GREAT LAKES AVIATION LTD, 10-K, 1997-04-04

GREAT LAKES AVIATION LTD
10-K, 1997-04-04
AIR TRANSPORTATION, SCHEDULED

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<PAGE>

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K

(Mark One)

/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 (FEE REQUIRED)

For the fiscal year ended December 31, 1996

/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)

For the transition period from __________ to __________

Commission File No. 0-23224

GREAT LAKES AVIATION, LTD.
(Exact name of registrant as specified in its charter)

Iowa 42-1135319
- ------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)

1965 330th Street
Spencer, Iowa 51301-9211
-------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (712) 262-1000

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act: Common Stock,
par value $.01

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days. Yes _____ No __X__

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

The aggregate market value of voting stock held by nonaffiliates of the
registrant as of March 27, 1997 was approximately $9,486,401.

As of March 31, 1997 there were 7,589,121 shares of Common Stock of the
registrant issued and outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Certain portions of the documents listed below have been incorporated by
reference into the indicated part of this Form 10-K.

Document Incorporated Part of Form 10-K
- --------------------- -----------------

Proxy Statement for 1997 Annual Meeting of Shareholders Part III

<PAGE>

FORM 10-K INDEX

Page
----
PART I . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Item 1. BUSINESS . . . . . . . . . . . . . . . . . . . . . . . . 1
Item 2. PROPERTIES . . . . . . . . . . . . . . . . . . . . . . . 12
Item 3. LEGAL PROCEEDINGS . . . . . . . . . . . . . . . . . . . 12
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
DURING FOURTH QUARTER OF FISCAL YEAR . . . . . . . . . . 12

PART II. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Item 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS . . . . . . . . . . . . . . . . . . 13
Item 6. SELECTED FINANCIAL AND OPERATING DATA . . . . . . . . . 14
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION. . . . . . . . . . . . . . . . . . . . . . . . 16
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. . . . . . . 24
Item 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE . . 41

PART III . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT . . . 41
Item 11. EXECUTIVE COMPENSATION . . . . . . . . . . . . . . . . . 41
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT . . . . . . . . . . . . . . . . . . . . . . . 41
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS . . . . . 41

PART IV . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K . . . . . . . . . . . . . . . . . . . . . . . . 42

SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44

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PART I

ITEM 1. BUSINESS

GENERAL

Great Lakes Aviation, Ltd. ("Great Lakes") is a regional airline which
operates under three marketing identities (the "Regional Identities"):
United Express, Midway Connection and Great Lakes Airlines. The Company is
one of several companies operating as United Express under code sharing
agreements with United Air Lines, Inc. ("United"). While the Company does
not compete against other United Express carriers on routes that it serves,
it does compete with them to receive the right to serve additional markets
under a United agreement. On October 1, 1995 the Company began operating
Midway Connection under a code sharing agreement with Midway Airlines
Corporation ("Midway"). On August 8, 1995 the Company began operations in
the Southwest United States and Mexico independently under its own code. As
of December 31, 1996, the Company operated a fleet of 42 Beechcraft Model
1900 19-passenger aircraft and 12 Embraer Brasilia 30-passenger aircraft.
References herein to the Company include Great Lakes and its wholly-owned
subsidiary.

The table below sets forth certain operating information for each of the
Regional Identities for the applicable period ended December 31, 1996.

<TABLE>
<CAPTION>
United Midway Great Lakes
Express Connection Airlines Total
-------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Operating revenues (000's) $ 86,419 $ 14,785 $ 8,466 $ 109,670
Passengers 749,527 165,975 97,463 1,012,965
Available seat miles (000's) 510,932 101,509 65,863 678,304
Revenue passenger miles (000's) 235,963 39,396 24,248 299,607
% of passengers connecting with partner 45% 50% N/A N/A
Load factor 46.2% 38.8% 36.8% 44.2%
</TABLE>

The Company's recent performance has caused certain liquidity problems.
See "Management's Discussion and Analysis of Financial Condition".

THE COMPANY'S REGIONAL IDENTITIES

UNITED EXPRESS

The United Express operation serves Chicago, Denver and Minneapolis-St.
Paul from 60 destinations in ten states located in the Upper Midwest as of
December 31, 1996. The Company became a "United Express" carrier in 1992
under a code sharing agreement with United and is one of the principal United
Express regional carriers.

The Company's code sharing and related agreements with United (the
"United Express Agreements") entitle the Company to use United's "UA" flight
designator code to identify its code sharing flights and fares in computer
reservation systems, United's "Apollo" reservation system (including United's
automated check-in, ticketing and boarding pass, and advance seat reservation
and baggage tracing systems), to use the United Express logo and aircraft
exterior paint schemes and uniforms similar to those of United and to
otherwise advertise and market its association with United. United Express
passengers participate in United's "Mileage Plus" frequent flyer program and
are eligible to receive a minimum of 500 United frequent flyer miles for each
trip on a United Express flight. The United Express Agreements also provide
for coordinated schedules and through fares. A through fare is a cost-saving
fare available to a prospective passenger who, in order to reach a particular
destination, transfers between the major carrier and that carrier's code
sharing partner. United establishes all through fares and the Company
receives a portion of the fares on a formula basis, subject to periodic
adjustment.

Under the United Express Agreements, United provides a number of
additional services to the Company. These include publication of the fares,
rules and related information that are part of the Company's contracts of
carriage

1
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for passengers and freight; publication of the Company's code sharing flight
schedules and related information using the United "UA" flight designator
code and flight numbers assigned by United; provision of ground support
services at six airports served by both United and the Company; provision of
ticket handling services at United's ticketing locations; provision of
airport signage at airports where both the Company and United operate;
provision of United ticket stock and related documents; provision of expense
vouchers, checks and cash disbursements to passengers on code sharing flights
of Great Lakes inconvenienced by flight cancellations, diversions and delays;
and cooperation in the development and execution of advertising, promotion
and marketing efforts featuring United Express and the relationship between
United and the Company under the Agreements. The Company pays United monthly
a fee based on the total number of revenue passengers boarded on all of Great
Lakes' United Express flights. This fee varies depending on whether the
passenger travels through United hubs at Denver and Chicago, is carried to or
from other airports served by United or if the passenger is carried between
cities only served by Great Lakes. The Company also receives an incentive
amount for each passenger that connects with a United flight. In order to
reduce expenses on those routes where passengers have few opportunities to
connect with United, the Company removes the United Code and provides the
service as Great Lakes Airlines.

With the exception of certain pre-approved destinations connecting with
Minneapolis-St. Paul and Detroit, the United Express Agreements require the
Company to obtain United's prior consent to operate as a United Express
carrier on all routes. Additionally, the United Express Agreements restrict
the Company's ability to decrease its service to Denver and Chicago O'Hare
below certain minimum levels. Great Lakes has the exclusive right to provide
United Express service to and from Detroit and Minneapolis-St. Paul and on
existing Great Lakes' routes to and from Chicago O'Hare and Denver. The
United Express Agreements, however, prohibit the Company from entering into a
code sharing agreement with any other airline at Chicago, Denver, Des Moines,
Detroit, Minneapolis-St. Paul and Omaha. The code sharing agreement,
however, does not prohibit United from competing with Great Lakes. The United
Express Agreements may be canceled if the Company fails to meet certain
financial tests or performance standards or fails to maintain certain minimum
flight frequency levels.

The United Express Agreements restrict the ability of the Company to
merge with another company or dispose of its assets or aircraft without first
offering United a right of first refusal to acquire the Company, or such
assets or aircraft. United also has a right of first refusal with respect to
issuances by the Company of shares of its Common Stock or the sale by Douglas
G. Voss, the Chief Executive Officer of the Company, of his Common Stock.
United has the option to terminate the United Express Agreements in the event
that Great Lakes merges with, or is acquired by, another air carrier or any
affiliate thereof, subject to certain pre-approved exceptions.

The code sharing agreement with United terminates in April 1997 but is
subject to earlier termination upon failure of the Company to provide
specified levels of service or performance, not paying without just cause its
bills when due, or upon other specified events. Currently, the Company is in
default of a covenant of the United Express Agreement as a result of its
nonpayment of bills when due and is attempting to obtain a waiver of the
default from United. The Company has commenced negotiations with United to
renew the code sharing agreement, which the Company expects will be completed
on a mutually advantageous basis, although no assurance can be given that
this actually will be accomplished. Any termination or failure to renew this
agreement, any material adverse modification of this agreement, or any
substantial decrease in the number of routes served by the Company under this
agreement would have a material adverse effect on the Company's business. As
a result of the code sharing agreement, the Company's business is sensitive
to events and risks affecting United. If adverse events affect United's
business, the Company's business may also be adversely affected.

MIDWAY CONNECTION

Since October 1, 1995 the Company has operated as a "Midway Connection"
carrier under a marketing agreement ("Midway Connection Agreement") with
Midway. As of December 31, 1996, the Company's Midway Connection operation
served Raleigh/Durham from 14 destinations in Virginia, Georgia, North
Carolina, South Carolina, Ohio, Florida, Maryland and the District of
Columbia.

The Company's marketing agreement with Midway entitles the Company to
use Midway's "JI" flight designator code to identify its code sharing flights
and fares in computer reservation systems, (including Midway's automated
check-in, ticketing and boarding pass, and advance seat reservation and
baggage tracing systems), to use the "Midway Connection" logo and aircraft
exterior paint schemes and uniforms similar to those of Midway and to
otherwise advertise and market its association with Midway. The Company's
passengers on code sharing flights may

2
<PAGE>

participate in American Airlines' frequent flyer program as long as Midway
participates in the American Airlines program. The Midway Connection
Agreement also provides for coordinated schedules and through fares. The
Company and Midway mutually establish through fares and the Company receives
a portion of the fares on a formula basis.

Under the Midway Connection Agreement, Midway provides a number of
additional services to the Company. These include publication of the fares,
rules and related information that are part of the Company's contracts of
carriage for passengers and freight; publication of the Company's code
sharing flight schedules and related information using the Midway "JI" flight
designator code and flight numbers assigned by Midway; provision of ticket
handling services at Midway's ticketing locations; provision of airport
signage at airports where both the Company and Midway operate; provision of
Midway ticket stock and related documents; provision of expense vouchers,
checks and cash disbursements to passengers on code sharing flights of the
Company inconvenienced by flight cancellations, diversions and delays; and
cooperation in the development and execution of advertising, promotion and
marketing efforts featuring Midway Connection and the relationship between
Midway and the Company.

With the exception of certain pre-approved destinations, the Midway
Connection Agreement requires the Company to obtain Midway's prior consent to
operate as a Midway Connection carrier on all routes. Under the terms of the
Midway Connection Agreement, the Company has the exclusive right to provide
Midway Connection service to and from Raleigh/Durham. The Midway Connection
Agreement, however, prohibits the Company from entering into a code sharing
agreement with any other airline at Raleigh/Durham.

Midway Connection services have been unprofitable. This is partially
attributable to the fact that Midway reduced the number of aircraft in their
operation early in 1996 rather than expanding operations as originally
planned. This reduced the number of connecting opportunities for the
Company's flights and, in turn, potential traffic which could use the
Company's services. As a result the Company is negotiating with Midway to
receive additional revenues to compensate it for providing current levels of
connecting traffic to Midway. There can be no assurance that these
negotiations will be successful. Early in 1997, the Company eliminated
unprofitable service to two communities and seasonably reduced flying to the
beach communities in the Midway Connection system.

The Midway Connection Agreement terminates October 1, 2004, but is
subject to immediate termination upon notice if either party becomes
insolvent, is not paying without just cause its bills when due, ceases to be
a going concern, makes an assignment for the benefit of creditors, or ceases
operations, unless the defaulting party posts a letter of credit to cover all
amounts potentially due to the other party. Either party may terminate the
Midway Connection agreement effective any time on or after October 1, 1997,
upon six months' prior written notice. In addition, if either party does not
perform any of its material covenants, agreements, terms or conditions under
the Midway Connection Agreement for a period of 30 days after written notice
to cure such default, then the other party may terminate the agreement upon
an additional 15 days' notice to the defaulting party. If it is determined
that the Company has failed to meet certain flight completion and on-time
performance standards for any three consecutive month period, then Midway may
terminate the Midway Connection Agreement upon 15 days' written notice to the
Company. At any time Midway could seek to terminate the Midway Connection
Agreement as a result of the Company's non-payment of bills when due and for
failure to perform under certain covenants in the agreement. As of March 31,
1997, the Company has not received any notice of breach or termination from
Midway and on April 4, 1997, received a letter from Midway stating that
Midway had no present intention of terminating the Midway Connection
Agreement. Any termination or failure to renew this agreement, any material
adverse modification of this agreement, or any substantial decrease in the
number of routes served by the Company under this agreement could have a
material adverse effect on the Company's business. As a result of the code
sharing agreement, the Company's business is sensitive to events and risks
affecting Midway. If adverse events affect Midway's business, the Company's
business may also be adversely affected.

GREAT LAKES AIRLINES

On August 8, 1995, the Company acquired from Arizona Airways, Inc.
("Arizona") certain aircraft parts, tools, furniture and fixtures, computer
equipment, accounts receivable and intellectual property (the "Assets")
pursuant to a foreclosure (the "Foreclosure") of a lien on the Assets. The
Foreclosure was for amounts owed the Company under a management assistance
and consulting services agreement, an aircraft parts purchase agreement, a
code sharing agreement, an aircraft lease agreement and other agreements,
between the Company and Arizona.

On August 8, 1995, the Company began service to the domestic
destinations (Tucson and Phoenix, AZ and Albuquerque, NM) previously served
by Arizona and on August 17, 1995 began service to the Mexican destinations
(Hermosillo, Guaymas, and Ciudad Obregon) previously served by Arizona.
Initially, the Company served these destinations under the trade name
"Arizona Airways Express," but beginning April 7, 1996, the Company began
providing this service under the name Great Lakes Airlines. Service between
Phoenix and Page/Lake Powell was

3
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added in April 1996 with Federal Subsidy. In October 1996, the Company
began service between Show Low, Arizona and Phoenix with subsidy provided
by the local community.

UNITED EXPRESS MARKETS

CHICAGO

The Company's service to the Chicago O'Hare market is anchored by its
ownership of 54 slots and its lease of 12 slots allocated by the Federal
Aviation Administration ("FAA"). These slots are used primarily to provide
connecting opportunities with United flights. The Company's ability to
increase its passenger volume at Chicago O'Hare is limited by its allocation
of slots, and future increases in passenger volume are expected to come from
increased load factors, the acquisition of additional slots and the
concentrated use at O'Hare of currently operated larger aircraft. See "Slot
Allocation" and " Aircraft." During 1996, approximately 65 percent of Great
Lakes' passenger traffic was carried to or from Chicago. During 1996,
approximately 47 percent of the Great Lakes' traffic at Chicago O'Hare
connected with United, two percent connected with other airlines and 51
percent traveled exclusively on a Great Lakes flight ("on-line"). As of
December 31, 1996, Great Lakes had 48 weekday Chicago O'Hare departures
serving 31 destinations located in Iowa, Illinois, Indiana, Michigan,
Minnesota, South Dakota and Wisconsin.

In January 1997 the Company was awarded slot exemptions for the
specific purpose of providing 20 operations per day between Chicago O'Hare
Airport and Dubuque and Mason City, Iowa; Huron and Sioux Falls, South
Dakota; and Fargo, North Dakota. These slot exemptions may not be bought,
sold or traded without Department of Transportation ("DOT") approval. In
addition, these slot exemptions require the Company to provide minimum
amounts of Essential Air Service to certain small cities.

DENVER

The Company's primary strategy at Denver is to implement service in
markets where United and other major carriers have reduced service and to
feed that traffic to this United hub. The Company is currently in
negotiations with United with respect to the sharing of the expenses of
operating at the new Denver airport. Operating costs at the Denver airport
were $755,000 in 1994 and the Company recorded operating costs of $2.2
million in 1995 and $2.1 million in 1996. During 1996, approximately 25.7
percent of Great Lakes' passenger traffic was carried to or from Denver.
During 1996, approximately 55 percent of the Company's traffic at Denver
connected with United, one percent connected with other carriers and 44
percent was on-line. As of December 31, 1996, Great Lakes had 25 weekday
Denver departures serving 18 destinations located in Iowa, Minnesota,
Nebraska, North Dakota and South Dakota.

MINNEAPOLIS-ST. PAUL

As of December 31, 1996, Great Lakes had 21 weekday departures serving
19 destinations located in Colorado, Iowa, Michigan, Minnesota, North and
South Dakota, Nebraska and Wisconsin. During 1997, services in the
Minneapolis/St. Paul markets have been substantially reduced and the
remaining services are supported by the Essential Air Service Subsidy program.

MIDWAY CONNECTION MARKETS

During 1995, under an agreement with American Airlines, Midway began
serving certain routes at a hub formerly operated by American at Raleigh
Durham airport. This service was primarily to cities in the Northeast as
well as Florida and the Caribbean. At the end of 1996 Midway operated twelve
F100 and one A320 aircraft.

The Company's Midway Connection operation focuses primarily on providing
feed to and from Midway's service at Raleigh Durham to business markets in
the Northeast. In 1996 and 1995, 50% and 70%, respectively, of Midway
Connection's passengers connected with Midway.

In select markets the Company's passengers may also receive American
Airlines' AAdvantage frequent flyer program awards.

