED JUNE 30, 2007 COMPARED TO THE QUARTER ENDED JUNE 30, 2006

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

	Three months ended June 30,
	2007			2006
Revenue:
Scheduled freight		91.8	%		97.3	%
Other		8.2			2.7
Total revenue		100.0			100.0
Cost of revenue		111.1			114.3
Gross loss		(11.1	)		(14.3	)
General and administrative expenses		6.8			5.0
Operating loss		(17.9	)		(19.3	)
Other (income) expense:
Interest expense		1.4			0.1
Other income		(0.1	)		(0.4	)
Total interest and other (income) expense		1.3			(0.3	)
Net loss		(19.2	)%		(19.0	)%

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:

	Three months ended June 30,
	2007					2006					Dollar			Percentage
			Percentage					Percentage			Change			Change
			of Total					of Total			from 2006			from 2006
	Revenue		Revenue			Revenue		Revenue			to 2007			to 2007
	(Dollars in thousands)
Scheduled freight	$	40,780		91.8	%	$	44,263		97.3	%	$	(3,483	)		(7.9	)%
Other:
ACMI		881		2.0			930		2.1			(49	)		(5.3	)
Miscellaneous		2,764		6.2			275		0.6			2,489			905.1
Total revenue	$	44,425		100.0	%	$	45,468		100.0	%	$	(1,043	)		(2.3	)%

     Scheduled Freight Network. For the three months ended June 30, 2007, the $3.5 million decrease in our scheduled freight network revenue was due to a 44.8% decrease in our average yield offset by a 77.8% increase in our chargeable weight as compared to the three months ended June 30, 2006. Approximately $7.4 million of the decrease was attributable to revenue from our expedited air freight product which decreased from $37.6 million for the three months ended June 30, 2006 to $30.2 million for the three months ended June 30, 2007. This decrease was offset by a $3.9 million increase in revenue attributable to our expedited ground freight product which increased from $6.7 million for the three months ended June 30, 2006 to $10.6 million for the three months ended June 30, 2007. Our chargeable weight increase was due to 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

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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.

     ACMI. For the three months ended June 30, 2007 and 2006, our ACMI revenue was due to operating one aircraft under an ACMI contract.

     Miscellaneous. For the three months ended June 30, 2007, our miscellaneous revenue was primarily related to EUVs and contracted service to our customers outside of our network and 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:

	Three months ended June 30,
	2007					2006					Dollar			Percentage
			Percentage					Percentage of			Change of			Change
	Cost of		of Total			Cost of		Total			from 2006			from 2006
	Revenue		Revenue			Revenue		Revenue			to 2007			to 2007
	(Dollars in thousands)
Flight expense	$	7,590		17.1	%	$	8,189		18.0	%	$	(599	)		(7.3	)%
Transportation expense		12,887		29.0			12,707		28.0			180			1.4
Fuel expense		12,007		27.0			14,150		31.1			(2,143	)		(15.1	)
Maintenance expense		3,697		8.3			3,877		8.5			(180	)		(4.6	)
Freight handling expense		7,857		17.7			8,953		19.7			(1,096	)		(12.2	)
Depreciation and amortization		822		1.9			776		1.7			46			5.9
Operating overhead expense		4,494		10.1			3,298		7.3			1,196			36.3
Total cost of revenue	$	49,354		111.1	%	$	51,950		114.3	%	$	(2,596	)		(5.0	)%

     Flight Expense. For the three months ended June 30, 2007, flight expense decreased $0.6 million, or 7.3%, compared to the three months ended June 30, 2006. This decrease was primarily a result of lower aircraft lease expense, crew costs and aircraft insurance expense.

     Our aircraft lease expense decreased $0.4 million due to 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 297 less revenue block hours in the scheduled freight network, a decrease of 5.1%, for the three months ended June 30, 2007 as compared to the three months ended June 30, 2006 due primarily to reductions in our flight schedule and changes in routing of aircraft for operating efficiencies. Our aircraft flew a total of 55 more revenue block hours related to our ACMI and ad-hoc charter transportation services for the three months ended June 30, 2007 as compared to the three months ended June 30, 2006. Crew costs decreased $0.1 million due in part to less revenue block hours operated by the fleet. Our aircraft insurance expense decreased $0.1 million due in part to reduced premiums for the three months ended June 30, 2007 as compared to the three months ended June 30, 2006.

