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FORM 10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.

For the quarterly period ended June 30, 2003

[ ] 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 1-13934
-------

MIDWEST EXPRESS HOLDINGS, INC.
------------------------------
(Exact name of registrant as specified in its charter)

Wisconsin 39-1828757
--------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)


6744 South Howell Avenue
Oak Creek, Wisconsin 53154
--------------------------
(Address of principal executive offices)
(Zip code)


414-570-4000
------------
(Registrant's telephone number, including area code)

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

Yes X No
------ ------

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

Yes X No
------ ------

As of July 31, 2003, there were 15,517,411 shares of Common Stock, $.01 par
value, of the registrant outstanding.

1

MIDWEST EXPRESS HOLDINGS, INC.

FORM 10-Q

For the period ended June 30, 2003

INDEX



Page No.
--------
PART I - FINANCIAL INFORMATION




Item 1. Financial Statements (unaudited)
- ------- --------------------------------

Condensed Consolidated Statements of Operations 3

Condensed Consolidated Balance Sheets 4

Condensed Consolidated Statements of Cash Flows 5

Notes to Unaudited Condensed Consolidated Financial Statements 6

Item 2. Management's Discussion and Analysis of Results of Operations
- ------- -------------------------------------------------------------
and Financial Condition 15
-----------------------

Item 3. Quantitative and Qualitative Disclosures about Market Risk 36
- ------- ----------------------------------------------------------

Item 4. Controls and Procedures 36
- ------- -----------------------

PART II - OTHER INFORMATION

Item 3. Defaults Upon Senior Securities 38
- ------- -------------------------------

Item 4. Submission of Matters to a Vote of Security Holders 38
- ------- ---------------------------------------------------

Item 6. Exhibits and Reports on Form 8-K 39
- ------- --------------------------------

SIGNATURES 40


2


PART I - FINANCIAL INFORMATION

Item 1. Financial Statements (unaudited)
- ------------------------------------------

MIDWEST EXPRESS HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share amounts)
(Unaudited)



Three Months Ended Six Months Ended
June 30, June 30,
-------- --------
2003 2002 2003 2002
---- ---- ---- ----

Operating revenues:
Passenger service $ 83,147 $ 104,095 $ 163,076 $ 195,645
Cargo 1,252 1,491 2,536 3,110
Other 12,499 10,389 25,344 21,242
-------------- -------------- -------------- --------------
Total operating revenues 96,898 115,975 190,956 219,997
-------------- -------------- -------------- --------------

Operating expenses:
Salaries, wages and benefits 34,742 39,618 73,725 77,589
Aircraft fuel and oil 18,270 19,801 42,990 35,539
Commissions 2,820 5,155 6,201 9,749
Dining services 1,451 5,583 4,713 10,206
Station rental, landing and other fees 8,354 8,960 19,535 18,715
Aircraft maintenance materials and repairs 7,297 9,798 15,234 19,324
Depreciation and amortization 5,487 5,161 10,844 10,720
Aircraft rentals 12,307 6,313 18,709 12,622
Impairment loss - - - 29,911
Other 11,725 13,664 22,482 26,367
-------------- -------------- -------------- --------------
Total operating expenses 102,453 114,053 214,433 250,742
-------------- -------------- -------------- --------------
Operating (loss) income (5,555) 1,922 (23,477) (30,745)
-------------- -------------- -------------- --------------

Other income (expense):
Interest income 176 342 480 567
Interest expense (499) (873) (987) (1,809)
Other, net 11,432 92 11,431 39,582
-------------- -------------- -------------- --------------
Total other income (expense) 11,109 (439) 10,924 38,340
-------------- -------------- -------------- --------------

Income (Loss) before income tax provision (credit) 5,554 1,483 (12,553) 7,595
Income tax provision (credit) 1,944 548 (4,393) 2,811
-------------- -------------- -------------- --------------
Net Income (Loss) $ 3,610 $ 935 $ (8,160) $ 4,784
============== ============== ============== ==============


Income (Loss) per common share - basic $ 0.23 $ 0.07 $ (0.53) $ 0.34
============== ============== ============== ==============
Income (Loss) per common share - diluted $ 0.23 $ 0.07 $ (0.53) $ 0.34
============== ============== ============== ==============

Weighted average shares - basic 15,516,279 14,055,278 15,514,299 13,944,052
Weighted average shares - diluted 15,538,228 14,131,780 15,514,299 14,024,125


See notes to unaudited consolidated financial statements.


3

MIDWEST EXPRESS HOLDINGS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
(Unaudited)




June 30, December 31,
ASSETS 2003 2002
---- ----

Current assets:
Cash and cash equivalents $ 35,023 $ 41,498
Accounts receivable:
Traffic, less allowance for doubtful accounts of $61 and $133
at June 30, 2003 and December 31, 2002, respectively 3,779 4,575
Income tax refund - 5,247
Other receivables 332 555
--------------- --------------
Total accounts receivable 4,111 10,377
Inventories 7,182 7,250
Prepaid expenses:
Commissions 1,028 1,691
Other 7,436 5,649
--------------- --------------
Total prepaid expenses 8,464 7,340
Restricted cash 25,558 15,067
Deferred income taxes 12,614 10,013
--------------- --------------
Total current assets 92,952 91,545

Property and equipment, at cost 357,305 360,993
Less accumulated depreciation and amortization 137,549 136,429
--------------- --------------
Net property and equipment 219,756 224,564

Landing slots and leasehold rights, less accumulated amortization of $3,833
and $3,642 at June 30, 2003 and December 31, 2002, respectively 2,917 3,108
Aircraft purchase deposits and pre-delivery progress payments 54,737 52,362
Other assets 19,346 5,027
--------------- --------------
Total assets $ 389,708 $ 376,606
=============== ==============


LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:
Accounts payable $ 6,524 $ 6,702
Income taxes payable 3,559 -
Notes payable 2,344 5,500
Current maturities of long-term debt 32,614 18,194
Air traffic liability 41,518 38,700
Unearned revenue 15,187 23,870
Accrued liabilities:
Vacation pay 6,464 6,676
Scheduled maintenance expense 3,508 5,932
Frequent flyer awards 1,950 1,985
Other 40,458 29,175
--------------- --------------
Total current liabilities 154,126 136,734

Long-term debt 2,314 16,903
Long-term debt on pre-delivery progress payments 41,118 37,516
Deferred income taxes 23,364 25,193
Noncurrent scheduled maintenance expense 2,088 6,186
Accrued pension and other postretirement benefits 14,741 12,724
Deferred frequent flyer partner revenue 7,398 8,085
Other noncurrent liabilities 27,966 8,138
--------------- --------------
Total liabilities 273,115 251,479

Shareholders' equity:
Preferred stock, without par value; 5,000,000 shares authorized,
no shares issued and outstanding - -
Common stock, $.01 par value; 25,000,000 shares authorized,
16,224,531 shares issued 162 162
Additional paid-in capital 32,126 32,177
Treasury stock, at cost (15,578) (15,644)
Retained earnings 99,883 108,043
Cumulative other comprehensive income - 389
--------------- --------------
Total shareholders' equity 116,593 125,127
--------------- --------------
Total liabilities and shareholders' equity $ 389,708 $ 376,606
=============== ==============


See notes to unaudited condensed consolidated financial statements.


4

MIDWEST EXPRESS HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)




Six Months Ended
June 30,
--------
2003 2002
---- ----

Operating activities:
Net (loss) income $ (8,160) $ 4,784
Items not involving the use of cash:
Impairment loss - 29,911
Depreciation and amortization 10,844 10,720
Deferred income taxes (4,430) 1,648
Other, net 9,596 (11,586)

Changes in operating assets and liabilities:
Accounts receivable 6,266 11,231
Inventories 68 (651)
Prepaid expenses 182 (1,132)
Restricted cash (10,491) (19,539)
Accounts payable (178) (9,984)
Accrued liabilities 7,744 3,203
Unearned revenue (8,274) (90)
Air traffic liability 2,818 1,291
Accrued pension 2,017 1,256
Deferred frequent flyer partner revenue (1,096) 613
----------- -----------
Net cash provided by operating activities 6,906 21,675
----------- -----------

Investing activities:
Capital expenditures (11,151) (2,630)
Aircraft purchase deposits and pre-delivery progress payment(18,428) (32,619)
Aircraft purchase deposits returned 16,393 -
Proceeds from sale of property and equipment 535 334
Other, net (670) (61)
----------- -----------
Net cash used in investing activities (13,321) (34,976)
----------- -----------

Financing activities:
Funding of pre-delivery progress payments 16,962 23,002
Funds received from private equity placement - 20,527
Return of pre-delivery progress payments (13,615) -
Payment on note payable (3,531) (10,000)
Payments on capital lease obligations (50) -
Other, net 174 (1,085)
----------- -----------
Net cash (used in) provided by financing activities (60) 32,444
----------- -----------

Net (decrease) increase in cash and cash equivalents (6,475) 19,143
Cash and cash equivalents, beginning of period 41,498 46,923
----------- -----------
Cash and cash equivalents, end of period $ 35,023 $ 66,066
=========== ===========

Supplemental non cash financing activities:
Non-cash incentives $ 19,813 $ -


See notes to unaudited condensed consolidated financial statements.


5

Midwest Express Holdings, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements

1. Business and Basis of Presentation

The accompanying unaudited condensed consolidated financial statements for
the three- and six-month periods ended June 30, 2003 and 2002 are unaudited
and reflect all adjustments (consisting only of normal recurring
adjustments) that are, in the opinion of management, necessary for a fair
presentation of the financial position and operating results for the
interim periods. The unaudited condensed consolidated financial statements
have been prepared in accordance with accounting principles generally
accepted in the United States of America for interim financial information,
in accordance with the instructions to Form 10-Q and Article 10 of
Regulation S-X, and do not include all of the information and notes
required for complete, audited financial statements. The unaudited
condensed consolidated financial statements should be read in conjunction
with the consolidated financial statements and related notes thereto,
together with Management's Discussion and Analysis of Financial Condition
and Results of Operations, contained in the Midwest Express Holdings, Inc.
(the "Company") Annual Report on Form 10-K for the year ended December 31,
2002. The results of operations for the three- and six-month periods ended
June 30, 2003 are not necessarily indicative of the results for the entire
fiscal year ending December 31, 2003.

2. Impairment Loss

During the first quarter 2002, the Company decided to accelerate the
retirement of the DC-9 fleet of Midwest Airlines, Inc. ("Midwest Airlines")
in anticipation of accelerated deliveries of Boeing 717 aircraft. In
connection with this decision, the Company performed evaluations to
determine, in accordance with Statement of Financial Accounting Standards
("SFAS") No. 144, "Accounting for the Impairment or Disposal on Long-Lived
Assets," whether probability-weighted future cash flows from an asset
(undiscounted and without interest charges) expected to result from the use
and eventual disposition of these aircraft would be less than the aggregate
carrying amounts. As a result of the evaluation, the Company determined
that the estimated probability-weighted future cash flows would be less
than the aggregate carrying amounts, resulting in impairment as defined by
SFAS No. 144. Consequently, in the first quarter 2002, the cost bases of
these assets were reduced to reflect the fair market value at the date of
the decision, resulting in a $29.9 million (pre-tax) impairment loss, and
the remaining depreciable lives were adjusted for the new retirement
schedule. In determining the fair market value of these assets, the Company
considered market trends in aircraft dispositions, data from third parties
and management estimates.

