BALTIC INTERNATIONAL USA INC, 10KSB/A, 1996-06-12

BALTIC INTERNATIONAL USA INC
10KSB/A, 1996-06-12
AIR TRANSPORTATION, SCHEDULED

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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

FORM 10-KSB/A

[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, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]

Commission File Number: 0-26588

BALTIC INTERNATIONAL USA, INC.
(Exact name of registrant as specified in its charter)

Texas 76-0336843
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)

1990 Post Oak Boulevard, Suite 1630
Houston, Texas 77056
(Address of principal executive offices, including zip code)

(713) 961-9299
(Registrant's telephone number, including area code)

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

Securities registered pursuant to Section 12(g) of the Exchange
Act:

Common Stock, $.01 par value
Warrants
Title of Class

Indicate by check mark whether the registrant (i) has filed all
reports required to be filed by Section 13 or 15(d) of the Exchange
Act during the past 12 months (or for such shorter period that the
registrant was required to file such reports), and (ii) has been
subject to such filing requirements for the past 90 days. Yes [x] No
[ ]

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-KSB or any amendment to this Form 10-KSB. [ ]

Issuer's revenues for the year ended December 31, 1995 were
$6,499,953. The aggregate market value of Common Stock held by non-
affiliates of the registrant at March 29, 1996, based upon the last
sales price as reported by Nasdaq, was $7,898,918. As of March 29,
1996, there were 5,905,592 shares of Common Stock outstanding.

TABLE OF CONTENTS
Page

PART I
Item 1. Business............................................... 3

Item 2. Properties............................................. 15

Item 3. Legal Proceedings...................................... 15

Item 4. Submission of Matters to a Vote of Security Holders.... 15

PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters.................................... 15

Item 6. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................... 16

Item 7. Financial Statements................................... 25

Item 8. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.................... 25

PART III
Item 9. Directors, Executive Officers, Promoters and
Control Persons: Compliance with Section 16(a)
of the Exchange Act.................................. 25

Item 10. Executive Compensation................................. 28

Item 11. Security Ownership of Certain Beneficial Owners and
Management............................................. 31

Item 12. Certain Relationships and Related Transactions......... 32

Item 13. Exhibits and Reports on Form 8-K....................... 34

SIGNATURES

PART I
Item 1. BUSINESS

Baltic International USA, Inc. (the "Company" or "BIUSA") is a
Texas corporation which currently owns interests in, and participates
in the management of, aviation-related businesses operating primarily
in the Baltic States. The Company is identifying and developing
additional aviation-related and other business opportunities in the
Baltic States and the Newly Independent States. The Company owns 49%,
and assists in the management, of Baltic International Airlines
("BIA"), a Latvian joint venture-limited liability company based in
Riga, Latvia. BIA operated as a passenger airline from June 1992
through September 1995. The routes and passenger service operations
of BIA were transferred to a new Latvian carrier, Air Baltic
Corporation ("Air Baltic"), effective October 1, 1995. The Company
will continue to manage and operate BIA which it intends to operate as
a cargo and charter carrier and aviation services holding company.
However, since October 1995, BIA has not conducted any substantive
business operations. The Company also provides aviation-related
support services to Air Baltic, BIA, and other airlines, through other
ventures. The Company provides freight marketing services through
Baltic World Air Freight ("BWAF"), a wholly owned subsidiary, food
distribution services through American Distributing Company ("ADC"), a
wholly owned subsidiary, and owns a 50% interest in Baltic Catering
Services ("BCS"), an aviation catering and distribution company.

Recent Developments

On August 29, 1995, the Company entered into the Air Baltic
Joint Venture Agreement which resulted in the establishment of a new
Latvian passenger carrier, Air Baltic. The new airline began
operations on October 1, 1995. Pursuant to the Air Baltic Joint
Venture Agreement, the Company acquired a 20.02% interest in Air
Baltic. The joint partners of BIA contributed BIA's current scheduled
passenger service operation to the new airline, and ceased operations
as a scheduled service carrier when Air Baltic commenced operations
in October 1995. From October to December 1995, the Company managed
the interim flight operations of Air Baltic, subleased the two
western aircraft previously operated by BIA to Air Baltic and provided
crews for these aircraft for an aggregate fee of $1,500,000. In
addition, Air Baltic has paid a $1.5 million fee to the Company for
services rendered in connection with the training of Latvian cockpit,
cabin and ground personnel.

On January 10, 1996, the Company entered into an agreement to
sell 12% of Air Baltic stock to SAS for $1.7 million in cash and the
assumption by SAS of the remaining subordinated debt obligation of the
Company to Air Baltic of $2,175,000. The Company will retain a 8.02%
interest in Air Baltic. The Company expects this transaction to close
in April 1996. The Company's influence over and participation in the
management of Air Baltic is nominal.

In connection with the creation of Air Baltic in August 1995,
the Company purchased a 25% interest in Latvian Airlines, which was
formerly owned 100% by the Latvian government. The Company also took
over the operational management of Latvian Airlines and transferred
its routes to Air Baltic. Subsequent to the Company's purchase of its
25% interest in Latvian Airlines in September 1995, the Commercial
Court of the Republic of Latvia ruled to temporarily halt the further
privatization and restructuring of the charter and cargo operations of
Latvian Airlines proposed by the Company. The Court in March 1996
ruled that Latvian Airlines is to be liquidated. The Company cannot
yet determine the potential recovery of its investment in Latvian
Airlines and currently has a 100% reserve against the investment in
Latvian Airlines.

On September 28, 1995, the Company executed Articles of
Incorporation with the joint stock company Siauliai Aviacija,
presently 100% owned by the Ministry of Transportation of the Republic
of Lithuania, and the Municipality of Siauliai City to form Lithuanian
Aircraft Maintenance Corporation ("LAMCO"), a Lithuanian closed stock
company, for the purpose of establishing an aircraft maintenance
facility in Lithuania. The Company has the right to own up to 50% of
LAMCO. The Company's initial investment will total only 2.8% of
LAMCO. Further purchases of shares are anticipated during 1996 as the
business plans for the operating entities of LAMCO are concluded.
Siauliai Aviacija currently owns 96.7% of LAMCO and .25% is owned by
the Municipality of Siauliai City. The Company will have the right to
recommend the general manager, chief financial officer and department
heads for approval by LAMCO's board for a period of 10 years. The
Company will also have the authority to negotiate a line of credit for
LAMCO. The Company does not expect LAMCO to be fully operational
until late 1996 or early 1997, if at all.

LAMCO has charter capital of $1,845,000. The LAMCO Articles
will not be registered until the parties have contributed at least 25%
of their respective capital obligations. The Lithuanian partners have
made their cash capital contributions. The Company's initial capital
contribution is $40,000 of which 25% was contributed on March 26,
1996, with the remainder of the Company's capital contribution due by
May 1, 1996.

In February 1996, the Company entered into a joint venture
agreement with Topflight AB, a Stockholm-based airline catering
company, which resulted in the establishment of a new catering
company, Airo Catering Services ("ACS"). The Company owns 51% of ACS
and Topflight owns 49%. On April 2, 1996, the catering operations of
BCS were acquired by Riga Catering Services ("RCS"), previously owned
by Topflight AB, in exchange for the issuance of RCS shares to the
Company. RCS is currently owned 35% by ACS, 23.5% by the Company and
41.5% by the principals of the Company's partner in BCS. ACS will
develop additional airline catering companies in selected markets of
the Baltic States and the Newly Independent States. ACS is preparing
a business plan which will identify the areas which may demonstrate
the best opportunity for development of in-flight catering operations.
There can be no assurances that definitive agreements will be entered
into or that business operations will result from this joint venture.