     Transportation Expense. For the three months ended June 30, 2007, transportation expense increased $0.2 million, or 1.4%, from the three months ended June 30, 2006. This increase is primarily due to an increase in our network trucking expense to provide our expedited ground freight product, including purchased transportation costs and owner operator expenses, due to the significant expansion to the network during 2006, including the June 2006 acquisition of substantially all of the operating assets of ACT. Offsetting this increase was a $0.9 million decrease in chartered aircraft expense due to flying 282 less block hours from a chartered aircraft operating in the scheduled freight network during the three months ended June 30, 2007 as compared to the three months ended June 30, 2006, a decrease of 54.3%.

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     Fuel Expense. Fuel expense is comprised of aircraft fuel used in the aircraft operated in the scheduled freight network and diesel fuel used in our owned and leased trucks operated in our scheduled freight network. For the three months ended June 30, 2007, fuel expense decreased $2.1 million, or 15.1%, as compared to the three months ended June 30, 2006.

     Aircraft fuel expense decreased approximately $2.7 million resulting from a $2.6 million decrease in fuel consumption and a $0.1 million decrease in the average cost of aircraft fuel. Our average cost per gallon of aircraft fuel decreased $0.01, or 0.5%, for the three months ended June 30, 2007 as compared to the three months ended June 30, 2006. The number of gallons used in our scheduled freight network decreased by approximately 1.2 million gallons, or 18.7%, for the three months ended June 30, 2007 as compared to the three months ended June 30, 2006. The decrease in fuel consumption is primarily due to our fuel conservation efforts and less revenue hours flown in the network.

     Operating the trucks acquired from ACT in our network during June 2006 contributed $0.7 million to total fuel expense for the three months ended June 30, 2007 as compared to $0.1 million for the three months ended June 30, 2006.

     Maintenance Expense. For the three months ended June 30, 2007, maintenance expense decreased $0.2 million, or 4.6%, as compared to the three months ended June 30, 2006. Of this change, maintenance expense related to our owned and leased trucks since their acquisition in June 2006 increased $0.4 million and 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, increased $0.2 million due to more revenue block hours on these aircraft. These increases were offset by $0.2 million less maintenance expense related to operating the Boeing 727-200 cargo aircraft due to a reduction in the number of aircraft flying resulting in lower external labor costs. We utilized $0.3 million less inventory related to aircraft maintenance which resulted from the lower of cost or market adjustment that was recorded in 2006 and flying 26.4% less hours on the Boeing 727-200 cargo aircraft as well as incurring $0.1 million less in aircraft engineering costs.

     Freight Handling Expense. For the three months ended June 30, 2007, freight handling expense decreased $1.1 million, or 12.2%, as compared to the three months ended June 30, 2006. The decrease in freight handling expense was primarily attributable to a 50.6% decrease in freight handling expense per pound of chargeable weight for the three months ended June 30, 2007 as compared to the three months ended June 30, 2006 due to handling an increased percentage of the system chargeable weight by our own employees at some of our regional hubs and outstations, and to a lesser extent, volume discounts available under our freight handling contracts.

     Depreciation and Amortization. For the three months ended June 30, 2007, depreciation and amortization expense increased $0.1 million, or 5.9%, as compared to the three months ended June 30, 2006. This increase is primarily due to depreciating the operating assets acquired from ACT and amortizing the intangible assets associated with the ACT transaction offset by some assets becoming fully depreciated prior to June 30, 2007 without incurring a significant amount of capital expenditures to replace or extend the life of those assets.

     Operating Overhead Expense. For the three months ended June 30, 2007, operating overhead increased $1.2 million, or 36.3%, as compared to the three months ended June 30, 2006. The increase is primarily attributable to the expansion of our network with the acquisition of the operating assets of ACT and operating our ground transportation services company. This activity resulted in increased outstation lease expense related to our new regional hubs and other service terminals, increased property, trucking liability and workers compensation insurance costs and increased administrative wages for management, safety and customer service personnel. Additionally, our allowance for doubtful accounts increased $0.1 million during the quarter ended June 30, 2007 as compared to the quarter ended June 30, 2006.

GROSS LOSS

     As a result of the foregoing, for the three months ended June 30, 2007, we recognized a gross loss of $4.9 million as compared to $6.5 million for the three months ended June 30, 2006.

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GENERAL AND ADMINISTRATIVE EXPENSE

     General and administrative expense increased $0.7 million, or 32.1%, for the three months ended June 30, 2007 as compared to the three months ended June 30, 2006. We incurred $0.1 million more in general and administrative wages related to operating the assets acquired from ACT and $0.4 million of higher professional fees related to strategic planning initiatives, management and Board of Directors changes, the repricing of the Original Warrant with Laurus and our crew member labor contract negotiations currently in arbitration. Additionally, general and administrative expense for the three months ended June 30, 2007 was further increased by $0.2 million of fewer gains from the sale of assets as compared to the three months ended June 30, 2006.