3. Settlement of Arbitration

Skyway Airlines, Inc., doing business as Midwest Connect ("Midwest
Connect"), currently operates 10 Fairchild 32-passenger 328JET regional
jets. In September 2001, the Company

6


settled its arbitration with Fairchild Dornier GmbH ("Fairchild") over the
cancellation of the 428JET program. In the first quarter 2002, the Company
recorded as other income $39.5 million (pre-tax) associated with the
settlement.

4. Other Income

In May 2003, the Company recorded other income of $11.4 million (pre-tax)
received from the April 2003 Emergency Wartime Supplemental Appropriations
Act for reimbursement of security costs.

5. Private Placement of Common Stock

During the second quarter 2002, the Company generated gross proceeds of
$21.9 million through the private placement of 1,675,000 shares of the
Company's common stock to qualified institutional investors at $13.09 per
share. Net proceeds, after commissions and expenses, of $20.5 million were
used to reduce indebtedness and provide general working capital.

6. Segment Reporting

Midwest Airlines and Midwest Connect constitute the reportable segments of
the Company. The Company's reportable segments are strategic units that are
managed independently because they provide different services, with
different cost structures and marketing strategies. Additional detail on
segment reporting is included in the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 2002. Financial information for the
three- and six-month periods ended June 30 for the two operating segments,
Midwest Airlines and Midwest Connect, follows (in thousands).


7

Three Months Ended June 30, 2003
--------------------------------



Midwest
Midwest Connect Elimination Consolidated
------- ------- ----------- ------------

Operating revenues $79,836 $18,436 ($1,374) $96,898
Operating loss (4,580) (975) - (5,555)
Depreciation and amortization expense 4,528 959 - 5,487
Interest income 212 - (36) 176
Interest expense (499) (36) 36 (499)
Income (loss) before income tax provision (credit) 6,110 (556) - 5,554
Income tax provision (credit) 2,139 (195) - 1,944
Net income (loss) 3,971 (361) - 3,610
Total assets 345,915 64,107 (20,314) 389,708
Capital expenditures 1,364 215 - 1,579


Three Months Ended June 30, 2002
--------------------------------
Midwest
Midwest Connect Elimination Consolidated
------- ------- ----------- ------------
Operating revenues $97,397 $20,065 ($1,487) $115,975
Operating income (loss) 2,003 (81) - 1,922
Depreciation and amortization expense 4,229 932 - 5,161
Interest income 371 - (29) 342
Interest expense (873) (29) 29 (873)
Income (loss) before income tax provision (credit) 1,593 (110) - 1,483
Income tax provision (credit) 589 (41) - 548
Net income (loss) 1,004 (69) - 935
Total assets 338,428 66,250 (11,473) 393,205
Capital expenditures 1,059 330 - 1,389


Six Months Ended June 30, 2003
------------------------------
Midwest
Midwest Connect Elimination Consolidated
------- ------- ----------- ------------
Operating revenues $159,462 $34,209 ($2,715) $190,956
Operating loss (16,679) (6,798) - (23,477)
Depreciation and amortization expense 8,861 1,983 - 10,844
Interest income 554 - (74) 480
Interest expense (987) (74) 74 (987)
Loss before income tax credit (6,137) (6,416) - (12,553)
Income tax credit (2,147) (2,246) - (4,393)
Net loss (3,990) (4,170) - (8,160)
Total assets 345,915 64,107 (20,314) 389,708
Capital expenditures 10,879 272 - 11,151


Six Months Ended June 30, 2002
------------------------------
Midwest
Midwest Connect Elimination Consolidated
------- ------- ----------- ------------
Operating revenues $185,952 $36,799 ($2,754) $219,997
Operating loss (29,889) (856) - (30,745)
Depreciation and amortization expense 8,936 1,784 - 10,720
Interest income 627 - (60) 567
Interest expense (1,809) (60) 60 (1,809)
(Loss) income before income tax (credit) provision (30,989) 38,584 - 7,595
Income tax (credit) provision (11,465) 14,276 - 2,811
Net (loss) income (19,524) 24,308 - 4,784
Total assets 338,428 66,250 (11,473) 393,205
Capital expenditures 1,874 756 - 2,630



8

7. Derivative Instruments and Hedging Activities

The Company from time to time utilizes option contracts to mitigate exposure to
the fluctuation in aircraft fuel prices in accordance with the Company's
financial risk management policy. This policy was adopted by the Company to
document the Company's philosophy toward financial risk and outline acceptable
use of derivatives to mitigate that financial risk. The options establish
ceiling prices for anticipated jet fuel purchases and serve as hedges of those
purchases. The Company does not hold or issue derivative instruments for trading
purposes. At June 30, 2003, the Company had no options in place for future
periods. If options had been in place at the end of the quarter, the value of
the options would be determined using estimates of fair market value provided by
the institutions that wrote the options.

The Company accounts for its fuel hedge derivative instruments as cash flow
hedges, as defined in SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities" and the corresponding amendments under SFAS No. 138,
"Accounting for Certain Derivative Instruments and Certain Hedging Activities"
and SFAS No. 149, "Amendments of Statement 133 on Derivative Instruments and
Hedging Activities." Therefore, all changes in the fair value of the derivative
instruments that are considered effective are recorded in other comprehensive
income until the underlying hedged fuel is consumed, when they are reclassified
to the income statement as an offset of fuel expense. The Company reclassified
$0.1 million to the income statement in second quarter 2003; year-to-date, $1.1
million has been reclassified to the income statement as a result of expired
hedges. Cumulative other comprehensive income was $0 and $0.1 million for the
six-month periods ended June 30, 2003 and 2002, respectively.

8. Debt Obligation Used for Aircraft Progress Payments

In the second quarter 2002, the Company entered into a loan agreement to fund
pre-delivery progress payments to The Boeing Company for new Boeing 717
aircraft. The Company obtained the loan from Kreditanstalt fur Wiederaufbau Bank
("KfW") with the assistance of Rolls-Royce Deutschland Ltd. & Co. KG
("Rolls-Royce"). Rolls-Royce agreed to guarantee this loan agreement on behalf
of the Company. The loan agreement provides up to $45.0 million in pre-delivery
progress payment financing, against which the Company has borrowed $40.3 million
as of June 30, 2003. Under a financing commitment between the Company and Boeing
Capital Corporation ("BCC"), at each aircraft delivery date BCC acquires and
pays for the aircraft delivered, including interest accrued on the debt owed
KfW, and then leases the aircraft to the Company. At that time, BCC reimburses
the Company in full for the pre-delivery progress payments the Company has made.
To the extent the Company originally funded such payments through KfW, the
Company uses the amounts reimbursed to repay the related debt to KfW. The loan
balance above reflects the net effect of pre-delivery progress payments and
delivery reimbursements as of June 30, 2003. Interest accrues from the date of
borrowing to the aircraft delivery date, and is included in the final purchase
price. The interest on borrowings under the agreement is LIBOR plus 195 basis
points. This debt has been classified as long-term in the

9


accompanying condensed consolidated balance sheet. There are no financial
covenants associated with this debt obligation.

9. New Accounting Pronouncements

In June 2002, the Financial Accounting Standards Board (the "FASB") issued SFAS
No. 146, "Accounting for Costs Associated with Exit or Disposal Activities,"
which is effective for exit or disposal activities that are initiated after
December 31, 2002. SFAS No. 146 requires that liabilities for the costs
associated with exit or disposal activities be recognized and measured initially
at fair value only when the liabilities are incurred, rather than when an entity
commits to effect an exit plan. In second quarter 2003, the Company recorded
$4.6 million (pre-tax) of aircraft lease expense for five leased DC-9 aircraft
removed from Midwest Airlines service prior to June 30, 2003, in accordance with
SFAS 146. These non-cash expenses were included in the aircraft rentals line of
the Company's statements of operations. The expense reflects future obligations
for these aircraft following their out-of-service dates. The Company has five
additional DC-9 leased aircraft that it plans to remove from service during the
third and fourth quarters of 2003 and the first quarter of 2004. The Company
expects to record an additional non-cash charge of $3.4 million (pre-tax) in
accordance with SFAS No. 146 in relation to these aircraft.

In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity," which requires
issuers to classify as liabilities certain classes of freestanding financial
instruments (instruments that are entered into separately from other instruments
or transactions or are legally detachable and separately exercisable) that
represent obligations of the issuer. SFAS No. 150 is effective for all public
company freestanding financial instruments entered into or modified after May
31, 2003. The adoption of SFAS No. 150, which is effective for the Company on
July 1, 2003, will not have a material impact on the Company's condensed
consolidated financial statements.

10. Other Debt Obligations

On October 7, 2002, the Company amended the agreement relating to its bank
credit facility. Under the amended agreement, the bank credit facility declined
in tranches from $25.0 million in October 2002 to $18.5 million in mid-April
2003. At June 30, 2003, the Company had $17.8 million outstanding on the credit
facility. The credit agreement, scheduled to expire August 30, 2003, is secured
(with certain exceptions) by substantially all non-aircraft personal property
assets of the Company, by certain aircraft and by a second priority lien on the
Company's headquarters facility. The interest rate on borrowings under the
facility is prime plus 50 basis points.

As of June 30, 2003, the Company had borrowings under the bank credit facility
totaling $2.0 million. In addition, the Company had outstanding letters of
credit totaling $15.8 million,

10


reducing the available credit by that amount. The letters of credit are
primarily used to support financing of the Company's maintenance facilities.

The credit agreement requires monthly compliance with certain financial
covenants. Primarily due to a weak revenue environment and increasing fuel
prices, the Company did not meet the financial covenants as of January 31, 2003
and obtained a waiver of the covenant default. The Company also did not meet the
financial covenants for February, March or April 2003. While the Company
achieved financial covenants in May and June 2003, the Company was still in
default on the credit facility as a result of the non-payment of obligations
under certain aircraft lease and debt agreements. The suspension of payments on
these lease and debt obligations also resulted in defaults under those
respective agreements. The temporary payment suspension also resulted in the
Company reclassifying $6.4 million of debt related to one MD-80 from long-term
to short-term on the accompanying condensed consolidated balance sheet as of
June 30, 2003.

On July 17, 2003, the Company announced that it had reached preliminary
agreements with aircraft lessors and lenders on the restructuring of leases and
debt obligations that had been under payment suspension. This agreement is
discussed in more detail in Note 14.

11. Non-cash Incentives

Non-cash incentives consist of purchase incentives received from aircraft and
engine manufacturers upon delivery of aircraft. These incentives will be
recognized over the life of the related leases.

12. Shareholders' Equity

At June 30, 2003, the Company had one stock-based employee compensation plan,
which is described more fully in Note 8 of the Notes to the Consolidated
Financial Statements of the Company's Annual Report on Form 10-K for the year
ended December 31, 2002. The Company has adopted the disclosure requirements of
SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123") as amended
by SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and
Disclosure." The Company has elected to continue to follow the provisions of
Accounting Principles Board No. 25, "Accounting for Stock Issued to Employees"
and its related interpretations; accordingly, no compensation cost has been
reflected for the stock option plan in the condensed consolidated financial
statements in this filing.