On January 25, 1996, the Company submitted a proposal to the
Estonian Privatization Agency for the privatization of Estonian Air,
the National Airline of the Republic of Estonia. The proposal
submitted by BIUSA envisages the purchase of 66% of the shares of
Estonian Air by private companies and/or institutions. The Company
has proposed to arrange for the sale of the shares which the
government wishes to privatize. The privatization process is a
competitive one and BIUSA has submitted its proposal along with four
other interested parties. The Company's proposal does not anticipate
that the Company will use any of its internal resources to acquire
shares or seek external equity funds to acquire shares. Further,
there can be no assurances BIUSA will be successful in its efforts to
participate in the privatization of Estonian Air or that any resulting
operations to the Company's interest may occur.

Background

Prior to the break-up of the former Soviet Union, the civil
aviation industry of the Republics of the Soviet Union was wholly
owned and managed by Aeroflot, a Soviet state enterprise that operated
under the direction of the Ministry of Civil Aviation. The airline
operations of each Republic were divisions of Aeroflot. At the time
of the demise of the Soviet Union, the former Republics acquired the
aviation assets of their respective Aeroflot divisions.

The management of Aeroflot was highly centralized and most upper
management personnel were located in Moscow. After independence, the
former Republics were left with a shortage of qualified administrative
and operational management personnel. Additionally, their aviation
assets including aircraft, reservations equipment, air traffic control
and terminal facilities, were not of acceptable international
standards. While the national governments of the Baltic States and
Newly Independent States desired to improve their respective aviation
industries to attract Western businesses and tourists, they were
hampered by lack of qualified personnel and modern equipment and
facilities.

The void in international aviation expertise and the poor
quality of operating assets was compounded by the failure of former
Soviet state enterprises to become viable economic entities under free
market reforms. New national carriers lacked an economic basis for
operating much of their previous flight schedules. The Baltic States
and Newly Independent States lacked both the capital infrastructure
and expertise to survive in a free market environment. Moreover, the
breakup of the former Soviet Union disrupted traditional markets. The
decline in the economy throughout the former Soviet Union meant a
limited domestic demand for air travel.

In this dynamic environment, the Company believes that three
trends became evident: (i) state aviation enterprises were unable to
successfully effect the transition to a free market operation; (ii)
state aviation enterprises lacked the ability to attract sufficient
capital for upgrading of services and operations; and (iii) private
companies or Western joint ventures free of the excessive overhead and
bureaucratic burdens of state aviation enterprises have fared better.

Many of the Baltic States and Newly Independent States entered
into "free sky policies" or liberal bilateral aviation agreements with
Western aviation authorities to encourage Western carriers to serve
these new markets. The entry of Western carriers into these new
markets created a new demand for support services. In addition to
maintenance, Western carriers require international standard catering
and other inflight support services. At present, the Company believes
that the demand for such support services is not being met in the vast
majority of the Baltic States and Newly Independent States. Such
conditions require the Western carriers to provide for services in
advance of both legs of a round-trip, which increases costs due to
weight considerations and reduced cargo capacity.

Business Strategy of the Company

The Company was created as a vehicle for identifying, forming,
and participating in aviation-related business ventures in the Baltic
States and Newly Independent States. The Company's initial business
venture was to form and develop BIA. Further, the Company formed
related aviation ventures to provide support services, including a
catering service and a freight marketing company. The Company is
entitled to its pro rata share of profits and losses from the
operations of all of its business ventures.

The Company intends to continue to form and operate ventures in
the Baltic States and Newly Independent States. Management believes
that there are many low cost opportunities due to the general
underdeveloped nature of the marketplace and the need for essential
services in the region, such as air transportation and aviation-
related services. Management believes that an opportunity exists to
utilize its expertise in order to establish business opportunities to
take advantage of existing market conditions.

Components of the Company's strategic plan are outlined below.
The Company believes these activities are essential to the development
of western-standard passenger service airline operations and to
further the development of other aviation related businesses The
Company believes that its implementation of this strategic plan has
been and will continue to be instrumental in attracting additional
airline-related business opportunities.

Alliance with Governmental Partners in Airline Ventures. The
Company seeks airline partnerships, as a minority partner, with
governmental entities. When BIA was formed, the Latvian government's
role as the majority partner was beneficial to BIA in the area of
bilateral agreement negotiations, as well as in other areas during the
development and start-up phase of BIA.

Membership in International Aviation Organizations. When the
Company commenced operations, no former division of Aeroflot had
gained admission to the various international aviation organizations,
including one of the most important, the International Air Transport
Association ("IATA"). Management believes that international aviation
organizations were concerned with the political implications of
admitting former Aeroflot divisions. BIA was the first airline of the
Baltic States or Newly Independent States to become a member of all
the departments of IATA including full tariff coordination, membership
in automatic interline agreements with approximately 280 international
airlines, and clearing house membership.

Insuring Airline Operations According to International
Standards. As an independent carrier, BIA was, for example, required
to maintain insurance coverage meeting the requirements of
international aviation organizations and Western airport authorities.
The Company retained aviation insurance specialists to study in detail
the safety and maintenance records of the former Latvian Aeroflot
division and to observe safety and maintenance procedures. On the
basis of these visits, Alexander Howden Aviation prepared a report for
insurance underwriters of Lloyds of London, which led to the
successful underwriting of BIA's insurance in the London market at
rates the Company believes to be comparable to Western carriers.

Marketing Organization. When the Company commenced operations,
most former Aeroflot divisions were served by Aeroflot as their
marketing representative in the West. The Company succeeded in
setting up an international marketing network for BIA by recruiting
general sales agents in various markets. General sales agents supply
a wide array of services, such as advertising, airport services and
lost and found. The Company is prepared to set up marketing services
directly for other start-up airlines in the Baltic States and Newly
Independent States.

Ticket Stock. An airline's ticket stock can be printed only if
it has been assigned a two-letter IATA code and a three-letter IATA
ticketing code. The Company succeeded in obtaining the two- and
three-letter codes for BIA which allowed it to print its own ticket
stock according to international standards. BIA was the first airline
from the former Soviet Union to have its own ticket stock recognized
by international aviation organizations and international carriers.

Interline Agreements. No international airline can operate
without interline agreements, which permit one airline to write ticket
segments on another airline. The Company succeeded in obtaining
interline agreements on behalf of BIA with many of the international
carriers that offer interline passengers to the Baltic region. BIA
was the first carrier from the former Soviet Union to have formal
interline agreements with the major international airlines.

Bank Settlement Plan. The Company assisted BIA in obtaining
membership in the Bank Settlement Plan of IATA, which allows member
airlines to settle accounts with one another through a system of
automatic debits and credits. This arrangement allows member airlines
that do not presently serve Riga to write tickets without a separately
negotiated interline agreement.

Airport Contracts. Traffic rights to destinations in foreign
countries are subject to approval by, and successful negotiation of
bilateral agreements with, the destination country. Western airport
authorities and suppliers must be convinced of a carrier's financial
solvency, the soundness of its operating plan, and the competency of
its personnel before it will allow new carriers to fly to their
market. The Company arranged airport and supplier contracts on behalf
of BIA in Germany and in the United Kingdom and finalized the
contracts necessary to carry out these Western operations.