INTEREST EXPENSE

     Interest expense increased $0.6 million for the three months ended June 30, 2007 as compared to the three months ended June 30, 2006 due to a higher outstanding balance on the Revolving Facility.

OTHER INCOME

     Other income decreased $0.2 million for the three months ended June 30, 2007 as compared to the three months ended June 30, 2006 primarily due to less interest income earned due to carrying a lower average cash balance.

INCOME TAXES

     For the three months ended June 30, 2007, we recognized no tax benefit associated with our operating losses because we continue to provide a full valuation allowance on our deferred tax assets.

SIX MONTHS ENDED JUNE 30, 2007 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 2006

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

	Six months ended June 30,
	2007			2006
Revenue:
Scheduled freight		92.3	%		98.6	%
Other		7.7			1.4
Total revenue		100.0			100.0
Cost of revenue		114.8			114.9
Gross loss		(14.8	)		(14.9	)
General and administrative expenses		7.5			5.4
Operating loss		(22.3	)		(20.3	)
Other (income) expense:
Interest expense		0.8			0.2
Other income		(0.1	)		(0.6	)
Total interest and other (income) expense		(0.7	)		(0.4	)
Net loss		(23.0	)%		(19.9	)%

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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:

	Six months ended June 30,
	2007					2006					Dollar			Percentage
			Percentage					Percentage			Change			Change
			of Total					of Total			from 2006			from 2006
	Revenue		Revenue			Revenue		Revenue			to 2007			to 2007
	(Dollars in thousands)
Scheduled freight	$	79,708		92.3	%	$	84,350		98.6	%	$	(4,642	)		(5.5	)%
Other:
ACMI		1,189		1.4			930		1.1			259			27.8
Miscellaneous		5,493		6.3			275		0.3			5,218			1,897.5
Total revenue	$	86,390		100.0	%	$	85,555		100.0	%	$	835			1.0	%

     Scheduled Freight Network. For the six months ended June 30, 2007, the $4.6 million decrease in our scheduled freight network revenue was due to a 50.7% decrease in our average yield offset by a 104.1% increase in our chargeable weight as compared to the six months ended June 30, 2006. Approximately $15.1 million of the decrease was attributable to revenue from our expedited air freight product which decreased from $74.5 million for the six months ended June 30, 2006 to $59.4 million for the six months ended June 30, 2007. This decrease was offset by a $10.5 million increase in revenue attributable to our expedited ground freight product which increased from $9.8 million for the six months ended June 30, 2006 to $20.3 million for the six months ended June 30, 2007. Our chargeable weight increase was due to 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.

     ACMI. For the six months ended June 30, 2007 and 2006, our ACMI revenue was due to operating one aircraft under an ACMI contract.

     Miscellaneous. For the six months ended June 30, 2007, our miscellaneous revenue was primarily related to EUVs and contracted service to our customers outside of our network and flying ad-hoc charter services for several customers. For the six months ended June 30, 2006, our miscellaneous revenue was primarily related to EUVs and contracted service to our customers outside of our network.

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:

	Six months ended June 30,
	2007					2006					Dollar			Percentage
			Percentage					Percentage of			Change			Change
	Cost of		of Total			Cost of		Total			from 2006			from 2006
	Revenue		Revenue			Revenue		Revenue			to 2007			to 2007
	(Dollars in thousands)
Flight expense	$	15,347		17.7	%	$	16,757		19.6	%	$	(1,410	)		(8.4	)%
Transportation expense		26,649		30.9			21,815		25.5			4,834			22.2
Fuel expense		22,732		26.3			27,354		31.9			(4,622	)		(16.9	)
Maintenance expense		7,349		8.5			7,611		8.9			(262	)		(3.4	)
Freight handling expense		16,260		18.8			16,953		19.8			(693	)		(4.1	)
Depreciation and amortization		1,704		2.0			1,529		1.8			175			11.4
Operating overhead expense		9,138		10.6			6,319		7.4			2,819			44.6
Total cost of revenue	$	99,179		114.8	%	$	98,338		114.9	%	$	841			0.9	%

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     Flight Expense. For the six months ended June 30, 2007, flight expense decreased $1.4 million, or 8.4%, as compared to the six months ended June 30, 2006. This decrease was primarily a result of lower aircraft lease expense, crew costs and aircraft insurance expense.