Had compensation costs for the Company's stock option plan been determined based
on their fair value at the grant dates for awards under those plans consistent
with the method of SFAS 123, the Company's net income (loss) and net income
(loss) per share for the three- and six-month periods ended June 30 would have
been reduced to the pro forma amounts indicated below (in thousands, except per
share amounts):


11




Three Months Ended Six Months Ended
June 30, June 30,
-------- --------
2003 2002 2003 2002
---- ---- ---- ----

Net income (loss):
As reported $ 3,610 $ 935 $ (8,160) $ 4,784
Deduct: Total stock-based employee
compensation expense determined under fair
value based methods, net of related tax effect (330) (538) (654) (1,076)
-------- -------- --------- ---------
Pro forma $ 3,280 $ 397 $ (8,814) $ 3,708
======== ======== ========= =========
Net income (loss) per share - basic:
As reported $ 0.23 $ 0.07 $ (0.53) $ 0.34
Pro forma $ 0.21 $ 0.03 $ (0.57) $ 0.27
Net income (loss) per share - diluted:
As reported $ 0.23 $ 0.07 $ (0.53) $ 0.34
Pro forma $ 0.21 $ 0.03 $ (0.57) $ 0.26


The following table is a reconciliation of the weighted average shares
outstanding for the three- and six-month periods ended June 30, 2003 and 2002
(in thousands):




Three Months Ended Six Months Ended
June 30, June 30,
-------- --------
2003 2002 2003 2002
---- ---- ---- ----

Weighted average shares
outstanding 15,516 14,055 15,514 13,944
Effect of dilutive securities:
Stock options (1) 0 62 0 66
Shares issuable under the 1995
Stock Plan for Outside
Directors (2) 22 15 0 14
-- -- - --
Weighted average shares
outstanding assuming dilution 15,538 14,132 15,514 14,024


(1) Stock options outstanding under the 1995 Stock Option Plan of 2,031 and
1,621 were excluded from the calculations for the three and six months
ended June 30, 2003 and 2002 as their effect was anti-dilutive.
(2) Shares issuable under the 1995 Stock Plan for Outside Directors of 20 were
excluded from the calculations for the three and six months ended June 30,
2003 as their effect was anti-dilutive.

13. Comprehensive Income (Loss)

Comprehensive income (loss) was $3.6 million and $(8.6) million for the three-
and six-month periods ended June 30, 2003, and $0.7 million and $4.9 million for
the three- and six-month periods ended June 30, 2002, respectively. The change
in comprehensive income (loss) is due to changes in fuel price options accounted
for as hedges and other changes in net income (loss).


12

14. Going Concern and Management's Plan

Going Concern - The consolidated financial statements presented in the Company's
Annual Report on Form 10-K for the year ended December 31, 2002 and the
unaudited condensed consolidated financial statements in this filing have been
prepared on a going concern basis, which contemplates the realization of assets
and the satisfaction of liabilities in the normal course of business. The
Company incurred substantial operating losses in 2001 and 2002, and existing
industry conditions - including higher fuel prices and depressed business travel
due to the stagnant economy - will likely cause the Company to incur an
operating loss for 2003. In addition, the Company's liquidity position has
deteriorated as a result of the losses and additional pressure applied by the
Company's creditors to reduce its obligations.

On March 7, 2003, the Company suspended lease and debt payments associated with
most of its aircraft, initially until June 7, 2003. On June 12, 2003, the
Company extended the payment suspension indefinitely while it continued in
negotiations with lessors and other affected creditors. (Note that the
obligations related to the Boeing 717 aircraft purchases and related leases were
not included in the payment moratorium.) The suspension was intended to provide
the Company the opportunity to negotiate a restructuring of the terms and
conditions of the leases and other financial obligations with the lessors and
other affected creditors to bring them in line with market conditions and better
reflect the reduced market values of the aircraft. Because the Company suspended
payments without the consent of the lessors and other affected creditors, the
suspension of payments resulted in defaults under the terms of the applicable
leases and debt obligations and a default under the terms of the Company's bank
credit agreement and the Company's credit card processing agreement for
MasterCard/Visa transactions. Such defaults give the other parties to these
arrangements certain rights and remedies. For example, the default under the
Company's credit card processing agreement for MasterCard/Visa transactions has
resulted in an increase of the reserve under that agreement to 100% of the card
processor's exposure. On July 17, 2003, the Company announced that it had
reached preliminary agreements with aircraft lessors and lenders on the
restructuring of leases and debt obligations that had been under payment
suspension. These preliminary agreements are discussed in more detail below in
Management's Plan.

The Company's consolidated financial statements do not include any adjustments
relating to the recoverability and classification of recorded asset amounts or
the amounts and classifications of liabilities that might be necessary should
the Company be unable to continue as a going concern. The Company's ability to
continue as a going concern is dependent on its ability to generate sufficient
cash flows to meet obligations on a timely basis and to obtain additional
financing should industry conditions not improve. Management is implementing a
number of plans to help alleviate these situations, as described in Management's
Plan.

Management's Plan - The Company has implemented a number of actions to improve
its profitability and liquidity position. These actions focus on two key areas:
1) cost reductions and

13


internal restructuring, and 2) the launch of Midwest Airlines Saver Service to
address the growing low-fare segment of the market. Further discussion of these
actions follows.


Cost Reductions and Internal Restructuring

In February 2003, the Company announced measures aimed at improving cash flow in
addition to previous cost control initiatives. The Company reduced capacity,
switched to a buy-onboard dining option, discontinued standard travel agency
commissions to match the industry, and implemented service fee increases for
nonrefundable tickets. In addition, the Company implemented an additional
workforce reduction, and remaining non-union employees received across-the-board
compensation reductions.

In July 2003, the Company announced that it had reached preliminary agreement
with labor unions, lessors and creditors on permanent cost reductions. Assuming
the Company reaches final agreements regarding these matters, the Company is
targeting its financial restructuring initiatives -- along with numerous
internal cost-reduction measures, revenue enhancements and flight schedule
changes implemented since September 11, 2001 -- to improve profitability and
reduce costs, relative to what it would have experienced if it had not effected
these changes, by approximately $70 million annually going forward. The
Company's objective is to finalize these agreements in August 2003. As the
Company moves forward with and completes its restructuring initiatives, it will
be subject to certain non-cash charges, which may be significant, throughout the
remainder of 2003. The cost reductions relate to the following areas:

o Labor cost savings and productivity improvements from the Company's
employee unions.
o Identification of opportunities to enhance productivity for non-represented
employees.
o Renegotiation of aircraft finance agreements.
o Adjustment of the Company's fleet plan and delivery schedules to provide
for more controlled growth.

Low-Fare Service

In February 2003, the Company announced the launch of low-fare service in high
demand, leisure-oriented markets, branded as Midwest Airlines Saver Service.
Service was launched August 1, 2003 with existing MD-80 aircraft that were
converted to a two-by-three seating configuration, with a total of eight MD-80
aircraft to be converted to the new configuration by year end. Saver Service is
expected to enable the Company to serve high-volume leisure destinations more
profitably.


14

Item 2. Management's Discussion and Analysis of Results of Operations and
- -------------------------------------------------------------------------
Financial Condition
- -------------------

Results of Operations

Overview
- --------
The Company's second quarter 2003 operating loss was ($5.6) million, a decline
of $7.5 million from second quarter 2002 operating income of $1.9 million. Net
income for the quarter was $3.6 million, a $2.7 million increase from second
quarter 2002 net income of $0.9 million. For the first six months of 2003,
operating loss was ($23.5) million, a decrease in loss of $7.2 million from the
operating loss for the first six months of 2002 of ($30.7) million. Year-to-date
2003 net loss was ($8.2) million, a decline of $13.0 million from the
year-to-date 2002 net income of $4.8 million. Year-to-date 2003 net loss per
share on a diluted basis was ($0.53), a $0.87 decrease from 2002 net income per
share on a diluted basis of $0.34. Year-to date 2003 results include income of
$11.4 million (pre-tax) received from the April 2003 Emergency Wartime
Supplemental Appropriations Act for reimbursement of security costs, as well as
a charge of $4.6 million related to the early recognition of lease expense on
five leased DC-9 aircraft removed from service prior to quarter end.
Year-to-date 2002 results include a $29.9 million (pre-tax) impairment charge
related to the early retirement of the Company's DC-9 fleet and other income of
$39.5 million (pre-tax) associated with an arbitration settlement with Fairchild
over the cancellation of the 428JET program.

The Company's total revenue in second quarter 2003 decreased $19.1 million, or
16.4%, to $96.9 million, from second quarter 2002 total revenue of $116.0
million. Traffic, as measured by scheduled service revenue passenger miles,
decreased 9.2% in second quarter, while scheduled service capacity, as measured
by available seat miles ("ASMs"), decreased 14.9%. Midwest Airlines' capacity
decreased 16.7% due primarily to five fewer aircraft in service quarter over
quarter, while capacity at Midwest Connect was essentially unchanged.

Second quarter revenue yield decreased 12.7% at Midwest Airlines and 19.8% at
Midwest Connect. The decreases in revenue yield were due in large part to a
substantial decline in high-yield business travel, heavy industrywide fare
discounting implemented to stimulate travel demand, and increased competition in
some markets.

The Company's operating costs decreased $11.6 million, or 10.2%, to $102.5
million in second quarter 2003. Most cost categories showed declines, including
a 45.3% decrease in commissions, a 74.0% decrease in dining services costs, and
a 25.5% decrease in maintenance expense. These decreases were partially offset
by an additional $6.0 million in aircraft rental costs over the prior year, due
primarily to the early recognition in the second quarter of $4.6 million
(pre-tax) of lease expense on five leased DC-9 aircraft removed from service
prior to quarter end, as well as the addition of five leased Boeing 717 aircraft
to the Midwest Airlines fleet as of June 30, 2003. First quarter 2002 operating
costs include a $29.9 million (pre-tax) impairment charge related to the early
retirement of the Company's DC-9 fleet. Additional detail on cost changes is
included in subsequent sections.

15

The Company's passenger traffic and yields declined severely following the
events of September 11. Since that time, the Company has experienced
significantly lower revenues and has incurred higher costs in certain
categories, particularly fuel, than were originally anticipated. To mitigate the
adverse financial situation, the Company has taken, and will continue to take,
action intended to improve financial performance by improving revenue and
reducing costs. These actions focus on two key areas: 1) cost reductions and
internal restructuring, and 2) the launch of Midwest Airlines Saver Service to
address the growing low-fare segment of the market. These actions are discussed
in more detail in the Restructuring section of Pending Developments below.



16

Operating Statistics
- --------------------
The following table provides selected operating statistics for Midwest Airlines
and Midwest Connect.