Aircraft Refurbishing. BIA started operations with Tupolev jet
equipment dating from the former Soviet Union. The Company was able
to arrange the refurbishing and repainting of these aircraft at
affordable prices to render the aircraft exteriors and interiors
acceptable to Western passengers.

Computerized Reservations Systems. The Company negotiated
contracts with recognized computerized reservation systems (SAAS,
SABRE, AMADEUS, GOLDSPAN, DATAS and SYSTEM ONE). These agreements
provided reservations systems and hardware equipment for use in Riga
and in Houston. Under these systems, flights are displayed with all
joint fares and reservation connections into and out of Riga, thereby
providing travel agents worldwide access to BIA's services.

Leasing of Western Equipment. The Company's challenge was to
bring in Western equipment at an affordable cost. Most leasing
companies require substantial deposits and guarantees which ultimately
make Western aircraft unaffordable to newly emerging carriers. The
Company was able to negotiate on favorable terms leases for Western
aircraft on behalf of BIA. The Company also organized a team of
experts to carry out maintenance procedures and establish supply and
maintenance programs for the safe and efficient operation of Boeing
727 equipment.

Catering Services. The Company established catering operations
as well as other related distribution operations in order to better
serve BIA, as well as other airlines. The catering services are
essential in order to upgrade service to meet international standards.

Freight Marketing. The Company is engaged in air cargo
marketing through BWAF to provide an additional means for carriers to
earn revenue.

The Attraction of Start-Up Capital. The major purpose of BIA's
business plan as prepared by the Company was to attract sufficient
capital to commence airline operations. The attraction of capital to
a region of uncertain political stability, uncertain economic reform
and legislation, and a questionable record of contract enforcement was
difficult. Despite the climate of uncertainty, the Company believes
that it has met its financial obligations under the terms of its joint
venture agreements.

The Company intends to market its abilities primarily through
management's long standing network in the region. Management is
regularly afforded aviation-related business opportunities in this
region and will utilize its discretion in determining which ventures,
if any, to pursue.

Airline Operations

BIA commenced scheduled passenger operations in June 1992, and
provided regularly scheduled service to and from Riga and Frankfurt,
Berlin, London, Tallinn, Amsterdam and Vilnius through September 1995.
In August 1995, the BIA route authorities, as well as those of Latvian
Airlines, were transferred to, and as of October 1, 1995 are operated
by, Air Baltic. Air Baltic currently provides passenger service on
the following routes:

Destination Frequency
----------- ---------
London 7 days per week
Frankfurt 7 days per week
Stockholm*** 7 days per week
Copenhagen* 7 days per week
Helsinki 7 days per week
Tallinn** 5 days per week
Warsaw 3 days per week
Kiev 4 days per week
Vilnius 5 days per week
Minsk 5 days per week

* Twice-daily service.
** Twice-daily service on Tuesday and Thursday.
*** Twice-daily service on Monday through Friday.

Additional routes, bringing the total routes to be serviced to
thirteen, are planned for 1996. However, there can be no assurances
any additional routes can be successfully negotiated resulting in a
commencement of operations. All routes may be subject to approval by,
and successful negotiation of bilateral agreements with, the
destination countries. Air Baltic management will require a
feasibility study and site visits as well as an established marketing
system before any additional routes can be initiated. Once a
bilateral agreement is entered into and the LDCA has confirmed the
award of the routes, Air Baltic will negotiate with various airports
for additional flight frequencies, times and services. There can be
no assurance that this intended expansion will occur.

Passenger Service and Aircraft

BIA initially operated Tupolev aircraft equipment until the
introduction of Western aircraft in August 1993. Management believes
that some Western travelers were reluctant to travel on Soviet
equipment, notwithstanding that BIA's equipment was fully refurbished
to Western standards. This reluctance may have restricted access to
potential passengers. The introduction of Western aircraft was
intended to mitigate passenger resistance. Air Baltic operates a SAAB
340 as well as two Avro 70 Jetliners. Air Baltic will use only
Western aircraft in its fleet and is currently developing a strategic
long-term plan for fleet selection. Air Baltic has entered into an
agreement with Avro International Aerospace to lease three Avro RJ70
aircraft for a period of seven years.

Air Baltic will pursue a strategy to maintain its fleet with low
cost Western aircraft for expansion to the East from its hub in Riga
as well as Western Europe. Cockpit, cabin crew, and maintenance
personnel have been and are being trained in the operation of the
Boeing aircraft and will undergo training for the aircraft selected
for the long-term needs of Air Baltic. Because of its low labor
expense, the strategy will be to ensure a long-term low cost
structure in the routine servicing and maintenance of its Western
aircraft fleet.

The SAAB 340 aircraft has a configuration of 34 single-class
seats, and the Avro 70 aircraft has a configuration of 70 seats.

Part of the strategy in the development of BIA and of Air Baltic
was to offer passenger service equivalent to service offered by major
United States carriers. All flights provide a multi-course meal to
business passengers as well as a full selection of newspapers and
periodicals. Duty-free services are offered to passengers and
management believes the level of service parallels that of
transatlantic in-flight passenger service.

BIA operated with full operational independence on the basis of
its own operating licenses and manuals, all of which met international
aviation standards and Air Baltic operations have a parallel standard.
The LDCA has determined to observe FAA rules in the operation of
Western aircraft by Latvian carriers. BIA's and Air Baltic's
operating procedures are designed to conform to FAA standards.

The Boeing aircraft previously used by BIA are not currently
being utilized. The Company is negotiating to return these aircraft
to the owner.

Marketing, Advertising and Promotion

BIA's services were marketed primarily through Skylink GmbH, the
airline's general sales agent in Germany, and Chapman Freeborn, the
airline's general sales agent in the United Kingdom. General sales
agents are used to attract Western business from Europe and the United
States. In Latvia, BIA used local travel agents in Riga and
surrounding cities to market the airline. These relationships will be
maintained by Air Baltic.

Air Baltic intends to concentrate its marketing efforts to
attract groups from the appropriate ethnic markets in Europe and the
United States that have large Latvian populations. Management
believes that lower operating costs than many of its competitors will
allow Air Baltic to offer comparatively attractive fares to business
and tourist passengers. Air Baltic intends to use advertising dollars
to increase its loads and a formal marketing program is currently
under development.

The development and implementation of Air Baltic's marketing
program will be managed and supervised by SAS in its capacity as
manager of Air Baltic and the Company has completed negotiations to
manage Air Baltic's North American marketing program. If the
Company's marketing staff will supervise and appoint general sales
agents and sales agents, monitor fares and computerized flight
listings, and prepare promotional material.

Maintenance and Training

BIA has provided routine and scheduled servicing and maintenance
for its aircraft using its own personnel who have been trained by BIA
and have met appropriate certification of the Ministry of
Transportation of the Republic of Latvia. BIA believes it has engaged
sufficient personnel, as well as professional consultants, with
appropriate experience to insure proper servicing and maintenance of
its aircraft. From October through December 1995, BIA personnel
provided similar services to Air Baltic. Air Baltic personnel, some
of which were transferred from BIA, will also ensure that maintenance
and training programs are in place to meet required certification in
the Republic of Latvia.