     Our aircraft lease expense decreased $0.8 million due to 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 1,705 less revenue block hours in the scheduled freight network, a decrease of 14.6%, for the six months ended June 30, 2007 as compared to the six months ended June 30, 2006 due primarily to reductions in our flight schedule and changes in routing of aircraft for operating efficiencies. Our aircraft flew a total of 207 more revenue block hours related to our ACMI and ad-hoc charter transportation services for the six months ended June 30, 2007 as compared to the six months ended June 30, 2006. Crew costs decreased $0.4 million due in part to less revenue block hours operated by the fleet. Our aircraft insurance expense decreased $0.2 million due in part to reduced premiums for the six months ended June 30, 2007 as compared to the six months ended June 30, 2006.

     Transportation Expense. For the six months ended June 30, 2007, transportation expense increased $4.8 million, or 22.2%, from the six months ended June 30, 2006. This increase is primarily due to an increase in our network trucking expense to provide our expedited ground freight product, including purchased transportation costs and owner operator expenses, due to the significant expansion to the network during 2006, including the June 2006 acquisition of substantially all of the operating assets of ACT.

     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. For the six months ended June 30, 2007, fuel expense decreased $4.6 million, or 16.9%, as compared to the six months ended June 30, 2006.

     Aircraft fuel expense decreased approximately $5.8 million resulting from a $5.6 million decrease in fuel consumption and a $0.2 million decrease in the average cost of aircraft fuel. Our average cost per gallon of aircraft fuel decreased $0.02, or 0.9%, for the six months ended June 30, 2007 as compared to the six months ended June 30, 2006. The number of gallons used in our scheduled freight network decreased by approximately 2.6 million gallons, or 20.7%, for the six months ended June 30, 2007 as compared to the six months ended June 30, 2006. The decrease in fuel consumption is primarily due to our fuel conservation efforts and less revenue hours flown in the network.

     Operating the trucks acquired from ACT in our network during June 2006 contributed $1.4 million to total fuel expense for the six months ended June 30, 2007 as compared to $0.1 million for the six months ended June 30, 2006.

     Maintenance Expense. For the six months ended June 30, 2007, maintenance expense decreased $0.3 million, or 3.4%, as compared to the six months ended June 30, 2006. Of this change, maintenance expense related to our owned and leased trucks since their acquisition in June 2006 increased $0.8 million and 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, increased $0.3 million due to more revenue block hours on these aircraft. These increases were offset by $0.5 million less maintenance expense related to operating the Boeing 727-200 cargo aircraft due to a reduction in the number of aircraft flying resulting in lower external labor costs. We utilized $0.4 million less inventory related to aircraft maintenance which resulted from the lower of cost or market adjustment that was recorded in 2006 and flying 34.8% less hours on the Boeing 727-200 cargo aircraft as well as incurring $0.3 million less in aircraft engineering costs.

     Freight Handling Expense. For the six months ended June 30, 2007, freight handling expense decreased $0.7 million, or 4.1%, as compared to the six months ended June 30, 2006. The decrease in freight handling expense was primarily attributable to a 53.0% decrease in freight handling expense per pound of chargeable weight for the six months ended June 30, 2007 as compared to the six months ended June 30, 2006 due to handling an increased percentage of the system chargeable weight by our own employees at some of our regional hubs and outstations and, to a lesser extent, volume discounts available under our freight handling contracts.

     Depreciation and Amortization. For the six months ended June 30, 2007, depreciation and amortization expense

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increased $0.2 million, or 11.4%, as compared to the six months ended June 30, 2006. This increase is primarily due to depreciating the operating assets acquired from ACT and amortizing the intangible assets associated with the ACT transaction offset by some assets becoming fully depreciated prior to June 30, 2007 without incurring a significant amount of capital expenditures to replace or extend the life of those assets.

     Operating Overhead Expense. For the six months ended June 30, 2007, operating overhead increased $2.8 million, or 44.6%, as compared to the six months ended June 30, 2006. The increase is primarily attributable to the expansion of our network with the acquisition of the operating assets of ACT and operating our ground transportation services company. This activity resulted in increased outstation lease expense related to our new regional hubs and other service terminals, increased property, trucking liability and workers compensation insurance costs and increased administrative wages for management, safety and customer service personnel.

GROSS LOSS

     As a result of the foregoing, we recognized a gross loss of $12.8 million for the six months ended June 30, 2007 as compared to a gross loss of $12.8 million for the six months ended June 30, 2006.