4
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GREAT LAKES AIRLINES

In Arizona, New Mexico, certain cities in the Midwest and Mexico the
Company operates under the name Great Lakes Airlines. At December 31,1996,
it served 13 destinations, two of which are also served as United Express.

ESSENTIAL AIR SERVICE PROGRAM

The Deregulation Act allowed airlines great freedom to introduce,
increase and generally reduce or eliminate service to existing markets. Under
the Essential Air Service Program, which is administered by the DOT, certain
communities that received scheduled air service prior to the passage of the
Deregulation Act are guaranteed specified levels of "essential air service."
The DOT may authorize federal subsidies to compensate a carrier providing
essential air service in otherwise unprofitable or minimally profitable
markets. Beginning in October 1997, the program is funded on an ongoing
basis from foreign air carrier overfly fees. If these subsidies are
eliminated the Company may discontinue service to some or all of the
subsidized communities.

At December 31, 1996, the Company served 18 essential air service
communities on a subsidized basis. The Company received $3.5 million, $2.6
million and $2.7 million in essential air service subsidies for the years
ended December 31, 1996, 1995 and 1994, respectively. An airline serving a
community that qualifies for essential air services is required to give the
DOT advance notice before it may terminate, suspend or reduce service.
Depending on the circumstances, the DOT may require the continuation of
existing service until a replacement carrier is found.

Consistent with current DOT service limits, aircraft departures in
subsidized service in 1997 are expected to be slightly below those in 1996.
However, through renegotiation of rates and modifications in service, the
Company expects to receive an increase of approximately $2.3 million from
providing such service. Further increases in subidy may result if DOT
authorizes increses of flight frequencies recognized for subsidy support at
EAS cities.

AIRCRAFT

GENERAL

At December 31, 1996, the Company operated a fleet of 42 Beechcraft 1900
aircraft and twelve Embraer Brasilia aircraft. The Beech aircraft are
pressurized, radar equipped and offer a 300-mile per hour cruising speed for
19 passengers, plus cargo, with a range of 850 miles. The Beechcraft 1900
aircraft is widely regarded by airlines as an efficient and reliable aircraft
for regional service. As of December 31, 1996, the Company owned 21 of its
Beechcraft 1900 aircraft and leased the remaining 21 under agreements with
remaining terms ranging from one month to 14 years.

The Embraer Brasilia aircraft are equipped with advanced avionics, have
stand-up cabins, restrooms, are staffed with a flight attendant for 30
passengers and offer a 360 mile per hour cruising speed with a range of 750
miles. As of December 31, 1996, the Company owned four of its Embraer
Brasilia aircraft and leased the remaining eight under agreements with
remaining terms ranging from 3 to 17 years.

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SUMMARY OF AIRCRAFT ADDITIONS AND DELETIONS

The table below shows the number and type of aircraft operated by the
Company on January 1, 1996 and December 31, 1996 and the number and type of
aircraft acquired or retired from the Company's fleet during the year ended
December 31, 1996.

<TABLE>
<CAPTION>
December 31, 1996
-----------------
January 1, 1996 Acquisitions Retirements December 31, 1996 Owned Leased
--------------- ------------ ----------- ----------------- ----- ------
<S> <C> <C> <C> <C> <C> <C>
Beechcraft 1900C 30 -- 6 24 15 9
1900D 8 10 -- 18 6 12

Embraer 120
New 5 -- -- 5 1 4
Used 7 -- -- 7 3 4
--- --- --- --- --- ---
Total 50 10 6 54 25 29
--- --- --- --- --- ---
--- --- --- --- --- ---
</TABLE>

The Company entered into an agreement in 1994 to acquire five new
Brasilia 30-passenger aircraft and options to acquire up to an additional 15
aircraft (the Embraer Agreement). Two of these aircraft were delivered in
December 1994, and three in 1995. In July 1996, the Embraer Agreement
was terminated.

During 1996 the Company sold eight Beechcraft 1900C aircraft to
Raytheon and leased them back under 12 year operating leases with an option
to return upon 30 day notice during the first two years. At the termination
of the lease, the Company will be required to comply with certain aircraft
refurbishment provisions. Gains and losses on these transactions are amortized
over the first two years of the lease agreement because this is the maximum
term for which the Company expects to retain the aircraft. If a lease is
terminated early the full amount of the remaining unamortized gain or loss is
recognized at that time. Five of the sale/leaseback aircraft were returned
to Raytheon. One of the sale/leaseback aircraft was destroyed in November 1996.
The Company intends to provide notice to terminate the lease on the remaining
two aircraft.

Since January 1, 1996, the Company took delivery of ten new Beechcraft
1900D aircraft. All of these aircraft have been financed by the manufacturer
under 14-1/2 year operating leases. In connection with the lease of these
new Beechcraft 1900D aircraft, the Company acquired the right to sell to
Raytheon certain Beechcraft 1900C aircraft at prices equal to the unamortized
balance of the amounts owed on the aircraft. In addition, the Company also
obtained the right to sell one Beechcraft 1900C pledged as collateral to
secure performance under a lease agreement wherein the Company operates two
of its Brasilia aircraft. Management intends to sell that Beechcraft 1900C
aircraft under this agreement and use substantially all of the proceeds of
this sale to purchase a certificate of deposit to continue to collateralize
this Brasilia lease. No significant amount of cash will be generated from
these transactions.

As of December 31, 1996, the average ages of the Company's owned and
leased aircraft were 5.3 and 3.9 years, respectively.

AIRCRAFT DEBT AND LEASES

As of March 31, 1997, the Company's aircraft lease agreements are
scheduled to expire in 1998 and thereafter.

The aircraft lease agreements contain provisions which the Company
believes are typical of leases for the type of aircraft involved. These terms
include the requirement that the Company pay all taxes, maintenance,
insurance and other operating expenses; general and tax indemnities from the
Company; condition-on-return provisions; and default provisions, including
cross-default provisions with other leases or agreements.

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<PAGE>

In 1996 the Company has suffered significant losses in 1996 and 1995 and
negative operating cash flow in 1996, has been unable to meet significant
current and long-term financial obligations, and has defaulted on certain
financial and operating agreements.

Raytheon Aircraft Company and its financing affiliates (collectively,
"Raytheon") is the Company's primary aircraft supplier and largest creditor.
The Company has financed all 42 of its Beechcraft 1900 aircraft and one of
its Brasilia aircraft under related lease and debt agreements with Raytheon,
and Raytheon has also extended the Company a $5 million loan secured by
accounts receivable (collectively, the "Raytheon Agreements"). The Raytheon
Agreements went into default in 1997 due to the Company's nonpayment of
scheduled amounts due. The Raytheon Agreements also contain cross-default
provisions which may be triggered if the Company's obligations to other
creditors are accelerated as a result of non-payment of those obligations.
The default provisions of the Raytheon Agreements give Raytheon the right to
accelerate certain amounts due under the Raytheon Agreements or repossess the
aircraft or other assets securing the Raytheon Agreements. The Company is
negotiating with Raytheon to defer, refinance, or restructure all balances
owed. While management believes that initial discussions have been
favorable, there can be no assurance that such negotiations will be
successful or that Raytheon will not exercise its rights under the default
provisions.

In addition, the Company has financed 11 of its Brasilia aircraft
through five lease and debt agreements with other unrelated entities
(collectively, the "Brasilia Agreements"). At December 31, 1996, one of the
Brasilia Agreements under which it operates 2 of these aircraft was in
default due to violation of a financial covenant. During 1997, all of the
other four Brasilia Agreements went into default due to non-payment of
scheduled amounts due. One of these Brasilia Agreements has been
subsequently modified to allow deferral of payment of the defaulted amounts.
Remedies available under the default provisions of the Brasilia Agreements
have not been exercised, but include possible repossession and resale of the
related aircraft, with the Company being responsible to pay any shortfall
between such sale proceeds and the balance of the underlying obligations.
The Company has received formal notice of default concerning non-payment of
obligations owed under two of the Brasilia Agreements under which the Company
leases a total of 4 Brasilia aircraft.

The Company has been in negotiations with its lessors and lenders for
deferral or other credit accommodations under the aforementioned lease and
debt agreements, and in conjunction with such negotiations is seeking
amendments of the agreements or waivers of the related defaults. There can
be no assurance that the lessors or lenders will agree to amend the
agreements or waive the defaults.

MAINTENANCE

The FAA mandates periodic inspection and maintenance of commercial
aircraft. The Company performs most maintenance and inspection of its
aircraft and engines (except engine overhaul) using its own personnel. Great
Lakes supports its fleet by utilizing eighteen decentralized maintenance
bases capable of performing these functions. These bases are located at
Williston, North Dakota; Fargo, North Dakota; Devils Lake, North Dakota;
Huron, South Dakota; Duluth, Minnesota; St. Paul, Minnesota; Grand Island,
Nebraska; Sioux City, Iowa; Spencer, Iowa; Chicago, Illinois; Springfield,
Illinois; Sault Ste. Marie, Michigan; Muskegon, Michigan; Marquette,
Michigan; Raleigh/Durham, North Carolina; Tucson, Arizona; Terre Haute,
Indiana and Denver, Colorado. The Company believes that performing its
maintenance at locations where its aircraft are stored overnight reduces
maintenance costs and promotes a higher level of operating efficiency.

Maintenance is performed at the locations where flights terminate at the
end of the day to minimize costly ferry flying and maximize the amount of
time aircraft may be accessed for maintenance procedures. Parts and supplies
inventories are also maintained at these locations to promote the mechanical
dispatch reliability of the fleet. The Company also maintains an inventory of
spare engines and propellers for its fleet to allow for minimal downtime
during major overhauls. The Company performs certain major maintenance
overhauls to its fleet which it believes most other regional airlines have
performed by outside contractors.

SLOT ALLOCATION

At Chicago O'Hare, scheduled flights during most times of day may be
conducted only if an airline has obtained a slot. Of the 54 slots allocated
to the Company by the FAA as of December 31, 1996, 27 may be used for
aircraft with up to 75 seats and the remainder may be used for aircraft with
up to 110 seats.

7
<PAGE>

Outstanding slots at FAA slot-controlled airports are currently freely
exchanged between airlines and other persons, bought or sold (often with
gates or other on-ground assets), or leased. Slot values depend on several
factors, including the airport, the time of day, the number and availability
of slots, and whether they are commuter or air carrier slots. Interests in
slots have also been used by airlines as collateral to secure debt financings
and other obligations. The DOT and FAA must be advised of all slot transfers
and must determine that each such transfer will not be injurious to the
Essential Air Service Program. The transfer of a slot obtained in an
FAA-administered lottery is limited for two years after its acquisition to
either transfers for other lottery slots at the same airport or sales or
leases to new entrants or incumbent slot holders with a small number of slots.

In addition to the foregoing, on during January 1997 the Company was
awarded slot exemptions for the specific purpose of providing 20 operations
per day between Chicago O'Hare Airport and Dubuque and Mason City, Iowa;
Huron and Sioux Falls, South Dakota; and Fargo, North Dakota. These slot
exemptions may not be bought, sold or traded without DOT approval.

The FAA's slot regulations require the use of each slot at least 80
percent of the time, measured on a bi-monthly basis. Failure to do so without
a waiver from the FAA (which is granted only in exceptional cases) subjects
the slot to recall by the FAA. In addition, the slot regulations provide that
slots do not represent a property right, but represent an operating privilege
subject to FAA control and that slots may be withdrawn by the FAA at any time
without compensation to meet the DOT's operational needs (such as providing
slots for international or essential air transportation or providing slots
for new entrant carriers).

Since the creation of the slot system in 1968, and subsequent to the
adoption of the FAA's slot allocation, use and transfer regulations in 1985,
there have been and are currently pending several proposals introduced in
Congress and discussions within the DOT and the FAA regarding slots. In
August 1993, the National Commission To Ensure A Strong Competitive Airline
Industry recommended that the "FAA review the rule that limits operations at
`high density' airports with the aim of either removing these artificial
limits or raising them to the highest level consistent with safety
requirements." In October 1993, Congress passed a bill requiring the FAA to
undertake a one-year review of whether slot restrictions can be eliminated or
substantially eased. In August 1995, Congress passed legislation granting the
FAA authority to create additional slots for essential air service,
international and certain domestic jet operations. Great Lakes has received
28 slots to date pursuant to the August 1995 legislation.

Effective October 29, 1995, pursuant to an option agreement, United
purchased ten of the Company's landing and takeoff slots at Chicago O'Hare
airport for $3.85 million. Concurrently, the Company has an agreement to
lease these slots from United until May 1997 at which time the Company
intends to extend the lease. These ten slots were the only slots owned by
the Company which were not encumbered by requirements to provide essential
air service to small communities. United has an option to purchase or lease
all or any portion of the remaining 54 slots, until expiration of the United
Express Agreement in April 1997. United may acquire the Company's remaining
54 slots for the lesser of their fair market value or $26.2 million.
United's acquisition of the Company's remaining 54 slots is subject to the
approval of the DOT and the assumption by United of essential air service
responsibility to certain communities. In the event United acquires any of
the Company's remaining 54 slots, the Company has the right to lease the
slots from United for a period of one year thereafter.

YIELD MANAGEMENT

The Company closely monitors its inventory and pricing of available
seats with a computerized yield management system. This system enables the
Company's revenue control analysts to examine the Company's past traffic and
pricing trends and to estimate the optimal allocation of seats by fare class
(the number of seats made available for sale at various fares). The analysts
then monitor each flight to adjust seat allocations and overbooking levels,
with the objective of maximizing the total revenue for each flight.

8
<PAGE>

MARKETING

For United Express, Midway Connection and Great Lakes Airlines
operations, the Company's services are marketed primarily by means of
listings in computerized reservation systems and the OFFICIAL AIRLINE GUIDE,
advertising and promotions, and through direct contact with travel agencies
and corporate travel departments. The Company's advertising and promotional
programs emphasize the Company's close affiliation with United, Midway and
other major carriers, including coordinated flight schedules and the right of
the Company's passengers to participate in United's "Mileage Plus" and
American Airlines' "AAdvantage" frequent flyer programs.

COMPETITION

The Company competes primarily with regional and major air carriers and
automobile transportation. The Company's competition from other air carriers
varies from location to location and, in certain areas, comes from regional
and major carriers who serve the same destinations as the Company but through
different hub and spoke systems. The domestic airline industry has undergone
major structural changes since the enactment of the Airline Deregulation Act
of 1978 (the "Deregulation Act"). Since that time, there has been
substantial consolidation and integration of both major and regional
carriers, including the acquisition or association of most regional carriers
by or with major carriers. Deregulation has made possible the rapid entry of
competitors into the Company's markets, and competitors are able to adjust
fares rapidly to improve their competitive position.

Almost all markets are subject to a high degree of price competition
both from established carriers and low fare jet carriers. The Company
believes, however, that its ability to compete in its market areas is
strengthened by its code sharing relationships with United and Midway.
United's substantial presence at Chicago O'Hare and Denver, enhances the
importance to Great Lakes of the United "UA" flight designator code in the
Upper Midwest. Beginning in mid-1996 and continuing into 1997, the Company's
scheduled operations at Minneapolis/St. Paul have been substantially reduced
and the resources redeployed to Chicago and Denver where United's dominant
position is expected to generate greater connecting traffic to the
Company's flights. The Company competes with other airlines by offering
frequent flights, flexible schedules and low fares. In addition, the
Company's competitive position benefits from the large number of participants
in United's "Mileage Plus" and American Airlines' "AAdvantage" frequent flyer
programs who fly regularly to or from the markets served by the Company. The
Company's code sharing agreement with United does not prohibit United from
competing with the Company. The code sharing agreements requires the Company
to obtain United's and Midway's written consent before commencing service on
routes other than certain pre-approved routes.

There can be no assurance that the Company will not experience increased
competition from existing competitors or from new entrants on one or more of
the Company's routes.

FUEL

The Company has not experienced difficulty with fuel availability and
expects to be able to obtain fuel at prevailing prices in quantities
sufficient to meet its future requirements. The Company contracts directly
with refiners for the purchase of its fuel. Standard industry contracts
generally do not provide protection against fuel price increases and do not
ensure availability of supply. The Company has generally been able to pass on
increases in fuel costs in the form of fare increases.

9
<PAGE>

EMPLOYEES

On December 31, 1996, the Company had 1198 full-time and 216 part-time
employees as follows:

CLASSIFICATION:
Pilots . . . . . . . . . . . . . . . . . . . . . . . . . . 354
Station personnel . . . . . . . . . . . . . . . . . . . . 673
Maintenance personnel. . . . . . . . . . . . . . . . . . . 182
Administrative and clerical personnel. . . . . . . . . . . 127
Flight attendants. . . . . . . . . . . . . . . . . . . . . 58
Management . . . . . . . . . . . . . . . . . . . . . . . . 20
-----
Total employees 1,414
-----
-----

On March 4, 1996 the International Brotherhood of Teamsters was
certified to represent the pilots and have informed the Company of their
intent to renegotiate the contract which became amendable on April 30, 1996.
The Company and union jointly made application to the National Mediation
Board for mediation services. Negotiations are on-going. During 1996 the
flight attendants voted to be represented by the Teamsters Union.

The Company's mechanics are represented by the International Association
of Machinists ("IAM"), a national labor organization. On February 1, 1994,
the Company entered into its initial agreement with the IAM which provided
for wage increases and benefit improvements. This agreement becomes
amendable on November 1, 1997.

The Company believes that relations with its employees are satisfactory.