Wet Lease

The Company and Air Baltic entered into a Wet Lease Agreement in
October 1995 which provided for the sublease of the Boeing aircraft to
Air Baltic through December 31, 1995. This agreement also provided
that the Company and/or BIA operate and staff Air Baltic's flight
operations and maintain insurance, with Air Baltic responsible for
ground handling. Air Baltic paid the Company a fee of $1,500,000
pursuant to the wet lease. The Company continues to be responsible
for the leases of the Boeing aircraft through July 1996, respectively,
and the Company is negotiating with the owner to return the aircraft
prior to the end of the lease.

BIA Joint Venture Agreement

In June 1991, the Company entered into an agreement with the
LCAB to form BIA for the primary purpose of establishing international
airline operations in the Republic of Latvia, including passenger,
freight, mail, airplane maintenance, catering and baggage handling
operations, which would service North America, Western Europe, the
Baltic States and the Newly Independent States. Effective July 1993,
the Company entered into a settlement agreement with the Latvian
Ministry of Transportation and Latvian Airlines (as the legal
successor to LCAB) whereby Latvian Airlines ceased to be the owner of
the Latvian share of BIA and the Latvian Aviation Department, an
agency of the Government of Latvia (the "Latvian Partner") was
appointed as such owner. The ownership shares were set at 40% for the
Company and 60% for the Latvian share. Under an agreement reached
September 15, 1994, the Company's share was increased to 49% and the
Latvian share was reduced to 51% as a consequence of the Company
converting a $2 million advance into equity. The following is a
summary of the more significant provisions of the BIA joint venture
agreement, as amended ("BIA Joint Venture Agreement").

Cash and Property Investment. BIA is owned 49% by the Company,
and 51% by the Latvian Partner. To date, the investment contribution
made by the Company has consisted of hard currency funds and other
capital and services used in the initial development of BIA, while the
Latvian Partner's and its predecessor's investment contribution has
primarily consisted of the TU134 aircraft. The Latvian Partner has
indicated its intent to make an additional contribution of real estate
to BIA as they are deficient in contributing capital to BIA.

General Duties. The Company's responsibilities under the BIA
Joint Venture Agreement include, without limitation, the negotiation
of any and all agreements of BIA necessary to carry out its
operations, marketing, the refurbishing of older generation aircraft
and providing of new aircraft, and financial planning. Furthermore,
in accordance with the BIA Joint Venture Agreement, the Company
generally provides advice and training for all flight operations of
BIA, including without limitation, maintenance of BIA's aircraft and
training of all of BIA's flight personnel.

Management and Control. The BIA Joint Venture Agreement
requires the creation of a 10-member board of directors, currently
comprised of nine members, and delegates all management control of BIA
to the board which is elected annually. Six members of the board are
designated by the Latvian Partner, and the remaining four members are
designated by the Company. It is expected that the current vacancy on
the BIA board will be filled by the Latvian Partner. The board has
the authority to appoint executive, audit and financial management
committees; however, none of these committees has been appointed to
date.

The attendance of six board members, including at least one
director designee of the Company and one designee of the Latvian
Partner, constitutes a quorum for all meetings of the board. All
decisions made by the board require the vote of at least 66% of the
directors constituting a quorum and present in person or by proxy at
any meeting of the board. Furthermore, certain major decisions
including, without limitation, the merger or dissolution of BIA, the
incurring of indebtedness, the encumbrance of any of BIA's assets
other than in the ordinary course of business and the issuance of
additional ownership shares in BIA, require the vote of at least 80%
of the directors of the entire board. Meetings of the board may be
held by teleconference or other similar means of communication, and
each director of BIA is entitled to vote in person or by proxy at any
meeting of the board. Accordingly, certain major decisions, such as
those aforementioned, may not be effected by BIA without the consent
of the Company.

Officers. The BIA Joint Venture Agreement provides for the
election of officers of BIA, who are responsible for the daily
management of BIA. Directors appointed by both the Company and the
Latvian Partner jointly elect the officers of BIA. Officers and
Directors of the Company who also serve as officers and directors of
BIA include Juris Padegs, Robert L. Knauss, Homi M. Davier, Paul
Gregory and James Goodchild.

Financial Activity and Distributions. The net profits generated
from the operations of BIA shall, subject to certain contributions to
an established reserve fund, first be utilized to pay taxes and other
expenses, and then distributed, on a pro rata basis, to the Company
and the Latvian Partner. So long as funds are legally available, all
net profits of BIA shall be distributed to the Company and the Latvian
Partner in accordance with their respective ownership interests in
BIA. Furthermore, the Company has the unilateral right under the BIA
Joint Venture Agreement to demand a pro rata distribution of 50% of
the net profit of BIA to the Company and the Latvian Partner. The
Company has not received any distributions of net profits from BIA.

Termination and Liquidation. The term of the BIA Joint Venture
Agreement is perpetual; however, BIA may be dissolved and liquidated
upon the occurrence of any of the following events: (i) the adoption
of a resolution by the board of directors dissolving BIA; (ii) the
insolvency of BIA; or (iii) transformation of BIA into a different
form of business activity. In the event the BIA Joint Venture
Agreement is terminated as a result of a default of the terms and
provisions of the BIA Joint Venture Agreement by the Company or the
Latvian Partner, the nondefaulting party has the right and is entitled
to continue the business of BIA by acquiring the defaulting party's
interest in BIA. The nondefaulting party may do so by paying the
defaulting party 10% of the fair market value (which shall be deemed
to be two times the annual gross revenues of BIA times the defaulting
party's percentage of ownership in BIA) in hard currency as a down
payment, with the balance to be paid in monthly installments of
principal and interest for a period of 10 years at a rate of 10% per
annum. The nondefaulting party has 180 days after termination of the
BIA Joint Venture Agreement to exercise the right to carry on the
business and purchase the defaulting party's shares in BIA or
liquidate BIA.

Governing Law and Arbitration. Under the BIA Joint Venture
Agreement, the Company and its Latvian Partner agree to submit
disputes that cannot be resolved between the parties to binding
arbitration at the Arbitration Institute of the Stockholm Chamber of
Commerce in Stockholm, Sweden, to be conducted pursuant to the
arbitration rules of the United Nations Commission on International
Trade Law. Such disputes will be governed by the Republic of Latvia
Law on Limited Liability Companies to the extent such law is
applicable; otherwise, Swedish law will be applied.

Current Status. BIA's passenger revenue service operations and
route authorities were contributed to Air Baltic as of August 29,
1995, and its passenger service revenue production was transferred to
Air Baltic on October 1, 1995. BIA has therefore discontinued the
passenger service portion of its operations. BIA has maintained its
rights and privileges to conduct charter and cargo operations as a
Latvian carrier and has maintained in good standing all of its
international organization memberships which would permit it to
conduct non-passenger related activities. The Company intends to
develop the charter and cargo operation of BIA. The Company has no
specific business plan at this time and has no estimate of capital
needs, if any, to develop the charter and cargo operations of BIA and
can make no assurances that BIA will commence operations as a charter
and cargo carrier.

Air Baltic Joint Venture Agreement

The following is a summary of the more significant provisions of
the Air Baltic Joint Venture Agreement.