Three Months Ended Six Months Ended
June 30, June 30,
-------- --------
2003 2002 2003 2002
---- ---- ---- ----
Midwest Airlines Operations
- ---------------------------

Origin & Destination Passengers 463,968 529,979 918,691 989,818
Revenue Passenger Miles (000s) 460,130 518,566 928,870 979,071
Scheduled Service Available Seat Miles (000s) 686,161 823,744 1,453,912 1,561,365
Total Available Seat Miles (000s) 703,921 839,508 1,487,576 1,595,440
Load Factor (%) 67.1 % 63.0 % 63.9 % 62.7
Revenue Yield $0.1417 $0.1622 $0.1398 $0.1625
Revenue per Scheduled Service ASM (1) $0.0995 $0.1062 $0.0935 $0.1061
Total Cost per Total ASM (2) $0.1199 $0.1136 $0.1184 $0.1353
Impairment Loss per Total ASM $0.0000 $0.0000 $0.0000 $0.0187
Average Passenger Trip Length (miles) 992 978 1,011 989
Number of Flights 8,818 11,422 19,035 21,588
Into-plane Fuel Cost per Gallon $0.924 $0.798 $1.020 $0.757
Full-time Equivalent Employees at End of Period 1,965 2,492 1,965 2,492
Aircraft in Service at End of Period 29 34 29 34

Midwest Connect Operations
- --------------------------
Origin & Destination Passengers 148,738 153,760 282,515 278,155
Revenue Passenger Miles (000s) 55,500 49,529 101,469 89,087
Scheduled Service Available Seat Miles (000s) 102,547 102,894 203,279 190,474
Total Available Seat Miles (000s) 102,562 102,916 203,337 190,676
Load Factor (%) 54.1 % 48.1 % 49.9 % 46.8
Revenue Yield $0.3232 $0.4029 $0.3277 $0.4102
Revenue per Scheduled Service ASM (1) $0.1790 $0.1945 $0.1675 $0.1924
Total Cost per Total ASM $0.1893 $0.1958 $0.2017 $0.1975
Average Passenger Trip Length (miles) 373 322 359 320
Number of Flights 13,863 14,193 28,042 26,693
Into-plane Fuel Cost per Gallon $0.997 $0.884 $1.086 $0.835
Full-time Equivalent Employees at End of Period 556 586 556 586
Aircraft in Service at End of Period 25 25 25 25


(1) Passenger, cargo and other transport-related revenue divided by scheduled
service ASMs.

(2) Includes impairment loss.

Note: All statistics exclude charter operations except the following: total
available seat miles ("ASMs"), cost per total ASM, Impairment loss per total
ASM, into-plane fuel cost, number of employees and aircraft in service. Aircraft
aquired but not yet placed into service are excluded from the aircraft in
service statistics. Numbers in this table may not be recalculated due to
rounding.


17

The following table provides operating revenue and expenses for the Company
expressed as cents per total ASM, including charter operations, and as a
percentage of total revenues.




Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
2003 2002 2003 2002
---- ---- ---- ----
Per Total % of Per Total % of Per Total % of Per Total % of
ASM Revenue ASM Revenue ASM Revenue ASM Revenue
--- ------- --- ------- --- ------- --- -------

Operating Revenues:
Passenger service $0.103 85.8% $0.110 89.7% $0.096 85.4% $0.109 88.9%
Cargo 0.002 1.3% 0.002 1.3% 0.002 1.3% 0.002 1.4%
Other 0.015 12.9% 0.011 9.0% 0.015 13.3% 0.012 9.7%
------ ----- ------ ----- ------ ----- ------ -----
Total Operating Revenues $0.120 100.0% $0.123 100.0% $0.113 100.0% $0.123 100.0%
------ ----- ------ ----- ------ ----- ------ -----

Operating Expenses:
Salaries, wages and benefits $0.043 35.8% $0.042 34.2% $0.044 38.6% $0.043 35.3%
Aircraft fuel and oil 0.023 18.9% 0.021 17.1% 0.025 22.5% 0.020 16.2%
Commissions 0.003 2.9% 0.005 4.4% 0.004 3.2% 0.005 4.4%
Dining services 0.002 1.5% 0.006 4.8% 0.003 2.5% 0.006 4.6%
Station rental, landing, other fee 0.010 8.6% 0.010 7.7% 0.012 10.2% 0.010 8.5%
Aircraft maint., materials and rep 0.009 7.5% 0.010 8.4% 0.009 8.0% 0.011 8.8%
Depreciation and amortization 0.007 5.7% 0.005 4.5% 0.006 5.7% 0.006 4.9%
Aircraft rentals 0.015 12.7% 0.007 5.4% 0.011 9.8% 0.007 5.7%
Impairment loss 0.000 0.0% 0.000 0.0% 0.000 0.0% 0.017 13.6%
Other 0.015 12.1% 0.015 11.8% 0.013 11.8% 0.015 12.0%
------ ----- ------ ----- ------ ----- ------ -----
Total Operating Expenses $0.127 105.7% $0.121 98.3% $0.127 112.3% $0.140 114.0%
====== ===== ====== ===== ====== ===== ====== =====

Total ASMs (000s) 806,483 942,424 1,690,913 1,786,116


Note: Numbers, percents and totals in this table may not be recalculated due to
rounding.


18

Three Months Ended June 30, 2003 Compared With
----------------------------------------------
Three Months Ended June 30, 2002
--------------------------------

Operating Revenues
- ------------------
Company operating revenues totaled $96.9 million in second quarter 2003, a $19.1
million, or 16.4%, decrease from second quarter 2002. Passenger revenues
accounted for 85.8% of total revenues and decreased $20.9 million, or 20.1%,
from second quarter 2002 to $83.1 million. The decrease is attributable to a
12.0% decrease in revenue yield and a 10.4% decrease in passenger volume.

Midwest Airlines passenger revenue decreased $18.9 million, or 22.5%, from 2002
to $65.2 million. This decrease was primarily caused by a 12.5% decrease in
origin and destination passengers as travel demand was less than second quarter
2002. Total capacity, as measured by scheduled service ASMs, decreased 16.7% due
to five fewer aircraft in scheduled service during second quarter 2003 as the
Company attempted to align capacity with lower demand. Load factor increased
from 63.0% in 2002 to 67.1% in 2003. Revenue yield decreased 12.7% due to a
substantial decline in high-yield business travel, increased competition in some
markets, the sluggish economy, and a depressed pricing environment resulting
from airlines attempting to stimulate travel demand and capture market share.

Midwest Connect passenger revenue decreased $2.0 million, or 10.1%, from second
quarter 2002 to $17.9 million. This decrease was primarily caused by a 19.8%
decrease in revenue yield due to decreased business travel as a result of the
weak economy, lower fares that were used to stimulate travel demand, and a
revised mix of longer flights with lower yields. Total capacity, as measured by
scheduled service ASMs, was essentially unchanged quarter over quarter.
Passenger volume, as measured by revenue passenger miles, increased 12.1%. Load
factor increased from 48.1% in second quarter 2002 to 54.1% in second quarter
2003. The average passenger trip length increased 51 miles, or 15.8%.

Revenue from cargo, charter and other services increased $1.9 million in second
quarter 2003. Revenue from charter sales increased $0.9 million in second
quarter 2003 as the Company had exclusive charter rights for one additional
professional sports team, and one professional sports team required additional
services as a result of playoff games. Cargo revenue decreased $0.2 million, or
16.0%, with most of the decrease due to lower U.S. Postal Service mail volumes,
in large part the result of security directives and restrictions.

Operating Expenses
- ------------------
Second quarter 2003 operating expenses decreased $11.6 million, or 10.2%, from
second quarter 2002. The Company reduced costs in all categories except aircraft
rentals and depreciation and amortization, primarily due to cost reduction
efforts. Cost per ASM at Midwest Airlines increased 5.5% in second quarter 2003,
while Midwest Connect cost per total ASM decreased 3.3% quarter over quarter.

19


Salaries, wages and benefits decreased $4.9 million, or 12.3%, from second
quarter 2002 to $34.7 million. The labor cost decrease reflects the reduction of
557 full-time equivalent employees (527 reductions at Midwest Airlines and 30
reductions at Midwest Connect). The headcount decrease was primarily the result
of furloughing employees. A $0.3 million reduction in overtime pay and lower
labor rates also contributed to decreased labor costs. These decreases were
partially offset by higher medical insurance costs. On a cost per total ASM
basis, labor costs increased 2.4% from 4.2(cent) in 2002 to 4.3(cent) in 2003.

Aircraft fuel and oil and associated taxes decreased $1.5 million, or 7.7% to
$18.3 million in second quarter 2003. Into-plane fuel prices increased 15.6% in
second quarter 2003, averaging 93.6(cent) per gallon versus 81.0(cent) per
gallon in second quarter 2002, and resulted in a $2.2 million (pre-tax)
unfavorable price impact. Fuel consumption decreased 20.2% in the quarter as a
result of the capacity reductions at Midwest Airlines. The Company had option
cap agreements relating to about 15% of its second quarter 2003 fuel volume, and
those agreements provided a $0.1 million benefit for the quarter. Fuel costs in
July 2003 trended upward, averaging 94.8(cent) per gallon. As of July 31, 2003,
no additional options had been placed for third quarter or subsequent periods.

Commissions for travel agents and commissions related to credit card
transactions decreased $2.3 million, or 45.3%, from second quarter 2002 to $2.8
million. The decrease was due primarily to the elimination of standard travel
agent commissions that went into effect on March 1, 2003, as well as due to a
20.1% decrease in passenger revenue and savings realized because of increased
travel booked directly through the Company's reservations center and Web site,
and other travel-related Web sites. Commissions as a percentage of passenger
revenue decreased from 5.0% in second quarter 2002 to 3.4% in second quarter
2003.

Dining services costs decreased $4.1 million, or 74.0%, from second quarter 2002
to $1.5 million. The decrease was due primarily to the elimination of
complimentary onboard meal service in April 2003, as well as to a 12.5% decrease
in Midwest Airlines origin and destination passengers. Total dining services
costs per Midwest Airlines passenger decreased from $10.22 in second quarter
2002 to $2.96 for second quarter 2003.

Station rental, landing and other fees decreased $0.6 million, or 6.8%, from
second quarter 2002 to $8.4 million. The decline is due primarily to an 11.5%
decrease in the number of flight segments. On a cost per total ASM basis, these
costs increased 9.0%.

Aircraft maintenance material costs decreased $2.5 million, or 25.5%, from
second quarter 2002 to $7.3 million. The decrease at Midwest Airlines was caused
by lower costs for maintaining the DC-9 fleet as 11 of these aircraft were
retired from service quarter over quarter. Additional savings were generated
from lower purchased maintenance costs and lower maintenance materials.
Maintenance costs at Midwest Connect increased $0.2 million. On a cost per total
ASM basis, these costs decreased 13.0%.

20


Depreciation and amortization increased $0.3 million, or 6.3%, from second
quarter 2002 to $5.5 million, due primarily to the addition of one MD-80
aircraft to the fleet in March 2003, as well as the acquisition of spare parts
to support the Boeing 717 program. On a cost per total ASM basis, these costs
increased 24.2%.

Aircraft rental costs increased $6.0 million from second quarter 2002 to $12.3
million. The increase was due primarily to the early recognition of $4.6 million
(pre-tax) of lease expense on five leased DC-9 aircraft removed from service
prior to quarter end, as well as to the addition of five leased Boeing 717
aircraft to the Midwest Airlines fleet quarter over quarter. Aircraft lease
expenses were recorded based on agreements in force at June 30, 2003, although
such payments were withheld pending agreement on new lease terms.

Other operating expenses decreased $1.9 million, or 14.2%, from second quarter
2002 to $11.7 million. Other operating expenses consist primarily of advertising
and promotion, insurance, property taxes, crew hotel rooms, reservation fees,
legal fees, professional services, administration and other items. Higher legal
and other professional service costs of $0.7 million were offset by lower crew
hotel rooms, advertising and insurance costs. On a cost per total ASM basis,
these costs increased 0.3%.

Provision for Income Taxes
- --------------------------
Income tax provision for second quarter 2003 was $1.9 million, a $1.4 million
increase from the 2002 expense of $0.5 million. The effective tax rates for the
first quarters of 2003 and 2002 were 35.0% and 37.0%, respectively. The decrease
in the effective tax rate was due to the economic uncertainty related to the
realization of state net operating loss carryforwards. For purposes of
calculating the Company's income tax expense and effective tax rate, the Company
treats amounts payable to Kimberly-Clark Corporation under a tax allocation and
separation agreement entered into in connection with the Company's initial
public offering as if they were payable to taxing authorities.