CHARTER AND FREIGHT SERVICE

Great Lakes uses available aircraft and from time to time leases four
and six passenger aircraft from an affiliated company to provide charter
services to private individuals, corporations and groups such as collegiate
athletic teams. Great Lakes also carries freight, mail and small packages on
most of its scheduled flights. Revenues from its charter flights and freight
deliveries were 1.6 percent, 1.5 percent and 1.2 percent of the Company's
total revenues for the years ended December 31, 1996, 1995 and 1994,
respectively.

REGULATION

In accordance with the provisions of the Federal Aviation Act of 1958,
as amended (the "1958 Act"), Great Lakes is an air carrier subject to
regulation by the DOT, primarily with respect to economic matters, and is
also subject to regulation by the FAA with respect to certain safety related
matters.

The Deregulation Act eliminated many regulatory constraints so that
airlines became free to set fares and, with limited exceptions, to establish
domestic routes without the necessity of seeking government approval. The DOT
is still authorized to establish consumer protection regulations; to prohibit
certain pricing practices; to mandate conditions of carriage; and to make
ongoing determinations of a carrier's fitness, willingness and ability to
properly and lawfully provide air transportation. The DOT also has the power
to bring proceedings for the enforcement of its regulations under the 1958
Act, including the assessment of civil penalties and the revocation of
operating authority, and to seek criminal sanctions.

The Company holds a commuter air carrier operating certificate issued by
the FAA pursuant to Part 135 of its regulations. The Company, as a commuter
air carrier, is licensed under Part 298 of the Economic Regulations of the
DOT.

10
<PAGE>

The Company is subject to the jurisdiction of the FAA with respect to
its aircraft maintenance and operations, including equipment, ground
facilities, dispatch, communications, training, weather observation, flight
personnel and other matters affecting air safety. To ensure compliance with
its regulations, the FAA requires airlines to obtain an operating certificate
and operations specifications for the particular aircraft and types of
operations conducted by the carrier, all of which are subject to suspension
or revocation for cause.

The Company is subject to the jurisdiction of the Federal Communications
Commission regarding the use of its radio facilities. Local governments and
authorities in certain markets have adopted regulations governing various
aspects of aircraft operations, including noise abatement and curfews and use
of airport facilities. The Company believes that it is in compliance with all
such regulations.

The use of landing and take-off slots at Chicago O'Hare is heavily
regulated by the FAA. The FAA has the authority to revoke a carrier's slots
for failure to comply with FAA regulations.

EXECUTIVE OFFICERS OF THE COMPANY

Set forth below are the names, ages and positions of the executive
officers of the Company.

Great Lakes
- -----------

Name Age Title
---- --- -----
Douglas G. Voss . . . . . . . 42 Chief Executive Officer, President
and Chairman of the Board of Directors
A. L. Maxson . . . . . . . . 61 Executive Vice President Finance,
Chief Financial Officer and Director
Richard H. Fontaine . . . . . 56 Senior Vice President Marketing
Roberta L. Dircks . . . . . . 52 Vice President, Controller and
Chief Accounting Officer

Background of Executive Officers
--------------------------------

DOUGLAS G. VOSS. Mr. Voss co-founded Great Lakes in 1979 and has served
in the positions of Chief Executive Officer and director since the Company's
inception. Mr. Voss became a pilot in 1974 and holds both an Airline
Transport Pilot Certificate and an Airframe and Powerplant Mechanic
Certificate. Mr. Voss is a graduate of Colorado Aero Tech. In 1977 and 1978,
Mr. Voss was employed as a mechanic for a subsidiary of Beechcraft. He has
served Great Lakes in a number of operational positions, including Director
of Maintenance and Director of Operations.

A. L. MAXSON. Mr. Maxson became the Company's Chief Financial Officer
and a director in December 1993 after serving the Company in a consulting
capacity for several months. Mr. Maxson began his career in the aviation
industry in 1966 when he joined Southern Airways, Inc. as its Controller and
was made Chief Financial Officer shortly thereafter. Southern Airways, Inc.
was ultimately merged with North Central Airlines Inc. to create Republic
Airlines Inc., where Mr. Maxson also served as Chief Financial Officer. Mr.
Maxson became Vice President Financial Planning for Northwest Airlines, Inc.
upon that company's acquisition of Republic Airlines, Inc. in 1986. Mr.
Maxson remained with Northwest Airlines, Inc. until 1991, and was
self-employed as a financial consultant during the period from 1991 to
December of 1993. Mr. Maxson is a Director of Aero Systems Engineering, Inc.

RICHARD H. FONTAINE. Mr. Fontaine rejoined Great Lakes in his present
position on September 25, 1995. He previously had held the positions at
Great Lakes of President and Chief Operating Officer from 1991 to 1993 and
Executive Vice President and Chief Operating Officer from 1988 to 1991. In
the interim he was employed by GP Express Airlines ("GP Express") as
Executive Vice President and President. Previously he had been at Alliance
Airlines as Executive Vice President from 1986 to 1988, Simmons Airlines as
Senior Vice President of Planning in 1985 and 1986, Mississippi Valley
Airlines as Vice President from 1982 to 1985 and United Airlines in various
positions from 1967 to 1982.

11
<PAGE>

ROBERTA L. DIRCKS. Ms. Dircks joined Great Lakes in her present
position in August 1994. She was Vice President and Controller at Gage
Marketing Group from August 1992 to August 1994 at which time she joined
Great Lakes. Ms. Dircks was Vice President, Chief Financial Officer and
Secretary for Vital Heart Systems from December 1991 to August 1992. She
served as Deputy State Auditor for the State of Minnesota from April 1991 to
December 1991. Ms. Dircks held several positions with Northwest Airlines and
Republic Airlines from 1985 to 1991; most recently, she served as Staff Vice
President with responsibility for the cost analysis and control department of
Northwest Airlines. She is a Certified Public Accountant.

The officers of the Company are elected annually and serve at the
discretion of the Board of Directors.

INSURANCE

The Company carries the types and amounts of insurance required by the
DOT and customary in the regional airline industry, including coverage for
public liability, property damage, aircraft loss or damage, baggage and cargo
liability and workers' compensation. The United Express Agreements and the
Midway Connection Agreement require the Company to maintain certain specified
levels of insurance coverage. The Company believes that the insurance is
adequate as to amounts and risks covered. There can be no assurance, however,
that the limits of the Company's insurance will be sufficient to cover any
catastrophic loss.

ITEM 2. PROPERTIES

The Company leases gate and ramp facilities at 66 airports and leases
ticket counter space at the 64 locations where ticketing is handled by
Company personnel. Payments to airport authorities for ground facilities are
based on a number of factors, including the amount of space used and flight
volume. The Company also leases aircraft maintenance and hangar space at 18
of the locations it serves.

The Company leases approximately 15,000 square feet of space in Spencer,
Iowa for its administrative, flight operations and maintenance offices, in
addition to approximately 35,000 square feet of aircraft maintenance and
hangar space located adjacent thereto. As of April 1, 1997 the Company leased
an additional 32,000 square feet of space in Spencer for administration and
maintenance shops. For the Midway Connection operation, the Company leases
approximately 23,000 square feet of space in Raleigh, North Carolina for its
administrative, flight operations, maintenance offices, and aircraft
maintenance and hanger space. In addition, the Company leases approximately
8,400 square feet of office space in Bloomington, Minnesota for accounting
and administrative functions. The Company believes that it has adequate
facilities for the conduct of its current and planned operations.

ITEM 3. LEGAL PROCEEDINGS

The Company is a defendant in a lawsuit arising from the collision of a
small aircraft with one of the Company's Beechcraft 1900 aircraft in Quincy,
Illinois on November 19, 1996. The collision occurred at the intersection of
two runways as the Company's aircraft was landing, and resulted in the death
of all ten passengers and the two crew members. The Company's insurance
carrier is providing for the Company's defense in the lawsuit and the Company
believes that all claims arising from the accident will be adequately covered
by insurance.

The Company is not currently a party to any other material pending legal
proceedings. From time to time the Company may become involved in routine
litigation incidental to its business.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS DURING FOURTH
QUARTER OF FISCAL YEAR

There were no matters submitted to a vote of the Company's shareholders
during the three-month period ended December 31, 1996.

12
<PAGE>

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS

The Company's Common Stock is traded under the symbol "GLUX" on the
NASDAQ National Market System. The Company's Common Stock began trading on
January 19, 1994, the date of its initial public offering. The initial
public offering price of the Company's Common Stock was $11.00 per share.

The following table sets forth the range of high and low sale prices for
the Company's Common Stock and the dividends per share for each of the fiscal
quarters since the Company's Common Stock began trading. Quotations for such
periods are as reported by NASDAQ for National Market System issues.

Stock Quotations
- ----------------

1996
High Low
----- -----
First quarter $4.20 $3.50
Second quarter 6.75 3.50
Third quarter 5.38 2.75
Fourth quarter 4.13 1.63

1995
High Low
----- -----
First quarter $5.38 $3.00
Second quarter 6.50 3.75
Third quarter 7.38 5.38
Fourth quarter 6.00 3.00

As of March 31, 1997, the Company had approximately 1,800 holders of
record of its Common Stock.

The transfer agent for the Company's Common Stock is Norwest Bank
Minnesota, N.A., 161 North Concord Exchange, South St. Paul, Minnesota,
55075-0738, telephone: (612) 450-4064.

The Company has not paid any dividends on its Common Stock since its
initial public offering in January 1994 and expects that for the foreseeable
future it will follow a policy of retaining earnings in order to finance the
continued development of its business. Payment of dividends is within the
discretion of the Company's Board of Directors and will depend upon the
earnings, capital requirements and operating and financial condition of the
Company, among other factors.

13
<PAGE>

ITEM 6. SELECTED FINANCIAL AND OPERATING DATA
(In thousands, except per share and selected operating data)

The following consolidated statement of earnings and consolidated
balance sheet data as of and for each of the years in the five-year period
ended December 31, 1996 are derived from the Company's consolidated financial
statements. The financial statements for the years ended December 31, 1996,
1995, 1994, 1993 and 1992 have been audited by Arthur Andersen LLP,
independent public accountants. The consolidated financial statements as of
December 31, 1996 and 1995 and for each of the years in the three-year
period ended December 31, 1996 and the report thereon are included elsewhere
in this Form 10-K. The following selected financial data should be read in
conjunction with and are qualified in their entirety by the consolidated
Financial Statements and the notes thereto included elsewhere in this Form
10-K.

<TABLE>
<CAPTION>
Year Ended December 31
----------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
STATEMENTS OF EARNINGS DATA:
Passenger and public service revenues $107,528 $ 81,215 $67,784 $58,000 $39,501
Other revenues 2,142 2,981 2,224 2,370 2,722
-------- -------- ------- ------- -------
Total operating revenues 109,670 84,196 70,008 60,370 42,223
-------- -------- ------- ------- -------
Operating expenses:
Salaries, wages and benefits 27,801 21,407 16,157 11,958 8,863
Aircraft fuel 19,377 14,181 12,123 9,879 7,094
Aircraft maintenance materials and repairs 13,248 9,229 8,612 6,631 3,600
Commissions 7,704 6,211 5,340 4,412 3,147
Depreciation and amortization 5,634 6,029 4,852 3,562 3,022
Aircraft rental 11,643 5,213 1,151 458 122
Other rentals and landing fees 6,794 5,370 3,416 2,861 2,015
Other operating expense 25,871 17,315 13,157 10,921 7,008
-------- -------- ------- ------- -------
Total operating expenses 118,072 84,955 64,808 50,682 34,871
-------- -------- ------- ------- -------
Operating income (loss) (8,402) (759) 5,200 9,688 7,352
Interest expense, net (5,875) (7,282) (5,370) (6,266) (6,549)
Gain on sale of slots -- 3,850 -- -- --
-------- -------- ------- ------- -------
Income (loss) before income tax expense (14,277) (4,191) (170) 3,422 803
Provision (benefit) for income taxes (1,454) (1,503) ( 65) 1,300 305
-------- -------- ------- ------- -------
Net income (loss) before extraordinary item (12,823) (2,688) (105) 2,122 498
Extraordinary item:
Gain on extinguishment of debt,
net of income taxes of $312,000 -- -- 509 -- --
-------- -------- ------- ------- -------
Net income (loss) $(12,823) $ (2,688) $ 404 $ 2,122 $ 498
-------- -------- ------- ------- -------
-------- -------- ------- ------- -------
Net income (loss) per share $ (1.69) $ (0.35) $ 0.05 $ 0.45 $ 0.11
-------- -------- ------- ------- -------
-------- -------- ------- ------- -------
Average number of common shares outstanding 7,585 7,579 7,365 4,700 4,700
</TABLE>

14
<PAGE>

<TABLE>
<CAPTION>
Year Ended December 31
----------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
SELECTED OPERATING DATA:
Available seat miles (000s)(1) 678,304 566,290 477,602 369,545 260,557
Revenue passengers carried 1,012,965 805,190 663,627 611,528 395,341
Revenue passenger miles (000s)(2) 299,607 248,625 213,034 181,580 118,876
Departures flown 165,972 147,748 133,493 106,423 80,858
Passenger load factor (3) 44.2% 43.9% 44.6% 49.1% 45.6%
Break-even passenger load factor (4) 51.5% 49.5% 44.7% 41.5% 38.4%
Average yield per revenue passenger mile (5) 34.7CENTS 31.6CENTS 30.5CENTS 30.9CENTS 33.2CENTS
Operating cost per available seat mile (6) 17.4CENTS 15.0CENTS 13.6CENTS 13.7CENTS 13.3CENTS
Average passenger fare (7) $ 102.69 $ 97.58 $ 97.99 $ 91.87 $ 95.83
Average passenger trip length (miles) (8) 296 309 321 297 301
Aircraft in service (end of period) 54 50 41 34 27
Destinations served (end of period) 86 73 55 47 42

BALANCE SHEET DATA:
Working capital (deficit) $ 603 $ 12,138 $ 10,615 $ (629) $ (392)
Total assets 119,109 140,715 141,934 103,316 80,367
Long-term debt, net of current maturities 65,986 87,478 89,393 83,896 68,000
Stockholders' equity 18,740 31,540 34,202 4,962 2,841
</TABLE>

(1) "Available seat miles" or "ASMs" represent the number of seats available
for passengers in scheduled flights multiplied by the number of scheduled
miles those seats are flown.
(2) "Revenue passenger miles" or "RPMs" represent the number of miles flown by
revenue passengers.
(3) "Passenger load factor" represents the percentage of seats filled by
revenue passengers and is calculated by dividing revenue passenger miles by
available seat miles.
(4) "Break-even passenger load factor" represents the percentage of available
seat miles which must be flown by revenue passengers at the average yield
(net of commissions and fees) for airline operations to break even.
(5) "Average yield per revenue passenger mile" represents the average
passenger revenue received for each mile a revenue passenger is carried.
(6) "Operating cost per available seat mile" represents operating expenses
divided by available seat miles.
(7) "Average passenger fare" represents passenger revenue divided by the
number of revenue passengers carried.
(8) "Average passenger trip length" represents revenue passenger miles divided
by the number of revenue passengers carried.

15
<PAGE>

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

OVERVIEW

This discussion and analysis contains certain forward-looking
terminology such as "believes," "anticipates," "will," and "intends," or
comparable terminology. Such statements are subject to certain risks and
uncertainties that could cause actual results to differ materially from those
projected. Potential purchasers of the Company's securities are cautioned not
to place undue reliance on such forward-looking statements which are
qualified in their entirety by the cautions and risks described herein and in
other reports filed by the Company with the Securities and Exchange
Commission.

The Company began providing air charter service in 1979, and has
provided scheduled passenger service in the Upper Midwest since 1981, along
the East Coast since October 1995, and in the Southwest and Mexico since
August 1995. In April 1992, the Company began operating as a United Express
carrier under a cooperative marketing agreement with United. In October
1995, the Company began operating as a Midway Connection carrier under a
cooperative marketing agreement with Midway. As of December 31, 1996, the
Company served 86 destinations in twenty states with 527 scheduled departures
each weekday.

The Company has suffered significant losses in 1996 and 1995 and negative
operating cash flow in 1996, has been unable to meet significant current and
long-term financial obligations, and has defaulted on certain financial and
operating agreements. These matters raise substantial doubt about its ability
to continue as a going concern. The Company's ability to continue as a going
concern depends upon successfully negotiating deferrals or a restructuring of
its financial obligations, negotiating extended or improved terms under its
major operating agreements, and ultimately, returning to sustained
profitability. See "Liquidity and Capital Resources".

In prior reports the Company has noted that it incurred an economic loss
of approximately $1.9 million during the period of August 1995 to February
1996 as a result of extraordinary FAA mandated inspections of Brasilia
propeller blades. The Company has resolved its claims related to these
losses at a substantially lesser amount.