Cash and Property Investment. Air Baltic is owned 8.02% by the
Company, 28.51% by SAS, 51.07% by the Republic of Latvia and 12.4% by
two Scandinavian financial institutions. The Company's and the
Republic of Latvia's shares in Air Baltic were obtained in exchange
for a contribution of the scheduled passenger service operation of
BIA. In addition, the Republic of Latvia contributed cash and real
estate to the new airline. SAS and the two Scandinavian financial
institutions contributed cash for their shares. Under the terms of
the Air Baltic Joint Venture Agreement, the parties other than the
Company, may be required to provide additional financing, if
necessary, in the form of subordinated debt.

Management and Control. The Air Baltic Joint Venture Agreement
created a seven-member board of directors. The Republic of Latvia has
designated four directors, SAS nominated two directors and the
Scandinavian financial institutions jointly have nominated the seventh
director. The board is responsible for supervising the actions of the
executive management as well as adopting business plans, budgets and
approving material agreements, borrowings and expenditures. The
attendance of six directors constitutes a quorum for all meetings of
the board. Each director has one vote and all matters to be decided
by the board require a majority of six votes in order for a decision
to be approved.

The agreement also provides that certain matters, including
distribution of profits, are to be decided by the parties themselves
in a participants' meeting. Participants having more than 75% shall
constitute a quorum. All matters to be decided

by the participants
shall be decided by simple majority except that certain matters,
including amendments, share issuances and reorganizations, require a
quorum of 90% and a majority of 90% of the votes cast either at a
meeting or in writing.

Executive Management. The executive management will manage the
development of the new airline except with respect to matters which
are specifically reserved to the board or participants. The executive
management shall report to the board via chief executive officer. For
a period of 10 years from the date of the Air Baltic Joint Venture
Agreement, SAS shall have the right to nominate the chief executive
officer, chief financial officer, chief flight operations officer,
chief technical officer and chief ground operations officer, subject
to approval by the board. To the extent that any of the executive
management positions are not filled by Latvian citizens or permanent
residents, the chief executive officer will appoint Latvian citizens
or permanent residents as deputies in order to achieve a transfer to
know-how with respect to finance, technical, flight operations, ground
operations and sales and marketing. Executive management will be
responsible for the day-to-day management of the airline, efficient
management of the airline including preparation and achievement of
business plans, preparation and delivery of monthly financial
statements and management reports, and obtaining services to be
provided to the airline by third parties on the best available terms.

Financial Activity and Distributions. So long as funds are
legally available, all net profits of Air Baltic shall be distributed
to the participants in accordance with their respective ownership
interest in Air Baltic.

Termination and Liquidation. The Air Baltic Joint Venture
Agreement shall continue for the duration of the airline's existence,
unless sooner terminated. The agreement may be terminated if the
airline has not commenced scheduled flight operations within six
months of the date of the agreement, a resolution is passed for the
winding-up of the airline, the airline becomes insolvent, the airline
makes a general assignment for the benefit of creditors, or the
airline has a receiver or other manager appointed over all or a
substantial part of its business or assets.

Governing Law and Arbitration. The construction, validity and
performance of the Air Baltic Joint Venture Agreement shall be
governed by Swedish law, subject to the mandatory requirements of
Latvian law. Any disputes under the agreement shall be referred to
and resolved by arbitration under the rules of the Arbitration
Institute of the Stockholm Chamber of Commerce in Stockholm, Sweden.

Current Status. Air Baltic began its passenger service
operations on October 1, 1995. From October 1, 1995 through December
31, 1995, Air Baltic's fleet consisted of two Boeing 727 aircraft
subleased from the Company, and one leased SAAB 340. The lease on the
SAAB 340 is expected to be renegotiated. Air Baltic has also entered
into an agreement with Avro International Aerospace to lease three
Avro RJ70 aircraft for seven years. These aircraft are modern narrow
bodied mid range aircraft.

Baltic World Air Freight

BWAF, a wholly-owned Latvian limited liability company, provides
cargo marketing services and is the cargo agent for BIA. BWAF is
currently negotiating with Air Baltic to become Air Baltic's cargo
marketing services company and cargo agent. Air Baltic has engaged
BWAF to serve as Air Baltic's interim cargo and cargo marketing agent
until a decision is made on definitive terms for a contract between
Air Baltic and BWAF. BWAF was formed to develop air cargo networks
between the Baltic States and Newly Independent States and Europe.
BWAF provides international standard air cargo management and services
to start-up and existing carriers. The Company believes that movement
of cargo within the large geographical areas of the Baltic States and
Newly Independent States is more efficient through air transportation,
due primarily to the lack of well-developed trucking and rail
networks. BWAF is also responsible for negotiating agreements
relative to the loading and unloading of freight, documentation of
shipments and development of policies for performance of the actual
carriage of freight.

BWAF is in the process of determining the merits of the
development of a cargo center at Riga International Airport to act as
a central point for shipping air cargo from Riga. With the expected
development of Riga International Airport as a hub, the growth of air
cargo will require a terminal for servicing the cargo needs of the
market area. The Riga International Airport has requested a grant
from the United States Trade Development Agency to engage the Company
to conduct a feasibility study with respect to the development of a
cargo center.

In addition to serving as the cargo agent for BIA and Air
Baltic, BWAF is negotiating with other regional carriers from the
Baltic States and former Soviet Union. There can be no assurance that
any definitive agreements will be executed with respect to any carrier
from the region.

Other Aviation-Related Ventures

Baltic Catering Services

BCS is an airline catering and duty-free products company, as
well as a wholesale food distributor. In connection with the
formation of BCS, the Company entered into a limited liability company
agreement with ARVO, Ltd., a Latvian limited liability company, the
term of which is perpetual, unless sooner terminated by the terms and
provisions of the limited liability agreement. Each venturer is
entitled to 50% of the distributions, profits and losses. ARVO, Ltd.
supervises the day-to-day production and preparation of catering
services and the construction and management of kitchen and other
catering facilities. The Company has overall management
responsibility, manages all financial matters and negotiates and
manages all third-party relationships.

BCS is the catering agent for Air Baltic and for seventeen
other international airline carriers serving Riga International
Airport. BCS maintains a kitchen at Riga International Airport for
wholesale food production. BCS operates a cafeteria for airport
employees and office workers located at the airport, which was built
in exchange for a five-year rent-free lease on property on the grounds
of the airport. BCS is a full-service airline catering company
located at Riga International Airport and provides catering, duty-free
and other in-flight support service products to Western airlines
servicing Riga. The availability of these services saves the
additional expense for the Western carriers in extra weight and
increases the cargo capacity of the aircraft. BCS' strategy is to
offer international standard catering and other in-flight support
services which meet the needs of the Western carriers traveling to
Riga.

BCS was also a wholesale distributor of food products. BCS
hired a management and sales staff and secured duty-free warehouse
space and offices at Riga International Airport for management of its
wholesale food distribution operations. Effective December 1, 1995,
BCS sold the rights to distribute Miller Beer products in Riga, Latvia
to ADC.