GENERAL AND ADMINISTRATIVE EXPENSE

     General and administrative expense increased $1.9 million, or 42.4%, for the six months ended June 30, 2007 as compared to the six months ended June 30, 2006. The increase was primarily due to incurring $0.2 million of fees related to terminating our bank agreement with PNC when it was replaced by an agreement with Laurus and writing off $0.5 million of debt issuance costs that were capitalized related to the PNC agreement. We also incurred $0.3 million more in general and administrative wages related to operating the assets acquired from ACT and $0.5 million of higher professional fees related to strategic planning initiatives, management and Board of Directors changes, the repricing of the Original Warrant with Laurus and our crew member labor contract negotiations currently in arbitration. Additionally, general and administrative expense for the six months ended June 30, 2007 was further increased by $0.3 million of fewer gains from the sale of assets compared to the six months ended June 30, 2006.

INTEREST EXPENSE

     Interest expense increased $0.6 million for the six months ended June 30, 2007 as compared to the six months ended June 30, 2006 due to a higher outstanding balance on the Revolving Facility.

OTHER INCOME

     Other income decreased $0.4 million for the six months ended June 30, 2007 as compared to the six months ended June 30, 2006 primarily due to less interest income earned due to carrying a lower average cash balance.

INCOME TAXES

     For the six months ended June 30, 2007, we recognized no tax benefit associated with our operating losses because we continue to provide a full valuation allowance on our deferred tax assets.

Forward-Looking Statements

     This quarterly report on Form 10-Q 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.

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

• the ability to raise additional debt or equity on economic terms or at all;

• 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;

• 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 the assets acquired by us from ACT;

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

• 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;

• 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.

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     The impact of any terrorist activities or international conflicts on the U.S. and global economies in general, or the transportation industry in particular, could have a material adverse effect on our business and liquidity. Other factors may cause our actual results to differ materially from the forward-looking statements contained in this quarterly report on Form 10-Q.

     These forward-looking statements speak only as of the date of this quarterly report on Form 10-Q and, except as required by law, we do not undertake any obligation to publicly update or revise our forward-looking statements. We caution you not to place undue reliance on these forward-looking statements.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     We have not experienced any significant changes in our market risk since the disclosures made in “Item 1A: Quantitative and Qualitative Disclosures About Market Risk” of our Annual Report on Form 10-K for the year ended December 31, 2006.

ITEM 4. 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 authorized Principal 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 quarterly 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 authorized Principal 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 quarterly report.

     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.

PART II. OTHER INFORMATION

ITEM 1. 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.

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ITEM 1A. RISK FACTORS

Risks Relating to Our Business

     We have liquidity issues and need to raise additional funding, however, further financing cannot be guaranteed.

     During the first six months of 2007, we continued to experience weakness in demand for our air and ground freight products and suffered significant losses. We believe the weakness in demand was caused by high fuel prices and economic conditions affecting the electronics, telecom and related infrastructure equipment, automotive, other durable goods and equipment industries in which our primary customers operate. We have taken actions throughout 2007 to reduce our network capacity in line with demand expectations and significantly reduced costs in general including, but not limited to, flying less block hours in the network, transitioning from purchased ground transportation to owner operators and company drivers and a reduction in staffing. We have also taken actions to strengthen our presence in the marketplace and expand our sales efforts. We believe these actions have been effective in reducing costs, maximizing revenues and positioning the Company for improving results if the economic conditions affecting the industries in which our customers operate and demand for our products improve; however, there is no assurance that such improvements will occur.

     At August 15, 2007, we had $0.6 million of cash on hand and $2.2 of availability under the Revolving Facility. Based on current forecasts that anticipate continued high fuel costs and limited improvements in demand for our products, we will require additional debt or equity financing to fund our operations. In July 2007, we retained Raymond James & Associates as our investment banker to work with the Board of Directors and senior management to assist in evaluating our strategic alternatives that may include, but are not limited, to raising additional capital, altering operations or a sale of the Company. However, there is no assurance that our forecasts will prove to be accurate or that our efforts to raise additional debt or equity financing will be successful. The inability to secure additional funding when and as needed will likely have a material adverse effect on our operations.

     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 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 52 business centers and a time-definite ground freight product to 61 cities as of August 15, 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.