RESULTS OF OPERATIONS

COMPARISON OF 1996 TO 1995

The following table sets forth certain financial and operating
information regarding the Company for the last three fiscal years:

16
<PAGE>
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------
For the years ended December 31 (000's)
------------------------------------------------------------------------------------
1996 1995 1994
------------------------------------------------------------------------------------
Cents % % Cents
per Increase Cents Increase per
Amount ASM from 1995 Amount per ASM from 1994 Amount ASM
-------- --------- ---- ------- --------- ---- ------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total operating revenues $109,670 - 30.3% $84,196 - 20.3% $70,008 -
-------- --------- ---- ------- --------- ---- ------- ----------
Salaries, wages and benefits 27,801 4.1 CENTS 29.9 21,407 3.8 CENTS 32.5 16,157 3.4 CENTS
Aircraft fuel 19,377 2.9 36.7 14,181 2.5 17.0 12,123 2.5
Aircraft maintenance
materials and repairs 13,248 2.0 43.6 9,229 1.6 7.2 8,612 1.8
Commissions 7,704 1.1 24.0 6,211 1.1 16.3 5,340 1.1
Depreciation and
amortization 5,634 0.8 (6.6) 6,029 1.1 24.3 4,852 1.0
Aircraft rental 11,643 1.7 123.3 5,213 0.9 352.8 1,151 0.3
Other rentals and landing fees 6,794 1.0 26.5 5,370 0.9 57.2 3,416 0.7
Other operating expense 25,871 3.8 49.4 17,315 3.1 31.6 13,157 2.8
-------- --------- ---- ------- --------- ---- ------- ----------
Total operating expenses $118,072 17.4 39.% $84,954 15.0 CENTS 31.1% $64,808 13.6 CENTS
-------- --------- ---- ------- --------- ---- ------- ----------
Operating income (loss) $ (8,402) - (1008.4)% $ (758) - (114.6)% $ 5,200 -
-------- --------- ---- ------- --------- ---- ------- ----------
-------- --------- ---- ------- --------- ---- ------- ----------
Interest $ 5,875 0.9 CENTS (19.3)% $ 7,282 1.3 CENTS 35.6% $ 5,370 1.1 CENTS
-------- --------- ---- ------- --------- ---- ------- ----------
-------- --------- ---- ------- --------- ---- ------- ----------
Aircraft Expense
Depreciation and
Amortization $ 5,634 0.8CENTS (6.6)% $ 6,029 1.1 CENTS 24.3% $ 4,852 1.0 CENTS
Aircraft Rental 11,643 1.7 123.3 5,213 0.9 352.8 1,151 0.3
Interest expense, net 5,875 0.9 (19.3) 7,282 1.3 35.6 5,370 1.1
-------- --------- ---- ------- --------- ---- ------- ----------
$ 23,152 3.4CENTS 25.0% $18,524 3.3 CENTS 62.9% $11,373 2.4 CENTS
-------- --------- ---- ------- --------- ---- ------- ----------
-------- --------- ---- ------- --------- ---- ------- ----------
</TABLE>
<TABLE>
<CAPTION>
Change Change
1996 from 1995 1995 from 1994 1994
-----------------------------------------------------
<S> <C> <C> <C> <C> <C>
Available seat miles (000's) 678,304 19.8% 566,290 18.6% 477,602
Revenue passenger miles (000's) 299,607 20.5% 248,625 16.7% 213,034
Passenger load factor 44.2% 0.3 pts 43.9% (0.7) pts 44.6%
Average yield per revenue
passenger mile 34.7 CENTS 3.1 CENTS 31.6 CENTS 1.1 CENTS 30.5 CENTS
</TABLE>

OPERATING REVENUES: Operating revenues increased 30.3% to $109.6
million in 1996 from $84.2 million during 1995. The increase in operating
revenues resulted from the increase in revenue passenger miles flown by 20.5%
to 299.6 million in 1996 from 248.6 million during 1995 and an increase of
9.8% in yield per revenue passenger mile which increased from 31.6 cents in
1995 to 34.7 cents in 1996. This coincided with a 19.8% increase in capacity
to 678.3 million ASMs in 1996 from 566.3 million ASMs during 1995. The
addition of Midway Connection and Arizona service for the entire year
accounted for 54.6% and 26.8%, respectively, of the increase in operating
revenues. The increase in passenger yield is due primarily to the expiration
of the 10% transportation tax without a corresponding reduction in ticket
prices and increases in certain fares. Midway Connection's full year
operation increased the overall average as a result of its higher yield
produced from its passengers with shorter trips.

OPERATING EXPENSES: Total operating expenses increased to $118.1
million, or 17.4 cents per ASM, in 1996 from 85.0 million, or 15.0 cents per
ASM in 1995. In part, the increase in cost per ASM is due to decreased
utilization of the Embraer 120 aircraft because of two airworthiness
directives requiring frequent propeller inspections and lack of

17
<PAGE>

replacement propeller blades during the first quarter of 1996. The increase
of total operating expenses reflect the costs associated with expansion of
the Company's aircraft fleet and increased level of operations, except as
detailed below.

Salaries, wages, and benefits expense increased to 4.1 cents per ASM
during 1996, from 3.8 cents per ASM during 1995, due to additional flight
attendant wages and additional pilot guarantees and training costs incurred
related to expansion of operations utilizing Brasilia aircraft, and FAA
Regulations Part 121 training. Customer service salaries increased to
facilitate the Company's expansion into new markets. In addition, mechanic
wages increased because of the previously discussed Brasilia propeller
inspections and replacement and increases in the number of mechanics to
build staff to required levels.

Aircraft fuel expense per ASM increased to 2.9 cents in 1996 from 2.5
cents in 1995 due to increased fuel prices from suppliers and the
reinstatement of the 4.3 cents per gallon federal excise tax on jet fuel in
August 1996.

Aircraft maintenance and repairs expense increased to 2.0 cents per ASM
during 1996, from 1.6 cents per ASM in 1995, due to higher engine overhaul
expense and increased repairs and contract labor for the initial on-going
periodic maintenance checks on the Brasilia.

Aircraft expense increased to 3.4 cents per ASM during 1996, from 3.3
cents per ASM in 1995 due to reduced utilization because of the previously
discussed Brasilia propeller inspections and replacement, and due to one
Brasilia not being flown in the first quarter because of other mechanical
problems. The change in mix of aircraft expense towards increased aircraft
rental expense from depreciation and interest expense is due to a policy
decision to lease the majority of aircraft acquisitions in order to gain
advantage of lower capital costs. Further, concurrent with acquisitions of
new Beech aircraft, older aircraft were being returned to Raytheon and
reacquired under reduced leases offering more flexible terms for early
termination. Interest expense also decreased in 1996 from 1995, as a result
of the decrease in the prime interest rate to which a substantial portion of
debt is tied.

Other rentals and landing fee expenses increased to 1.0 cents per ASM
during 1996, from 0.9 cents per ASM in 1995, as a result of higher facility
and landing fee costs at the new Denver International Airport, along with
increased administrative facility costs necessary for the Company's expansion
into new markets.

Other operating expenses increased to 3.8 cents per ASM in 1996 from 3.1
cents in 1995, reflecting higher passenger booking fees due to increases in
rates and increased bookings for the Midway Connection and higher credit card
expenses for the Midway Connection and Great Lakes Airlines operations.
These expenses were also increased due to flight cancellations resulting from
severe weather conditions in upper Midwest and to unanticipated turnover in
flight personnel due to major carrier hiring. During the fourth quarter of
1996, the Company accelerated its program to replace its Beechcraft 1900C
aircraft with 1900D aircraft. As a consequence, the Company believes it has
excess Beechcraft 1900C inventory and has made an adjustment for $1.5 million
dollars to reduce the inventory to estimated net realizable value. These
increases were partially offset by lower United program fees due to increased
flying under the Company's own code and insurance proceeds from the November
accident.

PROVISION (BENEFIT) FOR INCOME TAXES: The Company's effective rate was
10.2 percent in 1996 and 35.9 percent in 1995. In recognition of the
Company's financial results of recent periods the Company has elected to
cease recognizing future tax benefits until it is reasonably assured that
such benefits would be realized.

COMPARISON OF 1995 TO 1994

OPERATING REVENUES: Operating revenues increased 20.3% to $84.2 million
in 1995 from $70.0 million during 1994. The increase in operating revenues
resulted from the increase in revenue passenger miles flown by 16.7% to 248.6
million in 1995 from 213.0 million during 1994 in conjunction with a 18.6%
increase in capacity to 566.3 million ASMs in 1995 from 477.6 million ASMs
during 1994. The increase in passenger yield is due to moving service from
lower yield markets to higher yield markets and due to a slight increase in
prices in the general market and in some specific company markets. The
decline in load factor is due primarily to increased competition in existing
markets at a time when the Company was adding capacity to expand service to
new and existing routes for the United Express systems, mainly in the first
two quarters of 1995. See "Business-Competition." In addition, the
reduction in load factor is due to the introduction of Midway Connection
flying where the Company experienced a 23.7% load

<PAGE>

factor from October through December 1995. The average load factor in the
first quarter of 1996 for Midway Connection was 37.2%.

OPERATING EXPENSES: Total operating expenses increased to $85.0 million,
or 15.0 cents per ASM, in 1995 from 64.8 million, or 13.6 cents per ASM in
1994. In part, the increase in cost per ASM is due to decreased utilization
of the Embraer 120 aircraft because of two airworthiness directives requiring
frequent propeller inspections and lack of replacement propeller blades. The
increase of total operating expenses reflect the costs associated with
expansion of the Company's aircraft fleet and increased level of operations,
except as detailed below.

Salaries, wages, and benefits expense increased to 3.8 cents per ASM
during 1995, from 3.4 cents per ASM during 1994, due to additional flight
attendant wages and additional pilot guarantees and training costs incurred
related to expansion of operations utilizing Brasilia aircraft, and customer
service salaries to facilitate the Company's expansion into new markets.

Aircraft maintenance, materials and repairs expense decreased to 1.6
cents per ASM during 1995, from 1.8 cents per ASM, in 1994, due to a lower
rate of engine overhauls in 1995. At December 31, 1995, the average age of
the aircraft in the Company's fleet was four years.

Depreciation and amortization increased to 1.1 cents per ASM in 1995 from
1.0 cents per ASM in 1994, while aircraft rental expense increased to 0.9
cents per ASM during 1995, from 0.3 cents per ASM in 1994, due to the
increasing number of aircraft leased, along with the conversion of five
capital leases to operating leases in June 1995.

Other rentals and landing fee expenses increased to 0.9 cents per ASM
during 1995, from 0.7 cents per ASM in 1994, as a result of higher facility
and landing fee costs at the new Denver International Airport, along with
increased administrative facility costs necessary for the Company's expansion
into new markets.

Other operating expenses increased to 3.1 cents per ASM in 1995 from 2.8
cents in 1994, reflecting higher passenger booking and United program fee
rates and increased hull insurance costs, as a result of fleet additions,
along with additional hotels and transportation for repositioning of pilots
and training costs associated with the increase in the number of aircraft.
There were also increased passenger food and supply costs associated with
increased Embraer 120 flights.

INTEREST EXPENSE: Interest expense increased to 1.3 cents per ASM, in
1995 from 1.1 cents per ASM, during 1994, due to increased debt associated
with additional aircraft purchased which was partially offset by a reduction
in capitalized leases, as well as the increase in the prime interest rate to
which a substantial portion of debt is tied. All long-term debt outstanding
at December 31, 1995 was with Raytheon Acceptance Corporation, Inc. and CIT
Group/Equipment Financing, Inc., at interest rates ranging from 6.6 percent
to 9.75 percent.

PROVISION (BENEFIT) FOR INCOME TAXES: The Company's effective rate
was 35.9 percent in 1995 and 38.0 percent in 1994.

LIQUIDITY AND CAPITAL RESOURCES

The major uses of working capital in 1996 were the net loss of $12.8
million and increase of inventory of $2.1 million offset by non cash charges
for depreciation of $5.6 million and the increase of accounts payable and
accrued liabilities of $5.4 million, the latter primarily from extending the
period of time before invoices were paid. Inventory increased by $2.1
million due to increased levels of Embraer 120 and Beechcraft 1900D parts.
The increase in inventory was offset by an increase of $1.5 million in a
valuation allowance to reduce the inventory to net realizable value.

Further mitigating the above uses of cash flows in operating activities
was the reduction in accounts receivable resulting from the advance
collection of $2.2 million owed by United. The Company's working capital
decreased to $.6 million at December 31, 1996 from $12.1 million at December 31,
1995. Cash decreased $.1 million to $6.7 million at December 31, 1996
from $6.8 million at December 31, 1995.

agreements. These matters raise substantial doubt about its ability to
continue as a going concern. The Company's ability to continue as a going
concern depends upon successfully negotiating deferrals or a restructuring
of its financial obligations, negotiating extended or improved terms under
its major operating agreements, and ultimately, returning to sustained
profitability.

Raytheon Aircraft Company and its financing affiliates (collectively,
"Raytheon") is the Company's primary aircraft supplier and largest creditor.
The Company has financed all 42 of its Beechcraft 1900 aircraft and one of
its Brasilia aircraft under related lease and debt agreements with Raytheon,
and Raytheon has also extended the Company a $5 million loan secured by
accounts receivable (collectively, the "Raytheon Agreements"). The $5 million
loan bears interest at 8.25%. Interest on this loan is payable monthly and
all advanced principle is to be repaid by March 31, 1997. The Raytheon
Agreements went into default in 1997 due to the Company's non-payment of
scheduled amounts due. The Raytheon Agreements also contain cross-default
provisions which may be triggered if the Company's obligations to other
creditors are accelerated as a result of non-payment of those obligations.
The default provisions of the Raytheon Agreements give Raytheon the right to
accelerate certain amounts due under the Raytheon Agreements or repossess the
aircraft or other assets securing the Raytheon Agreements. The Company is
negotiating with Raytheon to defer, refinance, or restructure all balances
owed. While management believes that initial discussions have been favorable,
there can be no assurance that such negotiations will be successful or that
Raytheon will not exercise its rights under the default provisions.

In addition, the Company has financed 11 of its Brasilia aircraft through
five lease and debt agreements with other unrelated entities (collectively, the
"Brasilia Agreements"). At December 31, 1996, one of the Brasilia Agreements
under which it operates 2 of these aircraft was in default due to violation
of a financial covenant. During 1997, all of the other four Brasilia
Agreements went into default due to non-payment of scheduled amounts due.
One of these Brasilia Agreements has been subsequently modified to allow
deferral of payment of the defaulted amounts. Remedies available under the
default provisions of the Brasilia Agreements have not been exercised, but
include possible repossession and resale of the related aircraft, with the
Company being responsible to pay any shortfall between such sale proceeds and
the balance of the underlying obligations. The Company has received formal
notice of default concerning non-payment of obligations owed under two of the
Brasilia Agreements under which the Company leases a total of 4 Brasilia
aircraft.

The Company has been continuing to extend and increase the past due
amounts owed to its trade vendors. There can be no assurance that the
Company's trade vendors will continue to supply the Company with goods and
services on terms acceptable to the Company or that they will agree to any
credit accommodations on past due amounts owed.

On October 26, 1996 the Company entered into an agreement with a vendor
in which $1,767,231 of outstanding invoices were converted into a short-term
promissory note bearing interest at prime plus 1%.

Capital expenditures related to aircraft and equipment totaled $2.6
million in 1996, $18.2 million during 1995, and $33.4 million in 1994.
Payment of debt exceeded borrowings by $14.2 million in 1996. Long-term
borrowings exceeded principal repayments by $10.2 million in 1995, and
$7.0 million in 1994.

Long-term debt, net of current maturities of $5.1 million, totaled $66.0
million at December 31, 1996 compared to $87.5 million net of current
maturities of $4.8 million, at December 31, 1995, and $89.4 million, net of
current maturities of $5.4 million, at December 31, 1994. As of December 31,
1996, the term notes bear interest at rates ranging from 6.6 to 9.0 percent
and are payable monthly or quarterly through June, 2009. All long-term debt
as of

20
<PAGE>

December 31, 1996, relates to the acquisition of aircraft and funding of
operating losses and all financing was provided either by Raytheon or CIT
Group/Equipment Financing, Inc. and is collateralized by 24 related aircraft.
There are no financial covenants related to such long-term debt.

During 1996, the Company has taken delivery of ten new Beechcraft 1900D
aircraft. All of these aircraft have been financed by the manufacturer under
14-1/2 year operating leases.

The Company entered into an agreement in 1994 to acquire five new
Brasilia 30-passenger aircraft and options to acquire up to an additional 15
aircraft (the Embraer Agreement ). Two of these aircraft were delivered in
December 1994, and three in 1995. As a part of the Embraer Agreement, the
Company was granted incentives, the benefit of which is amortized over the
lease term. In July 1996, the Embraer Agreement was terminated.

SEASONALITY

Since commencing operations, the Company has traditionally experienced
lower passenger load factors during the months of November through April.
This seasonality can be attributed primarily to relatively difficult winter
weather operating conditions in the Company's principal area of operations
and fewer vacation and other discretionary trips and reduced business travel
during these months. These seasonal factors have generally resulted in
reduced revenues, profitability and cash flow for the Company during these
months.

FREQUENT FLYER PROGRAM

On the Company's United Express and Midway Connection flights passengers
may earn miles in United's "Mileage Plus" and American Airlines "AAdvantage"
frequent flyer programs, and passengers may use mileage accumulated in these
programs to obtain discounted or free tickets for trips that might include a
flight segment on one of the Company's flights. No revenues are earned or
collected on free tickets awarded to passengers under the programs. Awards
earned under the frequent flyers programs have an expiration date three years
from the date earned. The programs also contain certain restrictions,
including blackout dates and capacity controlled bookings which substantially
limit the use of awards on certain flights and during the busiest periods.
The Company continually monitors the number of free travel award reservations
on its flight segments to ensure that they are within the capacity
restrictions defined in the "Mileage Plus" and "AAdvantage" programs. The
Company's yield management program and related seat restrictions minimize the
number of revenue passengers that may be displaced on any individual flight
segment. To date, the Company has not experienced any material use of
"Mileage Plus" and "AAdvantage" awards to obtain travel on flights, and the
incremental cost to the Company attributable to the exercise of frequent
flyer awards (consisting primarily of a minimal amount of additional gate and
passenger service expenses) has not been material. Awards used on the
Company's flights during the year ended December 31, 1996 represented
approximately 2.6% percent of the Company's total passengers. The Company
expects that this percentage will remain approximately the same for the
foreseeable future. Based on this low percentage, on the availability on
many of the Company's flights of otherwise vacant seats, and on the programs'
restrictions, the Company believes that the displacement, if any, of revenue
passengers by users of "Mileage Plus" and "AAdvantage" awards will not become
material. The Company continually monitors the number of awards redeemed and
will accrue the incremental costs associated with the "Mileage Plus" and
"AAdvantage" programs if they become material.