Net Income
- ----------
Net income for second quarter 2003 was $3.6 million, an increase of $2.7 million
from second quarter 2002 net income of $0.9 million.


Six Months Ended June 30, 2003 Compared With
--------------------------------------------
Six Months Ended June 30, 2002
------------------------------

Operating Revenues
- ------------------
Company operating revenues totaled $191.0 million for the six months ended June
30, 2003, a $29.0 million, or 13.2%, decrease from the first six months of 2002.
Passenger revenues accounted for 85.4% of total revenues and decreased $32.6
million, or 16.6%, from 2002 to $163.1 million. The decrease was attributable to
a 3.5% decrease in passenger volume, as measured by revenue passenger miles, and
a 13.6% decrease in yield. Load factor increased from 61.0% in 2002 to 62.2% in
2003.

21


Midwest Airlines passenger revenue decreased $29.3 million, or 18.4%, from 2002
to $129.8 million in 2003. This decrease was caused by a 5.1% decrease in
passenger volume, as measured by revenue passenger miles, and a 14.0% decrease
in revenue yield. Total Midwest Airlines capacity, as measured by scheduled
service ASMs, decreased 6.9% due to five fewer aircraft in scheduled service at
June 30, 2003 as the Company attempted to align capacity with lower demand. Load
factor increased from 62.7% in 2002 to 63.9% in 2003.

Midwest Connect passenger revenue decreased by $3.3 million, or 9.0%, from 2002
to $33.3 million in 2003. Traffic increased 13.9% on a 6.7% increase in capacity
due to the shifting of certain routes from Midwest Airlines, as well as the
addition of Essential Air Service routes. Load factor increased from 46.8% in
2002 to 49.9% in 2003. Revenue yield decreased 20.1%, from $0.41 in 2002 to
$0.33 in 2003, primarily due to new service with longer flight segments and
lower-than-average system revenue yield, decreased business travel, and heavy
industrywide fare discounting to stimulate travel demand.

The Company's revenue from cargo, charter and other services increased $3.5
million, or 14.5%, in 2003. Midwest Airlines benefited from increased revenue
from charter sales as more aircraft time was available for charter service and
the Company had exclusive charter rights for seven professional sports teams as
of June 30, 2003. The increased charter revenue was partially offset by a $0.6
million decrease in cargo revenue. Most of this decrease was due to lower U.S.
Postal mail volumes, in large part the result of security directives and
restrictions.

Operating Expenses
- ------------------
2003 operating expenses decreased $36.3 million, or 14.5%, from 2002 to $214.4
million. The Company realized savings from companywide cost reduction efforts,
with reduced costs in many categories, as detailed below. 2002 operating costs
include a $29.9 million (pre-tax) impairment charge related to the early
retirement of the Company's DC-9 fleet. The Company's cost per total ASM
decreased 9.3%, from 14.0(cent) in 2002 to 12.7(cent) in 2003.

Salaries, wages and benefits decreased $3.9 million, or 5.0%, from 2002 to $73.7
million in 2003. The labor cost decrease reflects the reduction of 557 full-time
equivalent employees (527 reductions at Midwest Airlines and 30 reductions at
Midwest Connect) since June 30, 2002. The headcount decrease was primarily the
result of furloughing employees, which reduced labor costs $4.1 million. A $0.5
million reduction in overtime also contributed to decreased labor costs. These
decreases were partially offset by increased benefit costs primarily due to
higher medical insurance costs. On a cost per total ASM basis, labor costs
increased from 4.3(cent) in 2002 to 4.4(cent) in 2003.

Aircraft fuel and oil and associated taxes increased $7.5 million, or 21.0%,
from 2002 to $43.0 million in 2003. Into-plane fuel prices increased 33.8% in
2003, averaging $1.03 per gallon in 2003 versus $0.77 per gallon in 2002,
resulting in a $10.9 million unfavorable pre-tax price impact. Fuel consumption
decreased 9.8% in 2003 because of a decrease in flight operations.

22


Travel agent and credit card commissions decreased $3.5 million, or 36.4%, from
2002 to $6.2 million. On a cost per total ASM basis, commissions decreased 32.8%
from 2002. The decrease was primarily due to the elimination of standard travel
agency commissions as of March 1, 2003, as well as a 16.6% decrease in passenger
revenue and savings realized because of increased travel booked directly through
the Company's reservations center and Web site, and other travel-related Web
sites. Commissions, as a percentage of passenger revenue, decreased from 5.0% in
2002 to 3.8% in 2003.

Dining service costs decreased $5.5 million, or 53.8%, from 2002 to $4.7 million
in 2003. The decrease was due to the elimination of complimentary onboard meal
service in April 2003 as well as a 7.2% decrease in origin and destination
passengers at Midwest Airlines. Total dining service costs per Midwest Airlines
passenger decreased 51.6%, from $10.02 in 2002 to $4.86 in 2003.

Station rental, landing and other fees increased $0.8 million, or 4.4%, from
2002 to $19.5 million in 2003. The increase was primarily the result of fixed
costs that were not absorbed as efficiently following the Company's capacity
reductions. Other factors include increases in landing fee rates and airport
rental and ground handling costs, as well as the effect of nonrecurring credits
from first quarter 2002. On a cost per total ASM basis, these costs increased
10.3%.

Maintenance costs decreased by $4.1 million, or 21.2%, from 2002 to $15.2
million. The decrease was caused by lower engine repair costs at Midwest
Airlines due to the phase-out of the DC-9 program, and was partially offset by
increased maintenance costs at Midwest Connect due to additional acquisitions
and repairs of components for the 328JET aircraft. On a cost per total ASM
basis, this category decreased by 16.7%.

Depreciation and amortization increased $0.1 million, or 1.2%, from 2002 to
$10.8 million in 2003. On a cost per total ASM basis, these costs increased
6.9%.

Aircraft rental costs increased $6.1 million, or 48.2%, from 2002 to $18.7
million. The increase was due primarily to the early recognition of $4.6 million
(pre-tax) of lease expense on five leased DC-9 aircraft removed from service
prior to June 30, 2003, as well as the addition of five leased Boeing 717
aircraft to the Midwest Airlines fleet year over year. Aircraft lease expenses
were recorded based on agreements in force at June 30, 2003, although such
payments were withheld pending agreement on new lease terms.

During the first quarter 2002, the Company decided to accelerate the retirement
of the DC-9 fleet of Midwest Airlines in anticipation of accelerated deliveries
of Boeing 717 aircraft. In connection with this decision, the Company performed
evaluations to determine, in accordance with Statement of Financial Accounting
Standards ("SFAS") No. 144, "Accounting for the Impairment or Disposal on
Long-Lived Assets," whether probability-weighted future cash flows from an asset
(undiscounted and without interest charges) expected to result from the use and
eventual disposition of these aircraft would be less than the aggregate carrying
amounts. As a

23


result of the evaluation, the Company determined that the estimated
probability-weighted future cash flows would be less than the aggregate carrying
amounts, resulting in impairment as defined by SFAS No. 144. Consequently, in
the first quarter 2002, the cost bases of these assets were reduced to reflect
the fair market value at the date of the decision, resulting in a $29.9 million
(pre-tax) impairment loss, and the remaining depreciable lives were adjusted for
the new retirement schedule. In determining the fair market value of these
assets, the Company considered market trends in aircraft dispositions, data from
third parties and management estimates.

Other operating expenses decreased $3.9 million, or 14.7%, from 2002 to $22.5
million. Other operating expenses consist primarily of advertising and
promotion, insurance, property taxes, flight training, legal fees, crew hotel
rooms, reservation fees, administration and other items. The decrease was
primarily due to cost decreases in insurance, advertising, flight training and
crew hotel room expenses. These decreases were partially offset by increased
legal and professional services costs of $0.9 million. On a cost per total ASM
basis, these costs decreased 9.9%.

Other Income
- ------------
Other income for 2003 reflects $11.4 million (pre-tax) received from the April
2003 Emergency Wartime Supplemental Appropriations Act for reimbursement of
security costs. In the first quarter 2002, the Company recorded other income of
$39.5 million (pre-tax) associated with the Company's settlement of arbitration
with Fairchild over the cancellation of its 428JET program.

(Credit) Provision for Income Taxes
- -----------------------------------
Income tax credit for the first six months of 2003 was ($4.4) million, a
decrease of $7.2 million from the 2002 expense of $2.8 million. The effective
tax rate for the first six months of 2003 and 2002 was 35% and 37.0%,
respectively. The decrease in the effective tax rate was due to the economic
uncertainty related to the realization of state net operating loss
carryforwards.

Net (Loss) Income
- -----------------
Net loss for the first six months of 2003 was ($8.2) million, which reflects a
decrease of $13.0 million from 2002 net income of $4.8 million. The net (loss)
income margin declined to (4.3)% in 2003 from 2.2% in 2002.

Liquidity and Capital Resources

The Company's unrestricted cash and cash equivalents totaled $35.0 million at
June 30, 2003, compared with $41.5 million at December 31, 2002. Net cash
provided by operating activities totaled $6.9 million in 2003. Net cash used in
investing activities totaled $13.3 million in 2003. Net cash used in financing
activities in 2003 totaled $0.1 million, due primarily to funding associated
with the pre-delivery progress payments related to the Company's Boeing 717
aircraft program, partially offset by the payment of principal under the bank
credit facility (each as discussed below). The Company's unrestricted cash and
cash equivalents totaled $27.1 million at July 31, 2003. The cash balance at
June 30, 2003 reflects the effects of the lease and debt payment moratorium (as
discussed below). The aggregate amount of the payments that the

24


Company had not made as a result of the lease and debt payment moratorium as of
June 30, 2003 was approximately $11.7 million. In July 2003, the Company made
payments totaling $4.8 million to the lessors and lenders in conjunction with
the signing of the tentative agreement to restructure the aircraft financings
(as discussed in the Restructuring section of Pending Developments below). The
Company will pay an additional $2.3 million at the time it finalizes the
renegotiated aircraft finance agreements. The Company's objective is to finalize
these agreements in August 2003, but there is no assurance that it will be able
to do so. If the Company cannot finalize these agreements, then the Company
would likely be required to explore alternative scenarios, including filing for
reorganization under Chapter 11 of the U.S. Bankruptcy Code, or cessation of
operations.

As of June 30, 2003, the Company had a working capital deficit of $61.2 million
compared with a $45.2 million deficit on December 31, 2002. The increase in the
working capital deficit is due primarily to cash used to acquire spare parts for
the 717 program, as well as the reclassification of certain debt obligations
from long-term to short-term (as discussed more fully below). The working
capital deficit is primarily due to the Company's air traffic liability (which
represents deferred revenue for advance bookings, whereby passengers have
purchased tickets for future flights and revenue is recognized when the
passenger travels) and frequent flyer program liability (which represents
deferred revenue and accrued costs associated with future travel), as well as
the reclassification of debt from long-term to short-term due to the payment
moratorium. Because of this, the Company expects to operate at a working capital
deficit.