Lithuanian Aircraft Maintenance Corporation

On September 28, 1995, the Company executed Articles of
Incorporation with the joint stock company Siauliai Aviacija,
presently 100% owned by the Ministry of Transportation of the Republic
of Lithuania, and the Municipality of Siauliai City to form LAMCO, a
Lithuanian closed stock company, for the purpose of establishing an
aircraft maintenance facility and other aviation-related businesses in
Lithuania. The Company has the right to own up to 50% of LAMCO. The
Company's initial investment will total only 2.8% of LAMCO. Further
purchases of shares are anticipated during 1996 as the business plans
for the operating entities of LAMCO are concluded. Siauliai Aviacija
currently owns 96.7% of LAMCO and .25% is owned by the Municipality of
Siauliai City. The Company will have the right to recommend the
general manager, chief financial officer and department heads for
approval by LAMCO's board for a period of 10 years. The Company will
also have the authority to negotiate a line of credit for LAMCO. The
Company does not expect LAMCO to be fully operational until late 1996
or early 1997, if at all.

LAMCO has an authorized charter capital of $1.845 million. The
LAMCO Articles will not be registered until the parties have
contributed at least 25% of their respective capital obligations. The
Lithuanian partners have made their cash capital contributions. The
Company's initial capital contribution is $40,000 of which 25% was
contributed on March 26, 1996, with the remainder due by May 1, 1996.

American Distributing Company

The Company has been granted exclusive rights to distribute
selected Kraft products throughout the Baltic States. Additionally,
the Company has been granted rights to distribute Miller Beer products
in St. Petersburg, Russia. The Company intends to develop these
opportunities through a wholly owned Latvian limited liability
company, under the name of American Distributing Company. ADC will
operate the Kraft operation independently, but will work with a local
St. Petersburg based company to commence activities related to
distribution of Miller products in St. Petersburg.

Effective December
1, 1995, ADC acquired the rights to distribute Miller products in
Riga, Latvia from BCS. The Company intends to finance the activities
of ADC from internal sources of liquidity, or seek external financing
if necessary.

Airo Catering Services

In February 1996, the Company entered into a joint venture
agreement with Topflight AB, a Stockholm-based airline catering
company, to establish ACS, a new catering company. The Company owns
51% of ACS and Topflight owns 49%. On April 2, 1996, the catering
operations of BCS were acquired by Riga Catering Services ("RCS"),
previously owned by Topflight AB in exchange for shares in RCS. RCS
is currently owned 35% by ACS, 23.5% by the Company and 41.5% by the
principals of the Company's partner in BCS. ACS will develop
additional airline catering companies in selected markets of the
Baltic States and the Newly Independent States. ACS is preparing a
business plan which will identify the areas which may demonstrate the
best opportunity for development of in-flight catering operations.
There can be no assurances that definitive agreements will be entered
into or that business operations will result from this joint venture.

Government Regulation

Republic of Latvia Law on Foreign Investment

In November 1991, the Republic of Latvia adopted the Law on
Foreign Investment ("Foreign Investment Law"), which was designed to
encourage the participation by foreigners in the establishment of
Latvian joint ventures. The Foreign Investment Law generally provides
certain preferential tax advantages to ventures formed under the
Foreign Investment Law beginning in the year in which profits are
first generated from the operations of such ventures. In addition,
the Foreign Investment Law permits non-Latvian entities to own up to a
100% interest in most Latvian business entities, including airlines.

Pursuant to the Foreign Investment Law, ventures having foreign
participation of at least 30% (with a minimum investment of at least
$50,000) are exempt from profit taxes for a period of two years, and
thereafter for the following two years, profit taxes for such ventures
are reduced by 50%. Ventures having foreign participation in excess
of 50% (equal to at least $1,000,000), are exempt from profit taxes
for a period of three years, and thereafter for the following five
years, profit taxes for such ventures are reduced by 50%. In
addition, ventures which are active in certain industries deemed to be
"preferential" by the government of the Republic of Latvia and having
foreign participation of at least 30% (with a minimum investment of at
least $50,000) are entitled to a three-year tax holiday from the
payment of profit taxes, and thereafter for the following two years,
profit taxes for these "preferential" ventures are reduced by 50%.

The business of BIA, and also of Air Baltic, is deemed to be a
preferential industry, entitling it to a three-year profit tax holiday
for the first year in which it generates profits, and a 50% reduction
in profit taxes for the following two years. To date, BIA has not
generated any profits in any year. Furthermore, because the Company
has a 51% interest in BCS, BCS is entitled to a two-year profit tax
holiday for the first year it generates profits, and a 50% reduction
in profit taxes for the following two years.

Republic of Latvia Law on Limited Liability Companies

The formation and operation of joint venture-limited liability
companies within the Republic of Latvia is regulated and governed by
the Republic of Latvia Law on Limited Liability Companies ("Company
Law"). A joint venture-limited liability company is recognized as a
separate legal entity under the Company Law for purposes of
transacting business in the Republic of Latvia, and accordingly, a
joint venture-limited liability company can incur its own obligations
and liabilities with respect to its business operations. Furthermore,
the capital shareholders of a joint venture-limited liability company
are afforded limited liability with respect to any acts or obligations
of the joint venture-limited liability company. Accordingly, the
Company will not be liable, because of its status as owner of a joint
venture-limited liability company interest or as owner of any
subsidiary registered as a Latvian limited liability company, for any
obligations incurred by Air Baltic, BIA, BCS, BWAF or ADC resulting
from their respective business operations.

Republic of Latvia Law on Aviation

BIA and Air Baltic are subject to government regulation and
control under the laws of the Republic of Latvia and the laws of the
various countries which they serve. They are also governed by
bilateral air services agreements between the Republic of Latvia and
the countries to which they provide airline services. In April 1993,
the Republic of Latvia adopted the Law On Aviation ("Aviation Law"),
which regulates and governs all areas related to the aviation industry
in the Republic of Latvia, including the air transportation safety
standards, and is administered by the LDCA. The Aviation Law
generally corresponds to the internationally recognized standards,
requirements and regulations of the International Civil Aviation
Organization ("ICAO"), and the Republic of Latvia is a signatory to
the ICAO, the Chicago Convention and the Warsaw Convention. In
accordance with the Aviation Law all aircraft operating in the
Republic of Latvia are required to carry and maintain certificates of
air worthiness issued by the LDCA, and are required to carry
certificates of competency issued by the LDCA covering each member of
its operating crew. Furthermore, with respect to flight operations,
the Aviation Law requires that journey log books, containing
information regarding the aircraft, its crew and each journey, be
maintained for each aircraft engaged in air navigation in the Republic
of Latvia.

In order to conduct operations as an air carrier in the Republic
of Latvia, BIA and Air Baltic were required to, and did, obtain
certain certificates and licenses relating to the registration of
aircraft, airworthiness, each crew member and aircraft radio stations.
Air Baltic and BIA are subject to continuing regulation and inspection
by the LDCA regarding flight operations, maintenance programs and
operations personnel, flight training and retaining programs, security
program, ground facilities, dispatch, communications, equipment,
carriage of hazardous materials and other matters affecting air
safety. With respect to airports and routes, the LDCA requires each
air carrier to obtain an operating certificate and operation
specifications authorizing the carrier to operate to particular
airports on approved routes using specific equipment, such
certificates and specifications being subject to amendment,
suspension, revocation or termination by the LDCA. Air Baltic and BIA
currently hold a LDCA certificate and operations specifications
pursuant to the Aviation Law with respect to the airports used and
routes flown by Air Baltic and BIA.