EFFECTS OF INFLATION

Inflation has not had a material effect on the Company's operations in
the past five years.

<PAGE>

CAUTIONARY STATEMENTS FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995

CAUTIONARY FACTORS

The Company wishes to caution stockholders and prospective investors that
the following important factors, among other identified in this Annual Report
on Form 10-K, could affect the Company's actual operating results, and that
such results could differ materially from those expressed in any
forward-looking statements made by the Company. The statements under this
caption are intended to serve as cautionary statements within the meaning of
the Private Securities Litigation Reform Act of 1995. The following
information is not intended to limit in any way the characterization of other
statements or information under other captions as cautionary statements for
such purpose. The order in which such factors appear below should not be
construed to indicate their relative importance or priority.

ADDITIONAL FINANCING REQUIREMENTS

The Company's ability to maintain operations at current levels is
materially dependent on its ability to obtain substantial additional
financing. In the most recent two years, the Company has experienced
significant operating losses as a result of increased competition in the
marketplace, operational and equipment reliability challenges, and expenses
relating to expansion of fleet types. The difficult environment in which the
Company competes will continue into the foreseeable future. While the
Company is making efforts to achieve profitability, primarily through revised
scheduling, including reallocation of Brasilia assets from the Midway system
to the United Express system, continuing losses have resulted in significant
liquidity pressures. The Company has significant financial obligations,
including interest bearing debt and capital lease obligations. The Company's
long-term debt and lease obligations require significant periodic cash
payments and the Company has not made these payments on a timely basis. The
Company has not obtained commitments for additional capital and will be
required to rely on increases in financial performance to supply funds
necessary for debt service and working capital requirements. There can be no
assurance that the Company's financial performance will improve sufficiently
to provide cash needed for operations.

DEPENDENCE ON RELATIONSHIP WITH UNITED

The Company generated approximately 79% of its revenues for the year
ended December 31, 1996 under the United Express Agreements described under
"Business - The Company's Regional Identities". The United Express
Agreements require the Company to comply with specific operating performance
standards and, with certain limited exceptions, restrict the ability of the
Company to merge with another company or dispose of its assets or aircraft
without first offering United a right of first refusal to acquire the Company
or such assets or aircraft. The United Express Agreements also prohibit the
Company from entering into similar arrangements with other carriers in
Chicago, Denver, Minneapolis-St. Paul, Detroit, Des Moines or Omaha without
United's prior approval. The United Express Agreements require the Company
to obtain United's prior consent to operate as a United Express carrier in
any market, except for certain pre-approved markets connecting with
Minneapolis-St. Paul or Detroit. The United Express Agreements terminate in
April 1997 and are subject to termination upon the failure of the Company to
provide specified levels of service or performance or upon other specified
events. A failure to renew the United Express Agreements, any termination or
materially adverse modification of the agreements, or any substantial
decrease in the number of routes served by the Company under the agreements
would have a materially adverse effect on the Company's business. As a
result of the United Express Agreements, the Company's business is sensitive
to events and risks affecting United. If adverse events affect United's
business, the Company's business will also be adversely affected.

<PAGE>

UNITED OPTION TO PURCHASE O'HARE SLOTS

United holds an option to purchase or lease all or a portion of the 54
landing and takeoff slots which the Company holds at the Chicago O'Hare
airport. United may acquire these slots for the lesser of their fair market
value or $26.2 million. United's acquisition of the slots is subject to the
approval of DOT and the assumption by United of Essential Air Service
responsibility to certain communities. In the event United acquires these
slots, the Company has the right to lease the slots from United for a period
of only one year thereafter. In the event United exercises this option and
declines to extend the term of the lease-back to the Company, the Company's
operations at the Chicago O'Hare airport would be adversely affected.

EFFECT OF GENERAL ECONOMIC CONDITIONS

The airline industry is significantly affected by general economic
conditions. During recent recessions, most airlines reduced fares in an
effort to increase traffic. Economic and competitive conditions in the
airline industry have contributed to a number of bankruptcies and
liquidations among airlines. A worsening of current economic conditions, or
an extended period of recession nationally or regionally, would have a
materially adverse effect on the Company's operations.

FUEL COSTS

Fuel is a major component of operating expense for all airlines. The
Company's cost of fuel varies directly with market conditions, and the
Company has no guaranteed long-term sources of supply. The Company intends
generally to follow industry trends by raising fares in response to
significant fuel price increases. However, the Company's ability to pass on
increased fuel costs through fare increases may be limited by economic and
competitive conditions. Accordingly, a reduction in the availability or an
increase in the price of fuel could have a materially adverse effect on the
Company's cash flow from operations and profitability.

SEASONALITY

Historically, the Company has experienced lower passenger load factors
during the months of November through April. This seasonality can be
attributed primarily to relatively difficult winter weather operating
conditions in the Company's principal area of operations, resulting in fewer
vacation and other discretionary trips and reduced business travel during
these months. These seasonal factors have generally resulted in reduced
revenues, increased operating losses and reduced cash flow for the Company
during these months.

CONTROL BY PRINCIPAL STOCKHOLDER

Mr. Voss beneficially owns approximately 62% of the outstanding shares of
the Company's common stock. On October 22, 1996, Mr. Voss transferred
approximately one-half of the shares of the Company's common stock owned by
him, to his now ex-spouse, Ms. Gayle R. Voss, pursuant to the Marital
Dissolution Stipulation and Property Settlement. Ms. Voss has granted Mr.
Voss an Irrevocable Proxy to vote such securities until June 28, 2010. In
addition, the terms of the United Express Agreements require that Mr. Voss
control at least 51% of the Company's outstanding voting stock. Accordingly,
Mr. Voss will continue to be in a position to control the management and
affairs of the Company.

NO ASSURANCE AS TO LIQUIDITY ON THE NATIONAL MARKET SYSTEM

The Company's common stock is currently listed on The Nasdaq National
Market System. There can be no assurance that the Company's common stock
will be actively traded on such market or that it will continue to be listed
on such market.

<PAGE>

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The consolidated financial statements of the Company as of December 31, 1996
and 1995 together with Report of Independent Public Accountants are included
in this Form 10-K on the pages indicated below.

PAGE

Report of Independent Public Accountants................................... 25

Consolidated Balance Sheets as of December 31, 1996 and 1995............... 26

Consolidated Statements of Operations for the Years Ended
December 31, 1996, 1995 and 1994........................................ 27

Consolidated Statements of Stockholders' Equity for the Years Ended
December 31, 1996, 1995 and 1994........................................ 28

Consolidated Statements of Cash Flows for the Years Ended
December 31, 1996, 1995 and 1994........................................ 29

Notes to Consolidated Financial Statements................................. 30

Supplemental Schedule to Consolidated Financial Statements
Schedule II - Valuation and Qualifying Accounts......................... 41

All other schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission have been omitted as
not required, not applicable or the information required has been included
elsewhere in the financial statements and related notes.

24
<PAGE>

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To Great Lakes Aviation, Ltd.:

We have audited the accompanying consolidated balance sheets of Great Lakes
Aviation, Ltd. (an Iowa corporation) and Subsidiary as of December 31, 1996
and 1995, and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1996. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Great Lakes Aviation, Ltd.
and subsidiary as of December 31, 1996 and 1995, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1996, in conformity with generally accepted accounting principles.

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company has suffered significant losses in 1996 and
1995 and negative operating cash flow in 1996, has been unable to meet its
significant current and long-term financial obligations, and has defaulted on
certain financial and operating agreements. These matters raise substantial
doubt about its ability to continue as a going concern. Management's plans
in regard to these matters are also described in Note 2. The financial
statements do not include any adjustments relating to the recoverability and
classification of asset carrying amounts or the amount and classification of
liabilities that might result should the Company be unable to continue as a
going concern.

Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The supplemental schedule to the
consolidated financial statements is presented for the purposes of complying
with the Securities and Exchange Commission's rules and is not part of the
basic financial statements. This schedule has been subjected to the auditing
procedures applied in the audits of the basic financial statements and, in
our opinion, fairly states in all material respects the financial data
required to be set forth therein in relation to the basic financial
statements taken as a whole.

ARTHUR ANDERSEN LLP

Minneapolis, Minnesota,
April 4, 1997

<PAGE>

GREAT LAKES AVIATION, LTD. AND SUBSIDIARY
Consolidated Balance Sheets
As of December 31

ASSETS 1996 1995
------------ ------------
CURRENT ASSETS:
Cash $ 6,676,333 $ 6,784,516
Accounts receivable 7,273,766 8,480,199
Inventories, net (Note 3) 12,668,615 10,219,543
Prepaid expenses and other current assets 2,253,700 1,202,481
Deposits on flight equipment - 352,772
------------ ------------
Total current assets 28,872,414 27,039,511
------------ ------------
PROPERTY AND EQUIPMENT:
Flight equipment 98,281,251 124,665,915
Other property and equipment 3,863,011 3,369,788
Less - Accumulated depreciation and amortization (14,901,196) (16,005,052)
------------ ------------
Total property and equipment 87,243,066 112,030,651

OTHER ASSETS 2,493,869 1,644,530
------------ ------------
$118,609,349 $140,714,692
------------ ------------
------------ ------------

LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
Note payable and current maturities of
long-term debt $ 11,667,911 $ 4,820,000
Accounts payable 13,089,639 7,154,558
Accrued liabilities and unearned revenue 3,512,073 2,926,746
------------ ------------
Total current liabilities 28,269,623 14,901,304
------------ ------------

LONG-TERM DEBT, net of current maturities 65,985,943 87,477,663
DEFERRED CREDITS 5,614,116 5,341,863
DEFERRED INCOME TAXES - 1,453,640
------------ ------------
COMMITMENTS AND CONTINGENCIES (Notes 2, 4, 7 and 8)
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value; 50,000,000 shares
authorized, 7,586,326 and 7,580,723 shares
issued and outstanding at December 31, 1996
and 1995 75,863 75,807
Paid-in capital 28,919,765 28,897,202
Retained earnings (accumulated deficit) (10,255,961) 2,567,213
------------ ------------
Total stockholders' equity 18,739,667 31,540,222
------------ ------------
$118,609,349 $140,714,692
------------ ------------
------------ ------------
The accompanying notes to consolidated financial statements are an integral
part of these consolidated balance sheets.

26
<PAGE>

GREAT LAKES AVIATION, LTD. AND SUBSIDIARY

Consolidated Statements of Operations

For the Years Ended December 31

1996 1995 1994
------------ ----------- -----------
OPERATING REVENUES:
Passenger $104,016,017 $78,574,780 $65,034,718
Public service 3,512,156 2,639,857 2,749,025
Freight, charter and other 2,141,517 2,981,448 2,224,477
------------ ----------- -----------
Total operating revenues 109,669,690 84,196,085 70,008,220
------------ ----------- -----------
OPERATING EXPENSES:
Salaries, wages and benefits 27,800,983 21,406,644 16,156,867
Aircraft fuel 19,377,128 14,180,745 12,123,355
Aircraft maintenance materials
and repairs 13,247,641 9,229,072 8,612,097
Commissions 7,704,342 6,211,491 5,340,364
Depreciation and amortization 5,633,535 6,029,464 4,851,934
Aircraft rental 11,643,163 5,212,603 1,150,980
Other rentals and landing fees 6,793,660 5,369,654 3,415,732
Other operating expense 25,871,443 17,314,726 13,156,911
------------ ----------- -----------
Total operating expenses 118,071,895 84,954,399 64,808,240
------------ ----------- -----------
Operating income (loss) (8,402,205) (758,314) 5,199,980
------------ ----------- -----------
INTEREST EXPENSE (5,874,609) (7,282,294) (5,370,115)
GAIN ON SALE OF SLOTS - 3,850,000 -
------------ ----------- -----------
Loss before income taxes (14,276,814) (4,190,608) (170,135)
BENEFIT FOR INCOME TAXES (1,453,640) (1,503,000) (65,000)
------------ ----------- -----------
Net Loss before
extraordinary item $(12,823,174) $(2,687,608) $ (105,135)

EXTRAORDINARY ITEM:
Gain on extinguishment of debt,
net of income taxes of
$311,953 (Note 5) -- -- 508,976
------------ ----------- -----------
Net income (loss) $(12,823,174) $(2,687,608) $ 403,841
------------ ----------- -----------
------------ ----------- -----------
NET INCOME (LOSS) PER SHARE:
Before extraordinary item $ (1.69) $ (.35) $ (.02)
Extraordinary item - - .07
------------ ----------- -----------
Net income (loss) per share $ (1.69) $ (.35) $ .05
------------ ----------- -----------
------------ ----------- -----------
WEIGHTED AVERAGE SHARES
OUTSTANDING 7,585,405 7,578,779 7,365,447
------------ ----------- -----------
------------ ----------- -----------

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

<PAGE>

GREAT LAKES AVIATION, LTD. AND SUBSIDIARY

Consolidated Statements of Stockholders' Equity

<TABLE>
<CAPTION>
Comon Stock
---------------------- Retained
Earnings
Paid-In (accumulated
Shares Amount Capital deficit) Total
---------- -------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
BALANCE, December 31, 1993 4,700,000 $ 47,000 $ 64,342 $ 4,850,980 $ 4,962,322
Issuance of common stock 2,875,000 28,750 28,806,604 - 28,835,354
Net income - - - 403,841 403,841
---------- -------- ----------- ------------ ------------
BALANCE, December 31, 1994 7,575,000 75,750 28,870,946 5,254,821 34,201,517
Issuance of common stock 5,723 57 26,256 - 26,313
Net loss - - - (2,687,608) (2,687,608)
---------- -------- ----------- ------------ ------------
BALANCE, December 31, 1995 7,580,723 75,807 28,897,202 2,567,213 31,540,222
Issuance of common stock 5,603 56 22,563 - 22,619
Net loss - - - (12,823,174) (12,823,174)
---------- -------- ----------- ------------ ------------
BALANCE, December 31, 1996 7,586,326 $ 75,863 $28,919,765 $(10,255,961) $(18,739,667)
---------- -------- ----------- ------------ ------------
---------- -------- ----------- ------------ ------------
</TABLE>

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

<PAGE>

GREAT LAKES AVIATION, LTD. AND SUBSIDIARY
Consolidated Statements of Cash Flows
For the Years Ended December 31

<TABLE>
<CAPTION>
1996 1995 1994
------------- ----------- ----------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $(12,823,174) $(2,687,608) $403,841
Adjustments to reconcile net income (loss) to net
cash provided by (used in)
operating activities-
Depreciation and amortization 5,633,535 6,029,464 4,851,934
Deferred income taxes (1,453,640) (1,503,000) 247,000
Extraordinary item, net of income taxes - - (508,976)
Change in current operating items:
Accounts receivable, net 1,206,433 (2,147,639) (1,908,578)
Inventories, net (2,098,072) (1,926,992) (3,120,818)
Prepaid expenses and other current assets 195,868 (365,328) 390,702
Deposits on flight equipment 352,772 2,869,228 (3,222,000)
Accounts payable and accrued liabilities 5,427,236 3,841,659 1,219,856
------------- ----------- ----------
Net cash provided by (used in)
operating activities (3,559,042) 4,109,784 (1,647,039)
------------- ----------- ----------
INVESTING ACTIVITIES:
Purchases of flight equipment, property and equipment (2,607,852) (18,222,790) (33,407,435)
Proceeds from the sale of flight equipment 21,254,048 5,930,305 4,756,442
Increase in other assets (973,642) (672,974) (521,794)
------------- ----------- ----------
Net cash provided by (used in)
investing activities 17,672,554 (12,965,459) (29,172,787)
------------- ----------- ----------
FINANCING ACTIVITIES:
Proceeds from issuance of debt 11,166,726 21,543,745 39,468,072
Repayment of long term debt (25,411,040) (11,325,759) (32,514,547)
Proceeds from sale of common stock 22,619 26,313 28,835,354
------------- ----------- ----------
Net cash provided by (used in)
financing activities (14,221,695) 10,244,299 35,788,879
------------- ----------- ----------
NET CHANGE IN CASH (108,183) 1,388,624 4,969,053
CASH:
Beginning of year 6,784,516 5,395,892 426,839
------------- ----------- ----------
End of year $ 6,676,333 $ 6,784,516 $ 5,395,892
------------- ----------- ----------
------------- ----------- ----------
SUPPLEMENTARY CASH FLOW INFORMATION:
Cash paid during the year for-
Interest $ 6,024,469 $ 7,483,323 $ 5,526,457
Income taxes - - -
------------- ----------- ----------
------------- ----------- ----------
Noncash transactions-
Deferred manufacturers' incentives received as:
Property and equipment $ - $ 1,845,660 $ 729,289
Inventories 690,000 935,827 384,907
Other assets - 325,697 270,279
Prepaid expenses 700,000 - 140,000
------------- ----------- ----------
$1,390,000 $3,107,184 $1,524,475
------------- ----------- ----------
------------- ----------- ----------
Conversion of capital leases into operating leases - $14,202,584 -
------------- ----------- ----------
------------- ----------- ----------
</TABLE>

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

<PAGE>

GREAT LAKES AVIATION, LTD. AND SUBSIDIARY
Notes to Consolidated Financial Statements

December 31, 1996 and 1995

1. CORPORATE ORGANIZATION AND BUSINESS:

CORPORATE ORGANIZATION

The consolidated financial statements include the accounts of Great Lakes
Aviation, Ltd. (Great Lakes) and its wholly owned subsidiary, RDU Inc. (RDU),
referred to collectively herein as the Company. All significant
inter-company accounts and transactions have been eliminated in consolidation.