On October 7, 2002, the Company amended the agreement relating to its bank
credit facility. Under the amended agreement, the bank credit facility declined
in tranches from $25.0 million in October 2002 to $18.5 million in mid-April
2003. At June 30, 2003, the Company had $17.8 million outstanding on the credit
facility. The credit agreement, scheduled to expire August 30, 2003, is secured
(with certain exceptions) by substantially all non-aircraft personal property
assets of the Company, by certain aircraft and by a second priority lien on the
Company's headquarters facility. The interest rate on borrowings under the
facility is prime plus 50 basis points.

As of June 30, 2003, the Company had borrowings under the facility totaling $2.0
million. In addition, the Company had outstanding letters of credit totaling
approximately $15.8 million, reducing the available credit by that amount.
Separate from the credit facility banks, the Company also had letters of credit
totaling $0.4 million outstanding as of June 30, 2003. The letters of credit are
primarily used to support financing of the Company's maintenance facilities. As
of July 31, 2003, the Company had borrowings under the facility totaling $1.3
million. The reduction in the amount of the borrowings since the end of the
quarter was due to the application of proceeds from the sale of an aircraft of
$0.7 million. Letters of credit outstanding under the facility totaled $15.8
million with an additional $0.6 million of letters of credit outstanding
separate from the credit facility as of July 31, 2003.

The credit agreement requires monthly compliance with certain financial
covenants. Primarily due to a weak revenue environment and increasing fuel
prices, the Company did not meet the

25


financial covenants as of January 31, 2003 and obtained a waiver of the covenant
default. The Company also did not meet the financial covenants for February,
March or April 2003. While the Company achieved financial covenants in May and
June 2003, the Company was still in default on the credit facility as a result
of the non-payment of obligations under certain aircraft lease and debt
agreements. The suspension of payments on these lease and debt obligations also
resulted in defaults under those respective agreements. The temporary payment
suspension also resulted in the Company reclassifying $6.4 million of debt
related to one MD-80 from long-term to short-term on the accompanying condensed
consolidated balance sheet as of June 30, 2003.

On July 17, 2003, the Company announced that it had reached preliminary
agreements with aircraft lessors and lenders on the restructuring of leases and
debt obligations that had been under payment suspension. This agreement is
discussed in more detail in the Restructuring section of Pending Developments
below.

The Company has agreements with organizations that process credit card
transactions arising from purchases of air travel tickets by customers of the
Company. The Company has one such agreement with an organization that processes
MasterCard/Visa transactions; this organization is also a lender under the bank
credit facility. Credit card processors have financial risk associated with
tickets purchased for travel in the future because although the processor
generally forwards the cash related to the purchase to the Company soon after
the purchase is completed, the air travel generally occurs after that time and
the processor would have liability if the Company does not ultimately deliver
the travel. The agreement with the organization that processes MasterCard/Visa
transactions was amended in January 2002 to allow the credit card processor to
create and maintain a reserve account that is funded by retaining cash that it
otherwise would deliver to the Company (i.e., "restricted cash"). As of June 30,
2003, the retained cash amount was 95 percent of the credit card processor's
risk exposure, or approximately $23.2 million. Effective July 28, 2003, the
credit card processor increased the retained cash amount to 100 percent of risk
exposure, or $25.4 million as of July 31, 2003. This became effective in
conjunction with a tentative agreement to extend the credit card processing
agreement six months from the August 30, 2003 expiration date. The extension
includes an increase in processing fees and release of a second priority lien
that exists on substantially all non-aircraft personal property of the Company
and certain aircraft, and of a third priority lien on the Company's headquarters
facility. As of June 30, 2003, American Express had retained cash related to
credit card processing totaling $1.0 million. It is likely, if current industry
conditions persist, that other credit card processors will require a holdback as
well. The aggregate amount of the risk exposure of the processors (other than
amounts under holdback) as of July 31, 2003 was approximately $6.1 million.

The Company offers the Midwest Airlines MasterCard program. During 2002, the
Company transitioned the program from Elan Financial Services to Juniper Bank
under an agreement effective July 1, 2002. The program allows Midwest Airlines
to offer a co-branded credit card to enhance loyalty to the airline and to
increase frequent flyer membership. The Company generates income by selling
frequent flyer program miles to Juniper Bank, which in turn awards the miles to
cardholders for purchases made with their credit cards. In early fourth quarter
2002, Juniper

26


Bank paid the Company $20.0 million in accordance with the agreement between the
parties. In essence, this payment is in part the payment of a minimum amount due
for the period from July 1, 2002 to the date of the payment and in part the
prepayment of a minimum amount due for the period from the date of payment
through June 30, 2003. The Company is recognizing revenue under the agreement
(subject to the Company's revenue recognition policies for frequent flyer miles)
based on actual credit card purchase and mileage credit activity rather than on
the receipt of these or similar cash payments that the agreement may obligate
Juniper Bank to make. Accordingly, the Company is reflecting deferred revenue on
its balance sheet based on the amount by which the cash the Company has received
under the agreement exceeds the revenue the Company has recognized under the
Company's revenue recognition policy. As of June 30, 2003, the deferred revenue
was $1.7 million.

Capital spending totaled $11.2 million for the six months ended June 30, 2003.
Capital expenditures consisted primarily of costs associated with the start up
of the Boeing 717 program, with the majority of the spending related to the
acquisition of spare parts for the aircraft program. Capital spending for the
remainder of the year is estimated at $4 million.

To date, the Company has made pre-delivery progress payments of $51.5 million
for the Boeing 717 aircraft program. Of these payments, up to $45.0 million can
be funded under a loan agreement with KfW, guaranteed by Rolls-Royce. As of June
30, 2003, the Company has borrowed $40.3 million under this loan agreement.
Under a financing commitment between the Company and BCC, at each aircraft
delivery date BCC acquires and pays for the aircraft delivered, including
interest accrued on the debt owed KfW, and BCC then leases the aircraft to the
Company. At that time, BCC reimburses the Company in full for the pre-delivery
progress payments the Company has made. To the extent the Company funded such
payments through KfW, the Company uses the amounts reimbursed to repay the
related debt to KfW. To the extent the Company originally funded such payments
with operating cash, the amounts reimbursed represent available cash. The loan
balance above reflects the net effect of pre-delivery progress payments and
delivery reimbursements as of June 30, 2003. With the loan agreement with KfW
and the BCC commitment, the Company believes it has requisite financing for the
Boeing 717 program. Although BCC is able to terminate its financing commitment
if it deems the Company has experienced a material adverse change and the
commitment is subject to other conditions, the Company does not anticipate that
the financing commitment will be terminated or that the Company will be unable
to meet the conditions.

The Company has received credit memos from certain suppliers associated with the
delivery of each Boeing 717 aircraft to be used for the acquisition of aircraft
spare parts and maintenance tooling, employee training, flight simulator rental,
aircraft lease payments and engine maintenance agreements. As of June 30, 2003,
the amount of unused credit memos totaled $13.9 million and is recorded as Other
Assets. The Company will receive additional credit memos on the delivery of each
subsequent Boeing 717 aircraft, and will continue to use the credits as needed
to pay for applicable services.

27


In June 2001, one MD-80 series aircraft was debt-financed for seven years at a
fixed interest rate. In July 2001, the Company completed a sale and leaseback of
another MD-80 series aircraft, for a 10-year term. Three 328JETs were
debt-financed in 2001, each for a period up to 32 months at fixed interest rates
ranging from 5.58% to 5.92% for the first 26 to 28 months. The interest rates
revert to a variable rate for the last few months of the financing agreement.
All of these debt and lease obligations, which were the agreements in force at
June 30, 2003, are included in the tentative restructuring agreements reached
with banks, lessors and debt holders in July 2003 (as discussed more fully in
the Restructuring section of Pending Developments.) The Company's objective is
to finalize the restructured agreements in August 2003.

The Company's Board of Directors has authorized a $30.0 million common stock
repurchase program. As of June 30, 2003, the Company has repurchased a total of
842,015 shares of common stock at a cost of $17.0 million. No shares were
repurchased during the six months ended June 30, 2003. The Company has no
present intention to repurchase shares and has not repurchased shares since
2000.

On April 23, 2001, the Company completed a $6.3 million financing of a new
maintenance facility for Midwest Connect located at General Mitchell
International Airport. Construction was completed and occupancy occurred in
February 2002. The facility is financed by 32-year, tax-exempt, variable-rate
demand industrial development revenue bonds issued by the City of Milwaukee. To
ensure the tax-exempt status, Milwaukee County is the owner of the facility. The
bonds are secured by a letter of credit under the Company's credit facility.
Interest payments made to bondholders and amortization of principal are recorded
as rent expense.

The Company maintains a qualified defined benefit plan, the Pilots' Supplemental
Pension Plan (the "Qualified Plan"), which provides supplemental retirement
benefits to Midwest Airlines pilots, and an unfunded nonqualified defined
benefit plan to provide Midwest Airlines pilots with annuity benefits for salary
in excess of amounts permitted to be paid under the provisions of the tax law to
participants in the Qualified Plan. The discount rate used to determine the
funding requirements for the Qualified Plan was 6.75%. To determine this rate,
industry benchmarks were used, primarily the Moody's Aa Corporate Bond yield as
of December 31, 2002. The method used to determine the market-related value of
plan assets is the prior year's market-related value of assets, adjusted by
contributions, disbursements, expected return on investments and 20% of
investment gains (losses) during the five prior years. The Qualified Plan assets
are currently invested in money market and other stable principal-type funds.
Estimated 2003 funding requirements for the Qualified Plan are $1.7 million.

On March 7, 2003, the Company suspended aircraft lease and debt payments
associated with the Company's DC-9, MD-80, 328JET and Beech 1900 aircraft,
initially until June 7, 2003. Subsequently, the Company extended the payment
suspension indefinitely while it continued in negotiations with lessors and
other affected creditors. (Note that the obligations related to the Boeing 717
aircraft purchases and related leases were not included in the payment
moratorium.) The suspension was intended to provide the Company opportunity to
negotiate a restructuring of the terms and conditions of the leases and other
financial obligations with the lessors and other

28


affected creditors to bring them in line with market conditions and better
reflect the reduced market values of the aircraft. Because the Company suspended
the payments without the consent of the lessors and other affected creditors,
the suspension of payments resulted in defaults under the terms of the
applicable leases and debt obligations, and also resulted in defaults under the
terms of the Company's bank credit agreement and the Company's credit card
processing agreement for MasterCard/Visa transactions. Such defaults give the
other parties to these arrangements certain rights and remedies. For example,
the default under the Company's credit card processing agreement for
MasterCard/Visa transactions has resulted in an increase of the reserve under
that agreement to 100% of the card processor's exposure, and may result in
defaults of other contractual obligations. On July 17, 2003, the Company
announced that it had reached preliminary agreements with lessors and lenders on
the restructuring of leases and debt obligations that had been under payment
suspension (as discussed more fully in the Restructuring section of Pending
Developments.) The Company's objective is to finalize these agreements in August
2003.

In April 2003, the Senate and House of Representatives of the United States of
America passed, and the President signed, the Emergency Wartime Supplemental
Appropriations Act, a supplemental appropriations bill to provide certain
aviation-related assistance. The bill includes the following key provisions:

o $2.3 billion of the appropriation is for grants to be made by the
Transportation Security Administration ("TSA") to U.S. air carriers
based on the proportional share each carrier has paid or collected as
of the date of enactment of the legislation for passenger security and
air carrier security fees.
o The TSA will not impose passenger security fees on air carriers
between June 1, 2003 and September 30, 2003.
o $100 million of the appropriation will be available to compensate air
carriers for the direct costs associated with the strengthening of
flight deck doors and locks on aircraft.
o Aviation war risk insurance provided by the federal government is
extended until August 2004.