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     Our inability to attract and retain sufficient business from customers at economical prices for our air and ground freight products 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 1,000 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 network 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 United States Postal Service, or the USPS, accounted for more than 14.7% of our total revenue for the year ended December 31, 2006. In June 2007, we were advised by the USPS that it was unlikely that the USPS would operate a daytime air and ground network for holiday season mail, or C-NET network, in 2007. Management of the USPS C-NET network in 2006 was a significant source of revenue for Kitty Hawk; however, even if the USPS does not operate the C-NET network in 2007, we expect to generate revenue in the fourth quarter of 2007 from providing air and ground transportation services to the USPS for holiday season mail.

     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.

     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 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

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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 August 15, 2007, we had a borrowing base of $15.2 million and $13.0 million of outstanding borrowings, net of a $1.0 million reserve, which includes $2.7 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 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 two quarters of 2007. We believe other domestic freight transportation companies may have also experienced similar weaker than historical demand during this period.

     We have experienced recent changes in senior management that could adversely affect the operation of our business.

     Robert W. Zoller, Jr., who served as the Company’s President and Chief Executive Officer since November 2002, retired as the Company’s President and Chief Executive Officer effective April 30, 2007. Although he remains a member of our Board of Directors and is serving as a consultant to the Company, this is a substantial change for the Company and its management team. An Executive Committee comprised of two current members of our Board of Directors, Melvin Keating and Joseph Ruffolo, has assumed Mr. Zoller’s responsibilities until a replacement is appointed, if any. This is a significant change in management and could create transitional challenges for us. We cannot be assured that an effective transition to management by the Executive Committee has

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occurred or that we have taken the necessary steps to effect an orderly continuation of our operations during this transitional 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 long-lived assets could have a material adverse effect on our results of operations.

     We periodically monitor the carrying values of long-lived assets for potential impairment based on whether events have occurred that suggest the value of the long-lived assets may be impaired. If we determine that the current carrying value of the long-lived assets exceeds the fair market value of the long-lived assets, we would be required to write down the value of some or all of these assets. Any writedown 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.

     We have a $15.0 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.

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     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. 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 six months ended June 30, 2007, we used between 1.5 million and 1.9 million gallons of aircraft fuel per month in our scheduled freight network as compared to between 1.9 million and 2.4 million gallons for the six months ended June 30, 2006. 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 $200,000.

     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 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; Seattle, Washington; and Salt Lake City, Utah; and our ground network operations in Los Angeles and San Francisco, California; El Paso, Texas and Denver, Colorado, 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

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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 or lease 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. Because a settlement was not reached by April 9, 2007, both parties submitted their best and final position to a final offer, or “baseball” style arbitration. As of August 15, 2007, the arbitrator’s decision has not been returned. We cannot determine if the outcome of the arbitration will have a material adverse effect on our 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.

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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 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 the aircraft we operate 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

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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 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 the 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.

     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

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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;

• 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, due to the low trading price of our common stock, small changes in the price per share could result in a large percentage change in the price per share.

     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 August 15, 2007, our 5% or greater stockholders and their affiliates beneficially owned more than 67.0% of our common stock. In addition, one of our 5% or greater stockholders is a member of our Board of Directors and two other member of our Board of Directors, including our Chairman of the Board, were recommended by certain of our 5% or greater stockholders. 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.

     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

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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 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 or our Series B Redeemable Preferred 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 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

     In March 2007, our Board of Directors declared a dividend for the three months ended March 31, 2007 on our Series B Redeemable Preferred Stock in the amount of $27.61 for each share of Series B Redeemable Preferred Stock issued and outstanding on March 27, 2007. The Company gave the holders of our Series B Redeemable Preferred Stock the option of receiving shares of the Company’s common stock in lieu of cash to settle the dividend. Certain of our 5% or greater stockholders and their affiliates accepted common stock in lieu of cash, and, in April 2007, the Company issued 375,167 shares of our common stock at a price of $0.85 per share to certain of our holders of Series B Redeemable Preferred Stock, equal to approximately $318,892 in cash. No commissions or underwriting fees were paid in connection with the issuance of these securities. This issuance was made in reliance on exemptions from registration contained in Regulation D of the Securities Act of 1933, as amended.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

     Not applicable.

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

     Not applicable.

ITEM 5. OTHER INFORMATION

     Not applicable.

ITEM 6. EXHIBITS

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

Exhibit No.		EXHIBIT
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 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 or furnished herewith.

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SIGNATURES

     Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on August 20, 2007.

KITTY HAWK, INC.
By:	/s/ JAMES R. KUPFERSCHMID
	James R. Kupferschmid
	Vice President — Finance and Chief Financial
	Officer (Authorized officer and principal
	financial officer)

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