BUSINESS

The Company provides scheduled passenger and air freight service via three
marketing identities (United Express, Midway Connection and Great Lakes
Airlines), the first two of which operate under code-sharing agreements
with major airlines.

The Company operates as United Express under a cooperative marketing
agreement (United Express Agreement) with United Airlines, Inc. (United) and
provides service to 60 destinations in the Upper Midwest as of December 31,
1996. The term of the agreement continues through April 25, 1997 (see note 2).
Approximately 45%, 40%, and 37% of the United Express passengers connected
with United for the years ended December 31, 1996, 1995 and 1994,
respectively. Outside the scope of the United Express Agreement, the Company
serves additional destinations in the Upper Midwest as Great Lakes Airlines.

Since October 1, 1995 the Company has operated as a "Midway Connection"
carrier under a cooperative marketing agreement (Midway Connection Agreement)
with Midway Airlines, Inc. (Midway) and serves Raleigh/Durham from 14
destinations in eight states located along the East Coast as of December 31,
1996. Approximately 50% of Midway Connection passengers connected with Midway
for the year ended December 31, 1996. The Midway Connection Agreement
continues through 2004 but is subject to earlier termination upon failure of
the Company to provide specified levels of service or performance or upon
other specified events (see note 2).

In August 1995 the Company foreclosed under a security agreement and acquired
certain assets of Arizona Airways, Inc. As of December 31, 1996, the Company
serves 9 destinations in Arizona, New Mexico and Mexico as Great Lakes
Airlines.

Revenues during 1996 and 1995 were derived 79% and 97% from United Express
operations, 13% and 1% from Midway Connection and 8% and 2% from Great Lakes
Airlines operations. Substantially all 1994 revenues were derived from
United Express operations.

During October 1995, the Company sold certain landing and takeoff slots at
Chicago O'Hare airport to United, generating a gain of $3,850,000 (see note 8).

During January 1994 the Company completed its initial public offering of
2,875,000 shares of common stock for $11.00 per share, generating net
proceeds of $28,835,354.

2. LIQUIDITY AND GOING-CONCERN MATTERS:

<PAGE>

concern. The Company's ability to continue as a going concern depends
upon successfully negotiating deferrals or a restructuring of its
financial obligations, negotiating extended or improved terms under its
major operating agreements, and ultimately, returning to sustained
profitability.

Raytheon Aircraft Company and its financing affiliates (collectively,
"Raytheon") is the Company's primary aircraft supplier and largest creditor.
The Company has financed all 42 of its Beechcraft 1900 aircraft and one of
its Brasilia aircraft under related lease and debt agreements with Raytheon,
and Raytheon has also extended the Company a $5 million loan secured by
accounts receivable (collectively, the "Raytheon Agreements"). The Raytheon
Agreements went into default in 1997 due to the Company's non-payment of
scheduled amounts due. The Raytheon Agreements also contain cross-default
provisions which may be triggered if the Company's obligations to other
creditors are accelerated as a result of non-payment of those obligations.
The default provisions of the Raytheon Agreements give Raytheon the right to
accelerate certain amounts due under the Raytheon Agreements or repossess the
aircraft or other assets securing the Raytheon Agreements. The Company is
currently in negotiations with Raytheon to defer, refinance, or restructure
all balances owed. While management believes that initial discussions have
been favorable, there can be no assurance that such negotiations will be
successful or that Raytheon will not exercise its rights under the default
provisions.

In addition, the Company has financed 11 of its Brasilia aircraft through five
lease and debt agreements with other unrelated entities (collectively, the
"Brasilia Agreements"). At December 31, 1996, one of the Brasilia Agreements
under which it operates 2 of these aircraft was in default due to violation
of a financial covenant. During 1997, all of the other four Brasilia
Agreements went into default due to non-payment of scheduled amounts due.
One of these Brasilia Agreements has been subsequently modified to allow
deferral of payment of the defaulted amounts. Remedies available under the
default provisions of the Brasilia Agreements have not been exercised, but
include possible repossession and resale of the related aircraft, with the
Company being responsible to pay any shortfall between such sale proceeds and
the balance of the underlying obligations. The Company has received formal
notice of default concerning non-payment of obligations owed under two of the
Brasilia Agreements under which the Company leases a total of 4 Brasilia
aircraft.

The Company has been continuing to extend and increase the past due amounts
owed to its trade vendors. There can be no assurance that the Company's
trade vendors will continue to supply the Company with goods and services on
terms acceptable to the Company or that they will agree to any credit
accommodations on past due amounts owed.

On April 25, 1997, the United Express Agreement will expire. Currently, the
Company is in default of a covenant of the United Express Agreement as a
result of its nonpayment of bills when due. The Company earns the majority
of its revenues under the United Express Agreement and, in exchange for
certain per passenger fees, receives certain benefits from its relationship
with United including the listing of its flights under United's computer
reservation system code. Management is negotiating with United to renew the
United Express Agreement. While management believes that initial discussions
have been favorable, there can be no assurance that such negotiations will
be successful or that the United Express Agreement can be renewed or
extended at terms acceptable to the Company.

Since its inception in October 1995, significant operating losses have been
incurred from the Company's operations under the Midway Connection Agreement.
This is partially attributable to the fact that Midway reduced the number of
aircraft in its operation early in 1996 rather than expanding operations as
it had originally planned. This reduced the number of connecting
opportunities for the Company's flights and, in

<PAGE>

turn, potential traffic which could use the Company's services. The Company
is negotiating with Midway to receive additional revenues to compensate it
for providing current levels of connecting traffic to Midway. While
management believes that initial discussions have been favorable, there can
be no assurance that these negotiations will be successful. Depending on the
outcome of its negotiations with Midway, the Company may make certain
adjustments to its Raleigh / Durham scheduled service levels. During the
first quarter of 1997 the Company eliminated certain unprofitable routes and
the number of aircraft committed to Midway services have been reduced from
twelve to ten. The Company is not in compliance with certain of the
requirements of the Midway Connection Agreement and as a result, the Midway
Connection Agreement may be subject to early termination at Midway's option.
On April 4, 1997, the Company received a letter from Midway stating that
Midway has no intention to exercise its right to terminate the Midway
Connection Agreement; however either party may terminate the Midway Agreement
effective any time on or after October 1, 1997, upon six months' prior
written notice.

The Company has made substantial revisions to its flight schedules and may
make further revisions in an effort to improve operating results. Service to
several unprofitable cities has been eliminated and new service to certain
other cities has been or is anticipated to be introduced. The Company is
analyzing opportunities in 1997 to improve its revenue optimization processes
to increase revenue passenger yields and to reduce certain operating
expenses. The Company is also analyzing opportunities to rationalize its
capacity levels, optimize its aircraft fleet and mix, and improve the
deployment of its capacity. Further, the Company has negotiated improved
terms and subsidy rates on certain of its routes subsidized by the U.S.
Department of Transportation under the Essential Air Service program. While
management believes these initiatives will address some of the causes of its
recent operating losses, there can be no assurance that the results from
these actions will result in improved operating performance or sustained
profitability.

There can be no assurance that the Company's negotiations will be successful
in deferring or restructuring its current and long-term financial
obligations, extending or improving terms under its major operating
agreements, or that its operational improvement initiatives will result in
improved operating performance or sustained profitability. Such negotiations
and initiatives will require the Company to reach agreements with creditors,
trade vendors and code-sharing airlines on terms acceptable to the Company,
none of which are assured. If the Company is unsuccessful in its efforts,
it may continue to be unable to meet its current and future obligations,
making it necessary to undertake such other actions as may be appropriate to
preserve asset values, potentially including seeking protection from its
creditors under applicable bankruptcy laws. The financial statements do not
include any adjustments relating to the recoverability and classification of
asset carrying amounts or the amount and classification of liabilities that
might result should the Company be unable to continue as a going concern.

3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

ACCOUNTS RECEIVABLE

Substantially all accounts receivable balances are due from various airlines,
with approximately 42% of the December 31, 1996 balance and 62% of the
December 31, 1995 balance due from United. All receivables are pledged as
collateral securing a $5.0 million loan.

INVENTORIES

Inventories consist of flight equipment spare parts and fuel and are stated
at the lower of average cost or market. An allowance for depreciation is
provided at rates which depreciate the cost of flight equipment spare parts,
less estimated residual value, over the estimated useful lives of the related
aircraft. The accumulated allowances were $3,082,000 and $1,381,000,
respectively, at December 31, 1996 and 1997. Expendable parts are charged to
maintenance expense as used.

PROPERTY AND EQUIPMENT

Property and equipment is stated at cost and depreciated on a straight-line
basis for financial reporting purposes over estimated useful lives of 14-20
years for flight equipment and 3-10 years for other property and equipment.
Leasehold improvements are amortized over the shorter of the life of the
lease or the life of the asset. Accelerated methods of depreciation are used
for tax reporting purposes. All owned aircraft are pledged to collateralize
outstanding obligations.

<PAGE>

OTHER ASSETS

Approximately $1.8 million of long-term deposits on aircraft operating leases
at December 31, 1996, are included in other assets.

The remainder consists primarily of costs incurred in connection with the
implementation of Embraer Model EMB-120 Brasilia (Brasilia) aircraft in 1994,
primarily consisting of initial flight crew and maintenance training costs.
Such costs have been deferred and are being amortized over five years from
the date the Brasilia aircraft were ready for initial service. The costs of
developing new or extended routes and preoperating costs are charged to
expense as incurred.

DEFERRED CREDITS

The Company has received various incentives in the form of interest rate
subsidies and spares in connection with the acquisition of new aircraft.
These incentives are being amortized as a reduction of rent expense or
interest expense over the term of the related agreement.

REVENUE RECOGNITION

Passenger revenues are recorded as income when the respective services are
rendered. Liability for unused tickets issued by the Company is recorded as
unearned revenue. The Company also receives public service subsidy revenues
for serving certain communities that do not generate sufficient traffic to
fully support profitable air service.

FREQUENT FLYER AWARDS

The Company operates under code-sharing agreements with United and Midway,
and participates in their frequent flyer programs. The Company has not
deferred any revenue or accrued for incremental costs for mileage
accumulation relating to these programs, as the impact has not been material.

INCOME TAXES

The Company records income taxes under the liability method. Under this
method, current and deferred tax assets and liabilities are determined based
on tax rates and laws enacted as of the balance sheet date rather than on
historical tax rates.

NET INCOME (LOSS) PER SHARE

Net income (loss) per share amounts are computed based upon the weighted
average number of shares outstanding during the period. No material dilution
results from outstanding stock options, the only common stock equivalent.

USE OF ESTIMATES

The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Ultimate results could differ from those estimates.

FAIR VALUE OF FINANCIAL INSTRUMENTS

Unless otherwise indicated, the carrying amounts of the Company's financial
instruments approximate fair value.

<PAGE>

RECLASSIFICATIONS

Certain balances in the 1995 and 1994 financial statements have been
reclassified to conform with the 1996 presentation. These reclassifications
had no effect on net income (loss) or stockholders' equity as previously
reported.

NEW ACCOUNTING PRONOUNCEMENTS

Statement of Financial Accounting Standards (SFAS) No. 121 - "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
of", requires impairment losses on long-lived assets to be recognized when an
asset's book value exceeds its expected future cash flows (undiscounted).
The Company adopted this standard on January 1, 1996 and such adoption did
not have a material impact on the financial position or results of operations
of the Company.

SFAS No. 123 - "Accounting for Stock-Based Compensation", encourages but does
not require, a fair value based method of accounting for employee stock
options or similar equity instruments. As permitted under the new standard,
the Company will continue to account for employee stock options under
Accounting Principles Board Opinion No. 25-"Accounting for Stock Issued to
Employees." ("APB No. 25"). The pro-forma disclosures required by the new
standard were adopted as of January 1, 1996.

4. FLIGHT EQUIPMENT:

The Company's airline fleet consisted of Beechcraft Model 1900 (Beechcraft)
19-passenger and Embraer Brasilia 30-passenger aircraft summarized as follows
at December 31:

1996 1995
------------------------------ --------------------------------
Beechcraft Beechcraft Beechcraft Beechcraft
1900C 1900D Brasilia 1900C 1900D Brasilia
----- ----- -------- ----- ----- --------
Owned 15 6 4 23 6 4
Operating leases 9 12 8 7 2 8
------- ------- ---------- ------- ------- ---------

24 18 12 30 8 12
----------------------------------------------------------------
----------------------------------------------------------------

Maintenance and repairs, including major engine overhaul costs, are charged
to expense as incurred (the direct expense method). As a result of a
continuous maintenance program, the Company believes that the direct expense
method appropriately matches operating expenses and revenues.

The Company entered into an agreement in 1994 to acquire five new Brasilia
30-passenger aircraft and options to acquire up to an additional 15 aircraft
(the Embraer Agreement ). Two of these aircraft were delivered in December
1994, and three in 1995. As part of the Embraer Agreement, the Company was
granted incentives, the benefit of which is amortized over the lease term. In
July 1996, the Embraer Agreement was terminated.

During 1995, the Company and Raytheon amended the terms of certain aircraft
lease agreements which were recorded by the Company as capitalized leases.
Under the new terms of the amended agreements, these leases meet the criteria
for treatment as operating leases. Accordingly, the related capital lease
obligation and underlying asset balances have been removed from the Company's
balance sheet. The gain resulting from these transactions
was not material.

Since January 1, 1996 the Company has taken delivery of ten new Beechcraft
1900D aircraft. All of these aircraft have been financed by the manufacturer
under 14-1/2 year operating leases. In connection with the lease of these
new Beechcraft 1900D aircraft, the Company acquired the right to sell to
Raytheon certain Beechcraft 1900C aircraft at prices equal to the balance
of the amounts owed on the aricraft.

<PAGE>

In addition, the Company also obtained the right to sell one Beechcraft 1900C
pledged as collateral under a lease agreement with a third party which covers
two of its Brasilia aircraft. Management intends to sell that Beechcraft
1900C aircraft under this agreement and use substantially all of the proceeds
to purchase a certificate of deposit to continue to collateralize this
Brasilia lease. No significant amount of cash will be generated from these
transactions.

During 1996 the Company sold eight aircraft to Raytheon and leased them back
under 12 year operating leases with an option to return upon 30 day notice
during the first two years. At the termination of the leases, the Company
will be required to comply with certain aircraft refurbishment provisions.
Gains and losses on these transactions are amortized over the first two years
of the lease agreement because this is the maximum term for which the Company
expects to retain the aircraft. If a lease is terminated early, the full
amount of the remaining unamortized gain or loss is recognized at that time.
Five of the sale/leaseback aircraft were returned to Raytheon. One of the
sale/leaseback aircraft was destroyed in November 1996. The Company intends
to provide notice to terminate the lease on the remaining two aircraft.

5. LONG-TERM DEBT:

Long-term debt is summarized as follows at December 31 (in thousands):

1996 1995
-------- --------
Term notes owed to Raytheon; interest
at various rates ranging from 6.6% to
9.0%; payable monthly through June
2009, collateralized by aircraft
and accounts receivable $65,496 $80,734

Other term notes; interest at various
rates ranging from 8.7% to 9.1%;
payable monthly or quarterly through
July 2007, collateralized by aircraft 10,758 11,564

Other 1,400 -
-------- --------
77,654 92,298

Less - Current maturities (11,668) (4,820)
-------- --------
Total long-term debt $65,986 $87,478
-------- --------
-------- --------

The fair value of the Company's debt instruments at December 31, 1996 and
1995 are not reasonably determinable considering the financial condition of
the Company.

On October 26, 1996 the Company entered into an agreement with a vendor in
which $1,767,231 of outstanding invoices were converted into a short-term
promissory note bearing interest at prime plus 1%.

The Company had a line of credit arrangement with a bank totaling $5 million
at December 31, 1995. During 1995 the average outstanding borrowing was
$780,000 with an average rate of borrowings of 9.4%. The maximum borrowing
for 1995 was $4.15 million. There were no borrowings outstanding under this
arrangement at December 31, 1995. In August 1996, a $5 million loan under
a term note was obtained from Raytheon. This loan bears interest at 8.25%.
Interest on this loan is payable monthly and all advanced principal is to
be repaid by March 31, 1997. This loan is collateralized by accounts
receivable.

35
<PAGE>

As of December 31, 1996 the long-term debt obligations due in the five
subsequent years and thereafter are as follows:

1997 $11,668,000
1998 5,728,000
1999 6,315,000
2000 6,871,000
2001 6,745,000
Thereafter 40,327,000
---------------
$77,654,000
---------------
---------------

In connection with the Company's initial public offering in 1994 (see Note
1), approximately $20,000,000 of offering proceeds were used to prepay a
portion of eight notes owed to an aircraft manufacturer. The prepayment of
debt resulted in an extraordinary gain of $508,976 net of related income tax
effect.