In accordance with the Aviation Law, the LDCA has the authority
to suspend temporarily or revoke permanently the authority of Air
Baltic and BIA or its licensed personnel for failure to comply with
regulations promulgated by the LDCA and to assess civil penalties for
such failures. The LDCA has the power to bring proceedings to enforce
the safety laws and regulations of Air Baltic and BIA's authority to
operate. The Company believes that Air Baltic and BIA are in
compliance with all requirements necessary to maintain in good
standing its operating authority granted by the LDCA. A modification,
suspension or revocation of any of Air Baltic and BIA's LDCA
authorizations, certificates or licenses could have a material adverse
effect upon Air Baltic and BIA.

The LDCA also regulates landing and takeoff "slots" at Riga
International Airport. A "slot" is an authorization to take off or
land at Riga International Airport within a specified time window.
Air Baltic and BIA do not own any slots but instead apply to the LDCA
for use of slots at Riga International Airport as needed. While the
LDCA has the authority to revoke Air Baltic and BIA's landing rights,
the Company does not believe it will do so because the LDCA has had a
policy of encouraging air traffic at the airport, and also since the
controlling interest of Air Baltic and BIA is held by an entity
controlled by the Latvian government. Certain foreign airports served
by Air Baltic and BIA are also subject to slot allocations
administered by the local airports or the governments of the countries
in which such airports are located. To date, BIA has generally been
successful in obtaining the slots it needed to conduct planned
operations. Air Baltic has had no problems with obtaining permission
to conduct operations in the Scandinavian airports, but has to date
not been able to secure slots at airports served by Latvian Airlines.
While Air Baltic and the Company believe Air Baltic will be able to
soon service intended routes called for in the business plan of Air
Baltic, there can be no assurance that it will be able to do so, due
to among other things, government factors, government policies
regulating the distribution of slots in foreign countries, and the
potential for foreign airports to be unwilling to authorize slots as a
result of prior experience with Latvian Airlines.

International air services are generally governed by a network
of bilateral civil air transport agreements in which traffic rights
are exchanged between governments which then select and designate air
carriers authorized to exercise such rights. In the absence of a
bilateral agreement, such international air services are governed by
principals of comity and reciprocity. The provisions of such
agreements pertaining to charter services vary considerably depending
on the particular country. Scheduled international services also
subject to the provisions of bilateral agreements, which may specify
the city-pair markets that may be served, restrict the number of
carriers that may be designated, provide for prior approval by one or
both governments of the prices the carrier proposes to charge, limit
the amount of capacity to be offered in the market, and in various
other ways impose limitations on the operations of air carriers, such
as Air Baltic and BIA.

Political, Economic and Social Climate of Destination Countries

Air Baltic intends to expand its operations to geographic areas
which are subject to evolving political, economic and social climates,
including other Baltic States and other republics of the former Soviet
Union. Failure to improve political, economic or social stability in
these regions could have an adverse effect on the future operations
and expansion efforts of Air Baltic.

Competition

The Company's aviation business ventures face competition from
other companies and individuals who have also recognized the Baltic
States and Newly Independent States as a developing market. Air
Baltic as a passenger service carrier, faces competition from other
airlines, many of which have longer operating histories, greater name
recognition, greater financial resources, more extensive facilities
and equipment, and better marketing resources. Other aviation-related
ventures that the Company currently operates, or in the future may
operate, presently compete and will compete with other entities, many
of which may have greater financial, marketing and technical
resources.

Air Baltic assumed the scheduled passenger service operations of
BIA and Latvian Airlines and is designated as the international air
carrier of Latvia. As such, Air Baltic will experience no competition
from other Latvian-owned airlines. Management believes that
competition may develop in the future from private start-up regional
carriers based in Latvia or in nearby states which may want to provide
service between Riga and other destinations. These competitors, may,
however, wish to compete directly with Air Baltic on the same routes
or compete for new routes which Air Baltic also wishes to serve.

Western airline traffic to Riga has increased since the
restoration of independence in the Baltic States. Riga International
Airport is now served by approximately eight European carriers on a
scheduled basis. Air Baltic can expect increased competition at its
major Western European destinations, and from carriers which offer
interline service from North America to Riga via other hubs. Air
Baltic currently competes with Lufthansa German Airlines on its
Riga-Frankfurt route; with SAS and FinnAir on its London-Riga route;
with RIAIR on its London-Riga route; and with FinnAir on its Riga-
Helsinki route. Air Baltic experiences no competition on its
Stockholm or Copenhagen routes.

The development strategy for Air Baltic includes expansion to
destinations in the other Baltic States and Newly Independent States,
and other major metropolitan centers. At present, such markets are
either not served with regularly-scheduled service or are
underdeveloped and serviced only infrequently by carriers such as
Lufthansa German Airlines or the national carrier of the given state.
The Company has no specific knowledge of the plans of Lufthansa German
Airlines or any other major airline as it relates to expansion into
markets which Air Baltic may develop in the future.

Employees

The Company currently employs 10 persons on a full time basis.
The Company has in the past, and will continue in the future, to
employ independent contractors, and to make extensive use of its
outside directors and others as consultants. Air Baltic currently
employs approximately 140 persons on a full time basis, including
pilots, mechanics, cabin crews, airport services and administrative
personnel. BIA currently employs one person. BCS employs an aggregate
of approximately 66 persons, and BWAF employs 3 persons, and ADC
employs 21 persons. None of the employees of the Company, BIA, Air
Baltic, BCS, BWAF or ADC are represented by a labor organization. The
Company believes its relationships with all of these employees are
satisfactory.

Insurance

BIA and Air Baltic are exposed to potential losses that may be
incurred in the event of an aircraft accident. Any such accident
could involve not only repair or replacement of a damaged aircraft and
its consequent temporary or permanent loss from service, but also
significant potential claims of injured passengers and others. BIA
currently maintains comprehensive airline liability insurance in the
amount of $150 million per occurrence for its Tupolev aircraft. BIA
does not maintain property damage insurance on its TU134 aircraft
because management believes such coverage to be uneconomical. BIA
maintains comprehensive airline liability insurance and property
damage insurance on its two Boeing 727 aircraft as required by the
leases on such aircraft. In addition, BIA's insurance expenses could
significantly increase if BIA were to decide to provide future charter
and/or cargo service to destinations where military action is taking
place. Any such increases in expenses could have a material adverse
effect on BIA.

Air Baltic maintains liability and property damage insurance on
its SAAB 340 and Avro RJ70 aircraft through the insurance consortium
which insures SAS aircraft. Air Baltic will select the lowest cost
high standard third party

provider of liability and property damage
insurance on the future aircraft to be selected for the long term
needs for Air Baltic's development. Air Baltic insurance expenses may
significantly increase due to the addition of aircraft, the
acquisition of modern aircraft and due to a decision by Air Baltic to
provide service to destinations where military action is taking place.
Any such increases in expenses could have a material adverse effect on
Air Baltic.

The Company believes Air Baltic and BIA operate professionally
and prudently; however, airline services involve significant risks of
potential liability. The Company believes that the Latvian Division
of Aeroflot had an excellent reputation for safety and maintenance.
The Company believes that BIA was the first privatized part of a
former Aeroflot division to obtain Western insurance through Lloyds of
London. No material claim has been asserted against BIA to date or
Air Baltic, and Air Baltic and BIA are not aware of the basis for any
such claim. There can be no assurance that all possible types of
liabilities that may be incurred by Air Baltic and BIA are covered by
its insurance or that the dollar amount of such liabilities will not
exceed BIA's policy limits.