In second quarter 2003, the Company received a grant of $11.4 million (pre-tax)
from TSA for reimbursement of security costs as a result of this legislation.

The Company is currently in discussions with the credit facility banks to extend
the existing credit facility beyond the current August 30, 2003 expiration date
to allow additional time for the Company to seek and secure long-term financing.
The Company believes an extension will be granted. The Company is also in
discussions to secure a source of long-term equity or debt financing. If the
Company is not successful in extending the existing credit or in securing a
source of long-term liquidity, then the Company would likely be required to
explore alternative scenarios, including filing for reorganization under Chapter
11 of the U.S. Bankruptcy Code, or cessation of operations.

29

Pending Developments

This Form 10-Q filing, particularly this "Pending Developments" section,
contains forward-looking statements that may state the Company's or management's
intentions, hopes, beliefs, expectations or predictions for the future. In the
following discussion and elsewhere in the report, statements containing words
such as "expect," "anticipate," "believe," "estimate," "goal," "objective" or
similar words are intended to identify forward-looking statements. It is
important to note that the Company's actual results could differ materially from
projected results due to factors that include but are not limited to:

o the Company's ability to generate sufficient cash flows to meet
obligations on a timely basis;
o the Company's ability to reach a final agreement with its aircraft
lessors and debt providers to finalize preliminary agreements on the
restructuring of leases and debt obligations that had been under
payment suspension;
o the Company's ability to successfully achieve the desired
profit-improvement and growth measures;
o the Company's ability to benefit from premium pricing;
o uncertainties concerning ongoing financing for operations, including
the ability to finance the purchase of new aircraft;
o uncertainties related to general economic factors;
o industry conditions;
o labor relations, including the Company's ability to finalize the
ratified agreements related to the restructuring;
o scheduling developments;
o government regulations, including increased costs for compliance with
new or enhanced government regulations;
o aircraft maintenance and refurbishment schedules;
o potential delays related to acquired aircraft;
o increases in fuel costs or the failure of fuel costs to decline;
o competitive developments;
o interest rates;
o increased costs for security-related measures;
o higher fixed costs associated with the Boeing 717 aircraft;
o potential aircraft incidents and other events beyond the Company's
control (for example, traffic congestion and weather conditions); and
o terrorist attacks or fear of terrorist attacks, and other world
events, including U.S. military involvement in overseas operations.

Additional information concerning factors that could cause actual results to
differ materially from those in the forward-looking statements is contained from
time to time in the Company's Securities and Exchange Commission filings.

30


Boeing 717 Aircraft - In April 2002, the Company announced that it had amended
its Boeing 717 aircraft order. The Company placed a firm order for 25 new Boeing
717 aircraft, with purchase rights for an additional 25 aircraft. The firm order
is valued at $940 million. Under an amended purchase agreement, delivery of the
aircraft began in February 2003 and was to continue into 2005 at a rate of one
aircraft every month. In July 2003, the Company announced that it was further
amending the delivery schedule for the Boeing 717 aircraft. The Company will now
receive one aircraft per month through March 2004; then subsequent deliveries
will take place approximately one aircraft per quarter until all 25 aircraft on
order are delivered by October 2006.

Five Boeing 717 aircraft entered scheduled service in the six months ended June
30, 2003. These aircraft will replace Midwest Airlines DC-9 aircraft and be used
to expand service in existing and new markets. The purchase will significantly
affect the Company's cost structure by adding higher fixed costs because the
Boeing 717 aircraft will have higher ownership costs (i.e., purchase costs and
lease payment expenses) than the Company's DC-9 aircraft. Benefits of the Boeing
717 aircraft, which are not fixed in amount, include greater fuel efficiency,
lower maintenance costs, improved dispatch reliability, increased aircraft
utilization, reduced regulatory compliance costs, and higher revenues through
potential increased demand for air travel due to the fact that the Company is
using these aircraft. There is no assurance that the benefits of the Boeing 717
aircraft will outweigh the costs associated with these aircraft.

Regional Jet Aircraft - In April 2001, the Company signed a memorandum of
understanding placing firm orders for 20 new Embraer regional jets, with options
to purchase 20 additional aircraft. The firm order is valued at $400 million. In
August 2001, the parties signed a purchase agreement related to this order.
Under this purchase agreement, delivery of the 20 aircraft was scheduled to
begin in January 2002. In October 2001, due to ramifications of the events of
September 11, the Company reached an agreement with Embraer to delay deliveries
of the first aircraft to January 2003. For similar reasons, the Company reached
further agreement with Embraer in March 2002 to delay delivery of the first
aircraft until January 2004. This delay was intended to allow the Company to
concentrate on the introduction of Boeing 717 aircraft to the Midwest Airlines
fleet and provide additional time for the Company to evaluate financing
alternatives. The Company plans to use the new Embraer regional jets to expand
service in existing and new markets. Because the regional jets are produced in
three sizes, they are expected to provide Midwest Connect with flexibility to
serve markets with differing capacity demands. The Embraer regional jet program
requires less significant pre-delivery payments than the Boeing 717 program but
will require long-term financing on or after delivery. The Company believes
long-term financing will be difficult to obtain given current industry
conditions and Company financial results, and for these reasons, reached
agreement with Embraer in July 2003 to defer acquisition of these aircraft until
July 2006. The contract has been amended to reflect this agreement. The Company
will not incur any cost or face claims for breach of contract in relation to the
deferral.

31


New Accounting Pronouncements - In June 2002, the Financial Accounting Standards
Board (the "FASB") issued SFAS No. 146, "Accounting for Costs Associated with
Exit or Disposal Activities," which is effective for exit or disposal activities
that are initiated after December 31, 2002. SFAS No. 146 requires that
liabilities for the costs associated with exit or disposal activities be
recognized and measured initially at fair value only when the liabilities are
incurred, rather than when an entity commits to effect an exit plan. In second
quarter 2003, the Company recorded $4.6 million (pre-tax) of aircraft lease
expense for five DC-9 leased aircraft removed from Midwest Airlines service
prior to June 30, 2003, in accordance with SFAS 146. These non-cash expenses
were included in the aircraft rentals line of the Company's statements of
operations. The expense reflects future obligations for these aircraft following
their out-of-service dates. The Company has five additional DC-9 leased aircraft
that it plans to remove from service during the third and fourth quarters of
2003 and the first quarter of 2004. The Company expects to record an additional
non-cash charge of $3.4 million (pre-tax) in accordance with SFAS No. 146 in
relation to these aircraft.

In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity," which requires
issuers to classify as liabilities certain classes of freestanding financial
instruments (instruments that are entered into separately from other instruments
or transactions or are legally detachable and separately exercisable) that
represent obligations of the issuer. SFAS No. 150 is effective for all public
company freestanding financial instruments entered into or modified after May
31, 2003. The adoption of SFAS No. 150, which is effective for the Company on
July 1, 2003, will not have a material impact on the Company's condensed
consolidated financial statements.

Insurance - Due to the events of September 11, aviation insurance carriers have
significantly increased the premiums for aviation insurance, as well as hull and
war-risk coverage (insurance coverage available to commercial air carriers for
liability to persons other than employees or passengers for claims resulting
from acts of terrorism, war or similar events). Under the Air Transportation
Safety and System Stabilization Act, U.S. air carriers may purchase certain war-
risk liability insurance from the United States government on an interim basis
at rates that are more favorable than those available from private aviation
insurance carriers. The Company received an extension of this war-risk liability
insurance through October 11, 2003. As a result of the Emergency Wartime
Supplemental Appropriations Act of 2003, the Company expects to receive
extensions of this coverage through August 31, 2004.

Commercial air carriers are required by the Department of Transportation to
obtain appropriate aviation insurance coverage. The effects of September 11
insurance losses, additional terrorist attacks or other unanticipated events
could result in aviation insurers further increasing their premiums, or a future
shortage of available aviation insurance. Significant increases in insurance
premiums or a shortage of available insurance could result in the curtailment or
discontinuation of scheduled service.

Low-Fare Service - In February 2003, the Company announced the launch of
low-fare service, branded as Midwest Airlines Saver Service, focusing on the
leisure market. Service was launched

32


on August 1, 2003 and will complement the Company's existing premium (Midwest
Airlines Signature Service) and regional (Midwest Connect) products by offering
flights to high-demand leisure destinations at the lower fares leisure travelers
want to pay. The decision to offer low-fare service was based on extensive
market research. The Company expects to initiate service with five MD-80
aircraft (currently part of the Midwest Airlines fleet) that will seat 143-147
passengers in a two-by-three configuration in a single-class cabin. It is
expected that a total of eight MD-80 aircraft will be converted to the new
configuration by year end. Pitch will average 33 inches, similar to Midwest
Airlines and more than other low-fare carriers. Saver Service is expected to
enhance the Company's competitive position by serving a segment of the market
that is growing more rapidly than the business travel market, expanding to
destinations that have not been economically viable to serve with the premium
product, and serving some existing destinations more cost efficiently. As a
result of the introduction of Saver Service, the Company expects that it will
compete with other low-fare carriers in ways that are different from its
Signature Service. Among other things, the Company will compete more clearly on
the basis of fare levels. There is no assurance that the Company will be able to
compete successfully on these bases.

Government Assistance - On July 24, 2003, the Milwaukee County board approved a
resolution that would result in Milwaukee County becoming the obligor for the
payment of interest and principal on $14.2 million of industrial development
revenue bonds issued to finance construction of the Midwest Airlines and Skyway
Airlines maintenance facilities at Milwaukee General Mitchell International
Airport. This guarantee would be granted as part of a financing in which the
State of Wisconsin would provide a $4 million Economic Community Development
Block Grant to Racine County, with Racine County retaining $12,000 and the
balance going to Milwaukee County. The Company would contribute $1 million in
addition to pledging the financed maintenance facilities as collateral. The
money will be placed in escrow for use in the event the Company would fail to
make required bond interest and principal payments. Subject to Racine County
board approval, which is expected to occur in August 2003, and after meeting
certain significant conditions set forth by Milwaukee County, including
obtaining new financing totaling at least $14.2 million, the financial support
will become effective and result in the reduction of the Company's credit
exposure to the credit facility banks.

Restructuring Efforts - In July 2003, the Company announced that it had reached
preliminary agreement with labor unions, lessors and creditors on permanent cost
reductions. These reductions are a continuation of the Company's actions to
improve its profitability and liquidity position that began in September 2001.
These actions focus on two key areas: 1) cost reductions and internal
restructuring (discussed below), and 2) the launch of Midwest Airlines Saver
Service to address the growing low-fare segment of the market (discussed above).

In February 2003, the Company announced measures aimed at improving cash flow in
addition to previous cost control initiatives. The Company reduced capacity,
switched to a buy-onboard dining option, discontinued standard travel agency
commissions to match the industry, and implemented service fee increases for
nonrefundable tickets. In addition, the Company

33


implemented an additional workforce reduction, and remaining non-union employees
received across-the-board compensation reductions.