6. INCOME TAXES:

The components of the Benefit for income taxes for the years ended December
31 are as follows:

1996 1995 1994
-------------- ------------- -----------
Current $ - $ - $ -
Deferred (1,453,640) (1,503,000) (65,000)
-------------- ------------- -----------
$(1,453,640) $(1,503,000) $(65,000)
-------------- ------------- -----------
-------------- ------------- -----------

The federal statutory tax rate differs from the Company's effective income
tax rate for the years ended December 31 as follows:

1996 1995 1994
-------- -------- --------
Federal statutory rate (34.0)% (34.0)% (34.0)%
State income taxes, net of federal benefit (4.0) (4.0) ( 4.0)
Valuation allowance 27.8 2.1 -
-------- -------- --------
(10.2)% (35.9)% (38.0)%
-------- -------- --------
-------- -------- --------

Deferred tax assets (liabilities) as of December 31 were as follows:

1996 1995
--------------- ---------------
Net operating loss carryforwards $10,708,000 $ 10,998,000
Property and equipment (9,916,000) (14,585,000)
Accrued liabilities and other 2,827,000 2,133,360
--------------- ---------------
3,619,000 (1,453,640)
Valuation allowance (3,619,000) -
--------------- ---------------
Total deferred tax asset (liability) $ - $(1,453,640)
--------------- ---------------
--------------- ---------------

36
<PAGE>

The Company has net operating loss carryforwards for federal tax reporting
purposes totaling $29,000,000 available through December 31, 1996, expiring
in years from 2005 through 2010.

7. EMPLOYEE BENEFIT PLANS:

401(k)

The Company maintains a qualified 401(k) employee savings plan for the
benefit of substantially all employees. The Company matches up to 4% of
participating employees' contributions. Company contributions totaled
$316,000 in 1996, $260,000 in 1995, and $209,000 in 1994.

STOCK OPTION PLANS

In November 1993, the Company adopted The Great Lakes Aviation, Ltd. 1993
Stock Option Plan and the 1993 Director Stock Option Plan (the Plans). Under
the Plans, options to purchase an aggregate of not more than 600,000 shares
of common stock may be granted from time to time to key employees, officers
and directors of the Company. Transactions involving the Plans for the years
ended December 31, 1996, 1995, and 1994 were as follows:

Shares Price Per Share
------------ -------------------
Outstanding at December 31, 1993 260,000 $11.00
Granted 45,000 $ 6.50 - $ 8.62
Terminated (30,000)
------------
Outstanding at December 31, 1994 275,000 $ 6.50 - $11.00

Terminated (45,000) $ 7.36 - $11.00
Repricing reduction (63,000) $ 3.88 - $11.00
------------
Outstanding at December 31, 1995 167,000 $ 3.88 - $11.00
Granted 50,000 $ 3.75 - $ 4.13
Terminated (47,500) $ 3.88 - $ 8.62
------------
Outstanding at December 31, 1996 169,500 $ 3.88 - $11.00
------------
------------
Exercisable at December 31, 1996 97,700 $ 3.88 - $11.00
------------
------------
Available for grant at December 31, 1996 430,500
------------
------------

On May 19, 1995 the Board of Directors passed a resolution offering all
employee option holders the option to reprice their current options at the
then market price ($3.88) in exchange for 30% of their options. This offer
was accepted by all employee stock option holders. The exercise dates were
adjusted to reflect this change.

The Company accounts for the Plans under APB No. 25, under which no
compensation cost has been recognized. Had compensation cost for the Plans
been determined consistent with SFAS No. 123, the Company's pro forma net
loss and loss per share would not have been materially different from its
historical amounts.

EMPLOYEE STOCK PURCHASE PLAN

The Company maintains an employee stock purchase plan. Under the plan,
certain employees are eligible to purchase an aggregate of not more than
125,000 shares of the Company's common stock at

37
<PAGE>

95% of the lower of the fair market value at the beginning or the end of the
calendar year in which the shares are purchased. In 1997 and 1996, 2,795 and
5,603 shares were purchased with 1996 and 1995 payroll withholdings,
respectively.

8. COMMITMENTS AND CONTINGENCIES:

LEASE COMMITMENTS

The Company leases aircraft, hangar facilities and certain terminal
facilities under operating leases which provide for approximate future
minimum rental payments, as follows:

1997 $ 15,053,000
1998 14,338,000
1999 13,421,000
2000 13,205,000
2001 13,194,000
Thereafter 90,878,000
------------
$160,089,000
------------
------------

Rent expense under all operating leases totaled $15,569,000 in 1996,
$7,960,000 in 1995, and $2,876,000 in 1994. An aircraft operating lease
agreement requires the Company to maintain financial covenants. The Company
was not in compliance with these requirements at December 31, 1996. (See
Note 2)

In connection with the new Brasilia aircraft discussed in Note 3, the
Brazilian government has provided a financing subsidy to the Company in the
form of semiannual payments directly to the Company over ten years beginning
with the delivery of the aircraft. For leased aircraft the Company amortizes
payments on a straight-line basis over the term of the lease as a reduction
of lease expense. For owned aircraft the payments are recognized as received
as a reduction in interest expense. The subsidy payments are not
collateralized or otherwise secured against the credit risk of the Brazilian
government. The expected approximate future financing subsidy on the
aircraft is as follows:

1997 $ 928,000
1998 736,000
1999 631,000
2000 527,000
2001 423,000
Thereafter 658,000
------------
Gross future cash flows $ 3,903,000
------------
------------

The Company leases certain small aircraft used in its charter operations.
Beginning in December 1994 two Beechcraft Model 1900 19-passenger aircraft
used in airline operations were financed under operating leases from a
company owned by Great Lakes' president and majority stockholder. Total
payments for these leases were $884,000 in 1996, $844,000 in 1995, and
$142,000 in 1994.

<PAGE>

SLOT ALLOCATIONS

At December 31, 1996 the Company held 54 landing and takeoff slots at Chicago
O'Hare airport. On August 29, 1995, United exercised its contractual option
and effective October 29, 1995, purchased ten of the Company's landing and
takeoff slots at Chicago O'Hare airport for $3.85 million. Concurrently, the
Company has an agreement to lease these slots from United until May 1997 at
which time the Company intends to extend the lease. The sale of the slots
resulted in a gain of $3.85 million which was recorded in the fourth quarter
of 1995. These ten slots were the only slots owned by the Company which were
not encumbered by requirements to provide essential air service to small
communities.

United has an option which expires concurrently with the United Express
Agreement in April 1997 to acquire all or any portion of the Company's slots
for the lesser of their fair market value or certain specified maximum prices
set forth in the option agreement. The maximum aggregate purchase price for
the 54 slots is $26.2 million. United's acquisition of the slots would be
subject to the approval of the U.S. Department of Transportation (DOT) and
the assumption by United of essential air service responsibility to certain
communities. In the event United acquires the slots, the Company has the
right to lease the slots from United for a period of one year thereafter.

In February 1997 the Company was awarded slot exemptions for the specific
purpose of providing 20 operations per day between Chicago O'Hare Airport and
Dubuque and Mason City, Iowa; Huron and Sioux Falls, South Dakota; and Fargo,
North Dakota. These slot exemptions may not be bought, sold or traded
without DOT approval. In addition, these slot exemptions require the Company
to provide minimum amounts of Essential Air Service to certain small cities.

LITIGATION

The Company is a defendant in a lawsuit arising from the collision of a small
aircraft with one of the Company's Beechcraft 1900 aircraft in Quincy,
Illinois on November 19, 1996. The collision occurred at the intersection of
two runways as the Company's aircraft was landing, and resulted in the death
of all ten passengers and the two crew members. The Company's insurance
carrier is providing for the Company's defense in the lawsuit and the Company
believes that all claims arising from the accident will be adequately covered
by insurance.

The Company is a party to other ongoing legal claims and assertions arising
in the ordinary course of business. In the opinion of management, the
resolution of these matters will not have a material adverse effect on the
Company's financial position, results of operations, or cash flows.

9.SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED):

The following presents selected quarterly unaudited financial data for each
of the years ended December 31, 1996 and 1995 (in thousands, except for per
share information):

1996 First Second Third Fourth |
---- Quarter Quarter Quarter Quarter | Year
--------- --------- -------- --------- | --------
Operating revenues $23,140 $ 28,714 $ 31,174 $ 26,642 | $109,670
Operating income (loss) (2,937) 259 513 (6,237) | (8,402)
Net loss $(2,773) $ (1,155) $ (1,008) $ (7,887) | $(12,823)
--------- --------- -------- --------- | --------
--------- --------- -------- --------- | --------
Net loss $ (.37) $ (.15) $ (.13) $ (1.04) | $ (1.69)
per share |
--------- --------- -------- --------- | --------
--------- --------- -------- --------- | --------
Weighted average shares |
outstanding 7,583 7,586 7,586 7,586 | 7,585
|

<PAGE>

1995 First Second Third Fourth |
---- Quarter Quarter Quarter Quarter | Year
--------- --------- -------- --------- | --------
Operating revenue $16,159 $20,620 $24,812 $22,605 | $84,196
Operating income (loss) (1,073) 932 2,063 (2,680) | (758)
Net income (loss) (1,725) $ (542) $ 49 $ (470) | $(2,688)
--------- --------- -------- --------- | --------
--------- --------- -------- --------- | --------
Net income (loss) |
per share $ (.23) $ (.07) $ .01 $ (.06) | $ (.35)
--------- --------- -------- --------- | --------
--------- --------- -------- --------- | --------
Weighted average shares |
outstanding 7,575 7,579 7,581 7,581 | 7,579
--------- --------- -------- --------- | --------
--------- --------- -------- --------- | --------

The above financial data includes normal recurring adjustments and
reflects all adjustments which are, in the opinion of management,
necessary for a fair presentation of such financial data. The Company's
business is seasonal and, accordingly, interim results are not indicative
of results for a full year.

40
<PAGE>

GREAT LAKES AVIATION, LTD. AND SUBSIDIARIES

SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS

Additions
-----------------------------
Charged to
Balance at Charged to Other Balance at
Beginning Costs and Accounts- Deductions- End of
Classification of Period Expenses Describe(2) Describe (1) Period
Year Ended December 31,

<S> <C> <C> <C> <C> <C>
1996:
Inventory Reserves $1,380,854 $2,331,926 $ - $ 630,378 $3,082,402

1995
Inventory Reserves 937,146 678,319 132,131 366,742 1,380,854

1994
Inventory Reserves - 937,146 - - 937,146

</TABLE>

(1) Deductions related principally to scrapped parts and the results of
physical inventories.

(2) Balance sheet adjustment for capital lease conversion.

ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Information regarding the directors of the Company is incorporated herein
by reference to the descriptions set forth under the caption "Election of
Directors" in the Proxy Statement for Annual Meeting of Stockholders to be
held May 31, 1996 (the "1996 Proxy Statement"). Information regarding
executive officers of the Company is incorporated herein by reference to Item
1 of this Form 10-K under the caption "Executive Officers of the Company."

ITEM 11. EXECUTIVE COMPENSATION

Information regarding executive compensation is incorporated herein by
reference to the information set forth under the caption "Executive
Compensation" in the 1996 Proxy Statement.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Information regarding security ownership of certain beneficial owners and
management of the Company is incorporated herein by reference to the
information set forth under the caption "Security Ownership of Certain
Beneficial Owners and Management" in the 1996 Proxy Statement.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Information regarding certain relationships and related transactions with
the Company is incorporated herein by reference to the information set forth
under the caption "Certain Transactions" in the 1996 Proxy Statement.

<PAGE>

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a) DOCUMENTS FILED WITH THIS REPORT.

(1) See index to financial statements on page 23 of this report.

(b) REPORTS ON FORM 8-K. During the quarter ended December 31, 1996, the
Company filed no reports on Form 8-K with the Securities and Exchange
Commission.

3.1 Amended and Restated Articles of Incorporation.(1)
3.2 Amended and Restated Bylaws.(1)
4.1 Specimen Common Stock Certificate.(1)
10.1 Promissory Note payable to Raytheon in the amount of $3,445,000,
dated December 30, 1992, together with related security
agreement.(1)
10.2 Schedule identifying other Promissory Notes payable to Raytheon
which are substantially identical in all material respects to
Exhibit 10.1.(1)
10.3 Form of Aircraft Lease Agreement dated March 6, 1990, by and
between Raytheon and the Company.(1)
10.4 United Express Agreement, dated February 28, 1992, by and between
United Air Lines, Inc. and the Company (certain portions deleted
pursuant to request for confidential treatment).(1)
10.5 Standard Ground Handling Agreement, dated April 3, 1991, by and
between United Air Lines, Inc. and the Company.(1)
10.6 United Express Fare Revenue Sharing Agreement, dated February 28,
1992, by and between United Air Lines, Inc. and the Company
(certain portions deleted pursuant to request for confidential
treatment).(1)
10.7 Letter Agreement, dated April 21, 1995, amending the United
Express Agreement (certain portions deleted pursuant to request
for confidential treatment).
10.8 United Express Interline Agreement, dated February 28, 1992, by
and between United Air Lines, Inc. and the Company.(1)
10.9 Airline Services Agreement, dated August 8, 1995, between Midway
Airlines Corporation and RDU Co. (certain portions deleted
pursuant to request for confidential treatment).
10.10 O'Hare License Agreement, dated April 1, 1991, by and between
United Air Lines, Inc. and the Company (certain portions deleted
pursuant to request for confidential treatment).(1)
10.11 Hector International Airport Terminal License Agreement, dated
September 8, 1994, by and between United Air Lines, Inc. and the
Company (certain portions deleted pursuant to request for
confidential treatment).(1)
10.12 Airport/Airport Facilities Lease Agreement, dated November 1,
1989, by and between Minneapolis-St. Paul Airport and the
Company.(1)
10.13 Great Lakes Aviation, Ltd. 1993 Stock Option Plan.(1)
10.14 1993 Director Stock Option Plan.(1)
10.15 Great Lakes Aviation, Ltd. Employee Stock Purchase Plan.(1)
10.16 Facilities Lease Agreement, dated February 18, 1992, by and
between the City of Spencer, Iowa and the Company.(1)
10.17 Agreement in Principle, dated August 29, 1991, by and between
United Air Lines, Inc. and the Company (certain portions deleted
pursuant to request for confidential treatment).(1)
10.18 Fifth Amendment to the Agreement in Principle, dated November 12,
1993, by and between United Air Lines, Inc. and the Company
(certain portions deleted pursuant to request for confidential
treatment).(1)
10.19 Aircraft Finance Agreement, dated March 1, 1994, by and between
Raytheon and the Company.(2)
10.20 Aircraft Lease Agreement (N152GL), dated as of December 20, 1994,
by and between Iowa Great Lakes

<PAGE>

Flyers, Inc. and the Company.(3)
10.21 Aircraft Lease Agreement (N159GL), dated as of December 20, 1994,
by and between Iowa Great Lakes Flyers, Inc. and the Company.(3)
10.22 Negotiable Promissory Note, dated March 30, 1996, from the Company
to Raytheon Aircraft Credit Corporation.
10.23 Negotiable Promissory Note, dated July 31, 1996, from the Company
to Raytheon Aircraft Credit Corporation.
11. Statement regarding computation of per share earnings.(3)
23(i) Consent of Independent Public Accountants
________________
(1) Incorporated by reference to the Company's Registration Statement on
Form S-1, Registration No. 33-71180 (the "Form S-1").
(2) Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1994.
(3) Income per common share amounts are computed by dividing net income
applicable to common stockholders by the weighted average number of common
shares outstanding. Common stock equivalents related to stock options
which would have a dilutive effect based upon current market prices had no
effect on net income per common share in each of the years presented in the
Company's Statements of Income and, accordingly, this exhibit is not
applicable to this filing.

43
<PAGE>

SIGNATURES

Pursuant to the requirements of section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.

GREAT LAKES AVIATION, LTD.

Dated: By
-------------------------------------
Douglas G. Voss,
President and Chief Executive Officer

- -------------------------------------------------------------------------------
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.

- ---------------------------- President, Chief Executive Officer and Director
Douglas G. Voss

- ---------------------------- Director, Executive Vice President Finance
A. L. Maxson and Chief Financial Officer

- ---------------------------- Vice President, Controller and
Roberta L. Dircks Chief Accounting Officer

- ---------------------------- Director
Vernon A. Mickelson

- ---------------------------- Director
Luigi Talarico, Jr.

- ---------------------------- Director
Gayle R. Voss

<PAGE>

Exhibit 10.23

Principal Sum/Credit Limit: U.S. $5,000,000.00
Due Date: March 31, 1997
Done at Wichita, Kansas

NEGOTIABLE PROMISSORY NOTE

On this, 31st day of July, 1996 (the "Commencement Date"), for good and
valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, GREAT LAKES AVIATION, LTD., an Iowa Corporation, with its
principal place of business at 190 Norwest Financial Center, 7900 Xerxes
Avenue South, Minneapolis, Minnesota 55431 (hereafter "Debtor"),
unconditionally promises to pay to the order of RAYTHEON AIRCRAFT CREDIT
CORPORATION (hereinafter "Secured Party") or its assigns, the sum of Five
Million and 00/100 United States Dollars (U.S. $5,000,000.00) (hereinafter
"Principal Sum"), or, if less, the aggregate unpaid principal amount of all
advances made by Secured Party to Debtor, together with accrued interest at
the applicable Interest Rate specified below and such other charges and fees
as herein provided. This Negotiable Promissory Note is sometimes hereinafter
referred to as the "Promissory Note" or the "Agreement".

This Promissory Note possesses a revolving feature. Upon satisfaction
of all conditions set forth in this Note, Borrower shall be entitled to
borrow up to the full Principal Sum of this Promissory Note and to repay and
reborrow from time to time during the term of this Promissory Note.

Secured Party shall maintain a record of the amount loaned to and repaid
by Debtor under this Promissory Note. The aggregate unpaid principal amount
shown on such record shall be rebuttable presumptive evidence of the
principal amount owing and unpaid on this Promissory Note. The Secured
Party's failure to record the date and amount of any advance on such record
shall not limit or otherwise affect the obligations of the Debtor under this
Promissory Note to pay the principal amount of the advances together will all
interest accruing thereon. Secured Party shall not be obligated to provide
Debtor with a copy of the record on a periodic basis, however, Debtor shall
be entitled to inspect or obtain a copy of the record during Secured Party's
business hours.

The Principal Sum and accrued interest shall he repaid by Debtor to
Secured Party over a period of eight (8) months (hereinafter "Financing
Term") in accordance with the terms and subject to the conditions specified
below:

1. INTEREST RATE. In addition to Debtor's repayment of the Principal
Sum, Debtor shall pay interest to Secured Party on the unpaid balance of the
Principal Sum at the applicable rate of interest hereinafter specified. The
applicable rates of interest throughout the Financing Term shall be as
follows:

<PAGE>

(a) During the eight (8) month period beginning the Commencement Date
hereof (Months 1 through 8 of the Financing Term) , interest shall
accrue on the unpaid balance of the Principal Sum and be paid by
Debtor at an annual rate equal to the rate that Bank of America,
New York, New York, U.S.A. announces from time to time as its prime
lending rate (hereinafter "Prime Rate"). The rate of interest shall
be adjusted on the first business day of each calendar year quarter
(i.e., January 1, April 1, July 1 and October 1) to reflect any
increase or decrease in the Prime Rate as of that date.

The annual rate of interest applicable hereunder from time to time, as
specified above, is sometimes referred to herein as the "Interest Rate". All
interest shall be calculated on the basis of a 360-day year and actual days
outstanding. Notwithstanding anything set forth herein to the contrary, in
no event shall the Interest Rate payable hereunder be higher than the maximum
amount permitted under applicable law.

2 . PAYMENT OF PRINCIPAL AND INTEREST. The Principal Sum shall be
repaid by Debtor to Secured Party in one payment due March 31, 1997
(hereinafter "Due Date"). Interest shall be paid on the outstanding
principal balance monthly. The amount of each respective monthly interest
payment shall be advised by Secured Party to Debtor at the beginning of each
month. Debtor's first monthly interest payment shall be due and payable on
the 15th day of the calendar month following the month containing the
Commencement Date hereof (Month 1 of the Financing Term) . Each subsequent
monthly interest payment shall be paid by Debtor on the same date of each
succeeding calendar month.

3 . REPAYMENT AND PREPAYMENT. The aforesaid payments of principal and
interest shall be made to Secured Party at its office in Wichita, Kansas.
All payments shall be due and payable, without demand or notice to Debtor, in
strict accordance with the aforesaid monthly schedule of payments. Any
payment due on a non-business day may be made on the next succeeding business
day. Debtor's payments hereunder, when received, shall be applied first to
the payment of accrued interest (computed upon the unpaid balance of the
Principal Sum) and any late payment charges owed as of the date such payment
is received by Secured Party (if any), and the remainder of Debtor's payment
shall be applied to payment of the unpaid Principal Sum. The unpaid
Principal Sum and all accrued interest and late payment charges due hereunder
must be paid in full on the Due Date. Debtor may prepay the unpaid balance
of the Principal Sum in part or in full at any time and without any penalty.

4 . LATE PAYMENT CHARGE. In the event Debtor is more than ten (10)
days late in making any payment due hereunder as specified above, a late
payment charge in an amount equal to three percent (3%) of the amount of the
delayed payment shall be assessed against Debtor and added to the amount of
the delayed payment due hereunder for the purpose of defraying Secured
Party's expenses incident to handling the delinquent payment. Any late
payment charge assessed against Debtor shall be immediately due and payable
to Secured Party. The late payment charge shall be in addition to, and not
in lieu of, any other remedy provided to Secured Party in this Agreement for
default by Debtor.

<PAGE>

5. SECURED TRANSACTION. To secure the payment of Debtor's obligation
hereunder and any and all other indebtedness owed by Debtor to Secured Party
(whether now existing or hereafter arising) ,as well as any renewals,
extensions or changes in the form of said obligation or indebtedness, Debtor
has contemporaneously herewith executed a Loan and Security Agreement
(hereinafter "Security Agreement") granting to Secured Party a security
interest in all of Debtor's accounts receivables including but not limited to
the following:

All of Debtor's right, title and interest in and to the entire
Passenger Revenue, Air Freight, non-transportation, IATA, UATP and
net settlement amounts which are or shall be received for the account
of and are or shall become payable to Debtor by The Chase Manhattan
Bank, N.A. as agent for Airlines Clearing House, Inc.

All of Debtor' s right, title and interest in and to the entire
Passenger Revenues, Air Freight, and non-transportation amounts which
are or shall be received for the account of and are or shall become
payable to Debtor by Midway Airlines, Inc.

All of Debtor' s right, title and interest in and to the entire Passenger
Revenue, Air Freight, non-transportation, IATA, UATP and net settlement
amounts which are or shall be received for the account of and are or shall
become payable to Debtor by Airline Reporting Corporation.

6. PURPOSE OF LOAN. Debtor warrants and represents to Secured
Party that this loan is for business, commercial or agricultural
purposes and not primarily for personal, family or household purposes.

7 . DEBTOR'S DEFAULT. The parties agree that the occurrence of any
of the following events shall constitute an "Event of Default" :

(a) Debtor's failure to make any timely payment of either
principal, interest, late payment charges or any other
amount required to be paid hereunder, or Debtor's failure
to pay any amount required under any other promissory note,
security agreement or lease agreement between Debtor and
Secured Party, if such default is not cured by Debtor within
five (5) calendar days of receipt of Secured Party's notice
specifying such default;

(b) Debtor's failure to perform any promise, agreement,
obligation, warranty or covenant made by it herein or in the
Security Agreement, if such default is not cured by Debtor within
five (5) calendar days of receipt of Secured Party's notice
specifying such default;

(c) Five (5) calendar days after Secured Party provides
Debtor with written notice of any material misrepresentation
made by Debtor to Secured Party in connection with the Security
Agreement or this Agreement, provided that Secured Party is
materially prejudiced thereby;

<PAGE>

(d) entry of a money judgment against Debtor, if such judgment
is nonappealable and remains undischarged or unstayed for a
period in excess of sixty (60) days;

(e) dissolution, termination of existence, insolvency, business
failure, inability to pay debts as they mature, assignment
for the benefit of creditors, or the commencement, with
respect to Debtor, of any proceedings (either voluntary or
involuntary) under any bankruptcy or insolvency laws;

(f) appointment of a receiver of any material part or all of
Debtor's assets or the commencement of any involuntary
proceedings against Debtor under any bankruptcy or insolvency
laws, if such appointment or proceeding continues for a period
of more than sixty (60) days;

(g) Debtor entering into any transaction, without the prior
written consent of Secured Party, which consent will not be
unreasonably withheld, whereby all or substantially all of
Debtor's undertakings, property and assets would become the
property of any other company, whether by way of reconstruction,
reorganization, consolidation, amalgamation, merger, transfer,
sale or otherwise;

(h) default in the payment by Debtor of any indebtedness for
borrowed money owed to any creditor resulting in the
acceleration of a material amount of indebtedness greater
than U.S. $5,000,000.00 that would reasonably justify Secured
Party in deeming itself insecure;

(i) Debtor (or its Permitted Lessee) ceasing to be licensed
pursuant to U.S. or other applicable law to operate a
commercial air service; or

Should an Event of Default occur, Secured Party may employ all
remedies allowed by law, including declaring all indebtedness owed
hereunder, as well as any other indebtedness or liability of
Debtor owed to Secured Party, immediately due and payable.
Additionally, Secured Party may require Debtor to assemble the
Collateral and make it available to Secured Party at a place to be
designated by Secured Party which is reasonably convenient to both
parties. The requirements of the Kansas Uniform Commercial Code
for reasonable notification to Debtor of the time and place of any
proposed public sale of the Collateral or of the time after which
any private sale or other intended disposition of the Collateral
is to be made shall be met if such notice is mailed, postage
prepaid, to Debtor's address, as specified herein, at least ten
(10) days before the time of the sale or disposition. After
deduction of all reasonable expenses incurred in realizing on
Secured Party's security interest, and after the payment of all
principal, interest and late payment charges due under this
Agreement, the balance of the proceeds of sale, if any, may be
applied to the payment of any or all other indebtedness which
Debtor owes Secured Party, regardless of whether such indebtedness
is due or not. Debtor shall be liable for any deficiency in its
financial obligation under this Agreement after application of
such proceeds. Debtor agrees to pay the reasonable attorneys'
fees incurred by Secured Party to repossess the Collateral as well
as the attorneys, fees incurred in pursuing and collecting any
deficiency.

4
<PAGE>

8 . OBLIGATION TO MAKE PAYMENTS. Debtor acknowledges and agrees that
its obligation to make all payments due and owing under the provisions hereof
shall be absolute and unconditional and to the extent permitted by applicable
law shall not be affected by any circumstance whatsoever, including, without
limitation (a) any setoff, counterclaim, defense or other right which Debtor
may have against Secured Party or any other person or entity for any reason
whatsoever; (b) any liens or rights of others with respect to the Collateral;
(c) the invalidity or unenforceability or lack of due authorization of this
Agreement or any lack of right, power or authority of Debtor or Secured Party
to enter into this Agreement; (d) any insolvency, bankruptcy, reorganization
or similar proceedings by or against Debtor or any other person or entity; or
(e) any other cause whether similar or dissimilar to the foregoing, any
present or future law notwithstanding, it being the intention of the parties
hereto that all payments being payable by Debtor hereunder shall continue to
be payable in all events in the manner and at the time provided herein. Such
payments shall not be subject to any abatement, setoff or reduction for any
reason whatsoever, including any present of future claims by Debtor against
Secured Party under this Agreement or otherwise. To the extent permitted by
applicable law, Debtor hereby waives any rights which it may now have or
which may be conferred upon it, by statute or otherwise, to terminate,
cancel, quit or surrender this Agreement except in accordance with the terms
hereof.

9. WAIVERS. Debtor hereby waives any requirements pertaining to
presentment, demand for payment, notice of dishonor, and all other notices or
demands in connection with the delivery, acceptance, performance, default or
endorsement of this Promissory Note. No waiver of any covenant, warranty or
condition of this Agreement, nor of any breach or default hereunder, shall be
effective for any purpose whatsoever unless such waiver is in writing and
signed by an officer of Secured Party. It is expressly agreed that Secured
Party's waiver of any breach or default by Debtor shall constitute a waiver
only as to such particular breach or default and not a waiver of any future
breach or default.

10. LEGAL, VALID, BINDING AND ENFORCEABLE OBLIGATION. Debtor
represents and warrants to Secured Party that this Promissory Note, upon
execution and delivery, will constitute the legal, valid and binding and
enforceable obligation of Debtor. Debtor agrees to furnish Secured Party
with written legal opinions, satisfactory in form and substance to Secured
Party, verifying the aforesaid representation and warranty.

11. CHANGES OF ADDRESS. Debtor shall immediately notify Secured Party
in writing of any change of address from that shown in this Agreement.

12. GOVERNING LAW AND FORUM CHOICE. THIS AGREEMENT WAS MADE AND
ENTERED INTO IN THE STATE OF KANSAS AND THE LAW GOVERNING THIS TRANSACTION
SHALL BE THAT OF THE STATE OF KANSAS AS IT MAY FROM TIME TO TIME EXIST. THE
LAW OF THE STATE OF KANSAS SHALL APPLY TO ANY AND ALL MATTERS ARISING FROM OR
RELATED TO THIS AGREEMENT AND TRANSACTION, INCLUDING ANY ACTIONS UNDERTAKEN
BY SECURED PARTY SHOULD AN "EVENT OF DEFAULT" OCCUR, SUCH AS AN ACTION TO
OBTAIN POSSESSION OF AND FORECLOSE UPON THE COLLATERAL, AND ALL OTHER

5
<PAGE>

REMEDIES WHICH MAY BE AVAILABLE INCLUDING SEEKING A DEFICIENCY JUDGMENT
AGAINST DEBTOR. THE PARTIES AGREE THAT ANY LEGAL PROCEEDING BASED UPON THE
PROVISIONS OF THIS AGREEMENT SHALL BE BROUGHT EXCLUSIVELY IN EITHER THE
UNITED STATES DISTRICT COURT FOR THE DISTRICT OF KANSAS AT WICHITA, KANSAS,
OR IN THE EIGHTEENTH JUDICIAL DISTRICT COURT OF SEDGWICK COUNTY, KANSAS, TO
THE EXCLUSION OF ALL OTHER COURTS AND TRIBUNALS. NOTWITHSTANDING THE ABOVE,
IN THE EVENT AN "EVENT OF DEFAULT" SHOULD OCCUR, SECURED PARTY (AT ITS SOLE
OPTION) MAY INSTITUTE A LEGAL PROCEEDING IN ANY JURISDICTION AS MAY BE
APPROPRIATE IN ORDER FOR SECURED PARTY TO OBTAIN POSSESSION OF AND FORECLOSE
UPON THE COLLATERAL. THE PARTIES HEREBY CONSENT AND AGREE TO BE SUBJECT TO
THE JURISDICTION OF THE AFORESAID COURTS IN SUCH PROCEEDINGS.

13. ENFORCEABILITY. The provisions of this Agreement shall be
severable and, if any provisions are for any reason determined to be invalid,
void or unenforceable, in whole or in part, the remaining provisions shall
remain in full force and effect; provided that the purpose of the remaining
valid, effective and enforceable provisions is not frustrated; and provided
further that no party is substantially and materially prejudiced thereby.

14. ASSIGNABILITY. Secured Party shall have the absolute right to
assign, transfer or sell any of its rights under this Promissory Note to any
party of its choosing upon giving written notice thereof to Debtor. Debtor
may not assign or delegate any of its rights or obligations hereunder without
the prior written consent of Secured Party, which consent will not
unreasonably be withheld.

15. BINDING AGREEMENT. All obligations of Debtor hereunder shall bind
the heirs, legal representatives, successors and assigns of Debtor. If there
be more than one Debtor hereunder, their liabilities shall be joint and
several. All rights of Secured Party hereunder shall inure to the benefit of
its successors and assigns.

16. ENTIRE AGREEMENT. This Agreement and the Security Agreement
constitute the entire agreement between and among the parties with respect to
the subject matter hereof. There are no verbal understandings, agreements,
representations or warranties between the parties which are not expressly set
forth herein. This Agreement shall not be changed orally, but only in
writing signed by the parties hereto.

17. NOTICES. Any notice pertaining to this Agreement shall be deemed
sufficiently given if personally delivered or sent by registered or certified
mail, return receipt requested, to the party to whom said notice is to be
given. Notices sent by registered or certified mail shall be deemed given on
the third day after the date of postmark. Until changed by written notice
given by either party, the addresses of the parties shall be as follows:

6
<PAGE>

Debtor: Great Lakes Aviation, Ltd.
Attn.: President
190 Norwest Financial Center
7900 Xerxes Avenue South
Minneapolis, Minnesota 55431

Secured Party: Raytheon Aircraft Credit Corporation
Attn.: President
9709 East Central
Wichita, Kansas 67206

The designated addresses of both parties must be located within the
United States of America.

18. SIGNATORY AUTHORITY. The undersigned officer of Debtor verifies
and warrants that he/she has read this Promissory Note in its entirety, that
he/she understands its provisions and purpose, and that he/she has full
authority to sign and deliver the same on behalf of Debtor and to bind
Debtor, as a corporation, thereto.

In witness of the foregoing, Debtor has caused its duly authorized
officer to execute and deliver this Agreement at Wichita, Kansas on the day
and year herein stated.

GREAT LAKES AVIATION, LTD.

By: /s/ Douglas G. Voss
---------------------------
Douglas G. Voss, Chairman
"Debtor"

STATE of Kansas )
) ss:
COUNTY of Sedgwick )

This instrument was acknowledged before me on the 31st day of July,
1996, by Douglas G. Voss, who is the Chairman of Great Lakes Aviation, Ltd.,
on behalf of the corporation.

/s/ Pamela E. Bailey
---------------------------
Notary Public

My Commission Expires:
September 26, 1997

<PAGE>

Exhibit 23.1

CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS

As independent public accountants, we hereby consent to the incorporation of our
report incorporated by reference in this Form 10-K, into the Company's
previously filed Registration Statements File Nos. 33-90926.

ARTHUR ANDERSEN LLP

Minneapolis, Minnesota,
April 4, 1997

<PAGE>
<ARTICLE> 5

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 6,676,333
<SECURITIES> 0
<RECEIVABLES> 7,273,766
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<INVENTORY> 12,668,615
<CURRENT-ASSETS> 28,872,414
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<DEPRECIATION> (14,901,196)
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0
0
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