In July 2003, the Company announced that it had reached preliminary agreement
with labor unions, lessors and creditors on permanent cost reductions. Assuming
the Company reaches final agreements regarding these matters, the Company is
targeting its financial restructuring initiatives -- along with numerous
internal cost-reduction measures, revenue enhancements and flight schedule
changes implemented since September 11, 2001 -- to improve profitability and
reduce costs, relative to what it would have experienced if it had not effected
these changes, by approximately $70 million annually going forward. The
Company's objective is to finalize these agreements in August 2003. As the
Company moves forward with and completes its restructuring initiatives, it will
be subject to certain non-cash charges, which may be significant, throughout the
remainder of 2003. The cost reductions relate to the following areas:

o Labor cost savings and productivity improvements from the Company's
employee unions. All three of the Company's represented employee groups -
the Midwest Air Line Pilots Association, the Skyway Air Line Pilots
Association and the Midwest Association of Flight Attendants - ratified
agreements. The contracts are amendable after five years.
o Identification of opportunities to enhance productivity for non-represented
employees. Non-represented employee groups are currently working to develop
process and productivity improvements, which are expected to be implemented
by the end of 2003.
o Renegotiation of aircraft finance agreements. The Company has reached
preliminary agreements on renegotiating its existing finance agreements
with 11 aircraft lessors and lenders to reflect current market conditions.
These agreements provide for the reduction of the present value of the
current agreements by $60-70 million and will reduce cash requirements by
about $1.1 million per month and convert $24 million of short-term debt
into long-term obligations exceeding 10 years at low interest rates.
o Adjustment of the Company's fleet plan and delivery schedules to provide
for more controlled growth. In light of current overcapacity in the
industry, the Company has completed negotiations with aircraft
manufacturers to readjust the delivery schedule of its Boeing 717 aircraft
program and defer its acquisition of Embraer regional jets. Midwest
Airlines will continue to accept Boeing 717s at its current rate of one
each month through March 2004, when deliveries will change to approximately
quarterly. Under the new schedule, Midwest will acquire the 25 717s it has
ordered by October 2006. Midwest Connect will defer its acquisition of 20
Embraer regional jets from January 2004 to July 2006, during which time the
availability of long-term aircraft financing is expected to improve. The
Embraer contract has been amended to reflect this agreement.

34


A summary of revenue improvement/cost reduction measures implemented as of June
30, 2003 is as follows:

Revenue Improvement/ Cost Reduction Measure Estimated Annual Improvement
- ------------------------------------------- ----------------------------
($ in millions)

Headcount Reductions $15
Dining Services/Amenity Changes $15
Capacity Reductions/Schedule Changes $5
Travel Agent Commission Changes $5
Advertising Reduction $3
Fuel Management Program $2
Passenger Fee Changes $1
Other Programs $1
---
Total of Revenue Improvement/Cost Reduction Measures $47
===

A summary of profit improvement restructuring measures to be implemented by the
end of August 2003 is as follows:

Restructuring Measure Estimated Annual Improvement
- --------------------- ----------------------------
($ in millions)

Aircraft Lessor Concessions $12
Represented Employees' Concessions $7
Non-represented Employees' Concessions $4
---
Total of Restructuring Measures $23
===
Total of Revenue Improvement/Cost Reduction Measures
and Restructuring Measures $70
===

Stock Ownership and Dilution - As noted above, the Company reached preliminary
agreements with the aircraft lessors and lenders on renegotiating existing
aircraft finance agreements to reflect current market conditions, and the
Company's objective is to finalize these agreements in August 2003. The lessors
and lenders, in return for making the agreed to amendments to these finance
agreements, will receive the right to purchase, in the aggregate, 10% of the
amount of the Company's Common Stock that is outstanding, with certain
protection from dilutive issuances of common stock.

The Company also reached agreement on permanent labor cost savings and
productivity improvements with all three represented employee groups, pilots and
flight attendants at Midwest Airlines and pilots at Midwest Connect. The Company
has also identified opportunities to enhance productivity for non-represented
employees. In return for their contributions to the restructuring efforts,
employees (represented and non-represented) will receive options to

35


purchase 10% of the amount of the Company's Common Stock that is outstanding,
with certain protection from dilutive issuances of common stock. The option
grants are contingent on shareholders' approval of the equity participation
plan.

The shares issuable upon the exercise of warrants that the Company has agreed to
issue to its aircraft lessors and lenders, and options it has agreed to issue to
its employees, as well as any additional shares that may be issued as part of
any additional financing, will dilute the ownership interests of existing
shareholders. Further, any sales in the public market of the Common Stock
issuable upon such exercises and conversion could adversely affect prevailing
market prices of the Company's Common Stock. In addition, the existence of
warrants, options and other securities may encourage short selling by market
participants.

Litigation - In May 2003, U.S. Bancorp Equipment Finance, Inc. filed suit in
U.S. District Court in Milwaukee against the Company, filing a claim for unpaid
lease payments and a motion for replevin in relation to two MD-80 aircraft
leased by U.S. Bancorp Equipment Finance, Inc. to the Company. The Company
expects this suit to be voluntarily dismissed once final agreements have been
signed in connection with the renegotiation of the Company's aircraft finance
agreements. Even if it is not voluntarily dismissed, it is the Company's belief
that the litigation will not have a material adverse effect on the Company's
financial condition or results of operations.

Increased Competition - On July 1, 2003, Northwest Airlines added one nonstop
roundtrip flight in each of the following six markets: from Milwaukee to New
York City, Washington D.C., Orlando, Boston, Los Angeles and Las Vegas. Although
the Company competes with other carriers in all markets it serves, this
competition is unique because it constitutes the addition of another carrier
with nonstop service in the Company's Milwaukee base of operations. The Company
has successfully competed with legacy and low-cost carriers in the past and has
maintained market share in these markets. However, there can be no assurance
that the Company will be able to successfully compete with competitors in the
future.


Item 3. Quantitative and Qualitative Disclosures about Market Risk
- ------------------------------------------------------------------

There have been no material changes in the Company's market risk since December
31, 2002.


Item 4. Controls and Procedures
- -------------------------------

(a) Evaluation of disclosure controls and procedures. In accordance with Rule
13a-15(b) of the Securities Exchange Act of 1934 (the "Exchange Act"), as of the
end of the period covered by this Quarterly Report on Form 10-Q, the Company's
management evaluated, with the participation of the Company's principal
executive officer and principal financial officer, the effectiveness of the
design and operation of the Company's disclosure controls and procedures

36


(as defined in Rule 13a-15(e) under the Exchange Act). Based upon their
evaluation of these disclosure controls and procedures, the Company's Chairman
of the Board, President and Chief Executive Officer and the Company's Senior
Vice President and Chief Financial Officer have concluded that the disclosure
controls and procedures were effective as of the date of such evaluation to
ensure that material information relating to the Company, including its
consolidated subsidiaries, was made known to them by others within those
entities, particularly during the period in which this Quarterly Report on Form
10-Q was being prepared.

(b) Changes in internal controls. There was no change in the Company's internal
control over financial reporting that occurred during the period covered by this
Quarterly Report on Form 10-Q that has materially affected, or is reasonably
likely to materially affect, the Company's internal control over financial
reporting.


37

PART II - OTHER INFORMATION

Item 3. Defaults Upon Senior Securities
- ---------------------------------------

At June 30, 2003, the Company had defaulted on debt obligations on four
aircraft. These defaults were the result of failing to make required payments
during the period from February 28, 2003 through June 30, 2003 while the Company
was engaged in negotiations to restructure these obligations. The Company
defaulted on total principal payments of $1.0 million and interest payments of
$0.8 million. As of August 14, 2003, the total arrearage (principal and
interest) was $2.2 million. As discussed in the Restructuring section of Pending
Developments, the Company has reached preliminary agreements on renegotiating
its existing finance agreements with aircraft lessors and lenders to reflect
current market conditions, and expects to finalize these agreements in August
2003.

At June 30, 2003, the Company was also in default under a $17.8 million
revolving credit facility. The balance consisted of $2.0 million of debt and
$15.8 million of letters of credit that was outstanding at the end of the
period. Although the Company continued to make required payments under this
facility during the period, the Company was still in default on the credit
facility as a result of the non-payment of obligations under certain aircraft
lease and debt agreements, including the debt obligations described above.


Item 4. Submission of Matters to a Vote of Security Holders
- -----------------------------------------------------------

At the Company's Annual Meeting of Shareholders held on April 23, 2003, the
following individuals were elected to the Board of Directors:

Authority Granted Authority Withheld
----------------- ------------------
Samuel K. Skinner 13,479,358 123,780
Elizabeth T. Solberg 13,478,858 124,280
Richard H. Sonnentag 13,479,731 123,407

The terms of office for the following directors continued after the Company's
Annual Meeting: Timothy E. Hoeksema, James G. Grosklaus, Ulice Payne, Jr., David
H. Treitel, John F. Bergstrom, Fredrick P. Stratton, Jr., John W. Weekly.

In addition, shareholders approved a proposed amendment to the restated articles
of incorporation of the Company, to change the name of the corporation to
Midwest Air Group, Inc. 13,506,897 shares were voted FOR this amendment; 78,868
shares were voted AGAINST this amendment, and 17,373 shares ABSTAINED. This name
change has not been implemented as of June 30, 2003.


38


Item 6. Exhibits and Reports on Form 8-K
- ----------------------------------------

(a) Exhibits
--------

Exhibit No. Description

(31.1) Certification of the Chief Executive Officer Pursuant to Section 302
of the Sarbanes-Oxley Act and Rule 13a-14(a) of 15d-14(a) under the
Securities Exchange Act of 1934.

(31.2) Certification of the Chief Financial Officer Pursuant to Section 302
of the Sarbanes-Oxley Act and Rule 13a-14(a) of 15d-14(a) under the
Securities Exchange Act of 1934.

(32.1) Written Statement of the Chief Executive Officer and Chief Financial
Officer Pursuant to 18 U.S.C. Section 1350.

(b) Reports on Form 8-K
-------------------

The following reports on Form 8-K were filed during the quarter ended
June 30, 2003:



Date Filed Date of Report Item
- ---------- -------------- ----


April 17, 2003 April 17, 2003 The Company filed a news release under Item 12 of Form 8-K
reporting financial results for the first quarter ended
March 31, 2003.

June 13, 2003 June 12, 2003 The Company filed a press release under Item 5 of Form 8-K
announcing additional information on its restructuring
efforts.



39

SIGNATURES

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



Midwest Express Holdings, Inc.
------------------------------


Date: August 14, 2003 By /s/ Timothy E. Hoeksema
---------------------------
Timothy E. Hoeksema
Chairman of the Board, President and
Chief Executive Officer


Date: August 14, 2003 By /s/ Robert S. Bahlman
---------------------------
Robert S. Bahlman
Senior Vice President and
Chief Financial Officer


40

EXHIBIT INDEX
MIDWEST EXPRESS HOLDINGS, INC.
QUARTERLY REPORT ON FORM 10-Q

FOR THE QUARTER ENDED JUNE 30, 2003
-----------------------------------

Exhibit No. Description
- ----------- -----------

(31.1) Certification of the Chief Executive Officer Pursuant to Section 302
of the Sarbanes-Oxley Act and Rule 13a-14(a) of 15d-14(a) under the
Securities Exchange Act of 1934.
(31.2) Certification of the Chief Financial Officer Pursuant to Section 302
of the Sarbanes-Oxley Act and Rule 13a-14(a) of 15d-14(a) under the
Securities Exchange Act of 1934.
(32.1) Written Statement of the Chief Executive Officer and Chief Financial
Officer Pursuant to 18 U.S.C. Section 1350.

41