Item 2. PROPERTIES

The Company leases approximately 3,500 square feet of office
space in Houston, Texas for a monthly rental of approximately $3,000.
The Company believes that its facilities are adequate for its current
operations.

Air Baltic leases its offices at Riga Airport occupying
approximately 6,000 square feet. Air Baltic plans to open additional
sales offices in the downtown business center of Riga.

The facilities of the Company's other aviation-related business
ventures are satisfactory for current purposes.

Item 3. LEGAL PROCEEDINGS

Not applicable.

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

Not applicable.

Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS

The Company's Common Stock is listed on the Nasdaq Small-Cap
Market under the symbol "BISA." Public trading of units (consisting
of one share of Common Stock and one warrant) ("Units") on Nasdaq
commenced on April 28, 1994. The Units became separable and public
trading of the Common Stock on Nasdaq commenced on June 27, 1994. The
following table sets forth the high and low last sales prices of the
Common Stock for the periods indicated:

Price Range
Fiscal Year High Low
----------- ---- ---
1994
Second Quarter (commencing June 27, 1994) $5.000 $4.250
Third Quarter 4.750 3.625
Fourth Quarter 3.875 1.750

1995
First Quarter 2.375 1.250
Second Quarter 2.000 0.688
Third Quarter 3.625 1.313
Fourth Quarter 3.500 0.938

The Units traded on Nasdaq from April 28, 1994 through June 26,
1994, and the high and low bid price of the Units during this period
were $7.00 and $4.625, respectively. On March 29, 1996, the last
sales price for the Common Stock was $2.50, and the Company believes
there were approximately 700 beneficial holders of its Common Stock.

The Company has not paid, and the Company does not currently
intend to pay cash dividends on its Common Stock. The current policy
of the Company's Board of Directors is to retain earning, if any, to
provide funds for operation and expansion of the Company's business.
Such policy will be reviewed by the Board of Directors of the Company
from time to time in light of, among other things, the Company's
earnings and financial position.

Item 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with the
financial statements and notes thereto included elsewhere herein.

General

The Company was formed in March 1991 as a vehicle for identifying,
forming and participating in aviation-related ventures in the Baltic
States and Newly Independent States. In June 1991, the Company
entered into a joint venture agreement with the LCAB, an agency of the
government of Latvia, and created BIA as a joint venture-limited
liability company under the laws of Latvia. The Company owns a 49%
joint venture interest in BIA, which provided passenger airline
service from June 1992 through September 1995. In September 1992, the
Company formed BWAF which commenced operations in 1993. In March
1993, BCS was formed and commenced operations. Substantially all of
the Company's revenues have historically been derived from BIA.

Pursuant to the Air Baltic Joint Venture Agreement, the Company
acquired a 8.02% interest in the capital of Air Baltic. The joint
venture partners of BIA contributed BIA's current scheduled passenger
service operation to Air Baltic which commenced operations in October
1995. From October 1, 1995 to December 31, 1995, the Company managed
the interim flight operations of the new airline, subleased two
western aircraft previously operated by BIA and provided crews for
such aircraft. In addition, Air Baltic has paid a $1.5 million fee
to the Company for services rendered in connection with the training
of Latvian cockpit, cabin and ground personnel. The Company intends
to operate BIA as a cargo and charter carrier.

BIA's operations are expected to become insignificant with respect
to their overall impact on the financial condition of the Company. As
Air Baltic is in the start-up phase, there is no financial history to
evaluate.

Both the Company's and BIA's internally generated cash flows from
operations have historically been and continue to be insufficient for
their cash needs. BIA has historically relied upon financing provided
by the Company to supplement its operations and continues to rely upon
such financing. The Company also continues to rely on external
financing to supplement its operations. The Company's current
independent accountants have modified their opinion with respect to
the Company's and BIA's financial statements for the year ended
December 31, 1995 to reflect that incurred losses from operations have
raised substantial doubt about the ability of the Company and BIA to
continue as a going concern. The reports of the Company's prior
independent accountants on the financial statements of the Company and
BIA as of December 31, 1994 and for each of the two years in the
period then ended included an explanatory paragraph indicating that
the Company's financial statements included a significant investment
in Baltic International Airlines which has incurred losses from
operations that raise substantial doubt about its ability to continue
as a going concern and that BIA had incurred losses from operations
that also raised substantial doubt about its ability to continue as a
going concern. The Company's prior independent accountants also noted
in each of the explanatory paragraphs that the financial statements
did not include any adjustments that might result from the outcome of
such uncertainty. If it appears at any time in the future that the
Company is again approaching a condition of cash insufficiency, the
Company will be required to seek additional debt or equity financing,
curtail operations, sell assets, or otherwise bring cash flow in
balance. Management does not anticipate a need for any such action
and therefore has no specific plans or commitments with respect
thereto for the Company. However, if such action were required, there
is no assurance that the Company would be successful in any such
effort.

The Company's operations have been insufficient as a source of
funds to meet the Company's capital requirements and other liquidity
needs. The Company believes it can raise sufficient amounts of
additional equity and obtain debt financing in order to meet its
liquidity requirements for the remainder of the year ending December
31, 1996. However, management has no specific plans or commitments
with respect thereto for the Company, and there can be no assurance
the Company will be successful in any effort. Historical earnings
history of the Company have been directly affected by the consistent
advances to BIA. The Company does not anticipate any further advances
to BIA which would adversely impact earnings. The other operating
interests of the Company do not require significant advances and are
currently profitable. However, there can be no assurances that the
Company, as a whole, will not continue to experience liquidity
difficulties or losses.

Baltic International USA, Inc.

The Company's revenues have historically been derived from its
equity in the net income of its joint ventures; fees for management
services rendered pursuant to a management agreement between BIA and
the Company; commissions due from sales of airline tickets under the
international promotional sales agreement between BIA and the Company;
and the Boeing 727 aircraft rental charged to BIA. During 1994, the
Company contributed its revenues earned from BIA because of the
uncertain collectibility of such fees. The Company does not charge
management fees to its other ventures. Substantially all of the
operational activity of the Company is reflected in the fees from, and
the net equity in earnings and losses of, joint venture investments,
as the Company uses the equity method to record its interest in its
joint ventures owned 50% or less. The Company's losses relating to
joint venture activities were $437,479 for 1993, $4,339,676 for 1994
and $3,071,222 for 1995. Furthermore, the Company contributed
$969,561 of revenues earned from BIA during 1994.

Current Latvian law does not restrict the repatriation of cash to
foreign participants in joint ventures and recent amendments to the
foreign investment law have reaffirmed the structure permitting
repatriation of profits. However, there can be no assurances that
repatriation of profits in the future will not be restricted. Since
the Company's ventures currently generate revenues in United States
dollars or in other major currencies, repatriation of cash has not
been historically affected by exchange rate differentials between the
Lat and the United States dollar.

Beginning in 1994, the Company contributed certain of its charges
to BIA due to the uncertain collectibility of such charges from BIA.
Management fees were charged by the Company to BIA pursuant to the
terms of a management agreement with BIA which expired on December 31,
1994. This agreement provided that the Company will provide certain
managerial and professional services and facilities to BIA and be
reimbursed by BIA. In 1994, the Company charged BIA for actual costs
incurred on behalf of BIA, primarily pilots' salaries, consulting fees
and an allocation of officers' salaries. Sales commissions are
charged on sales of airline tickets pursuant to the terms of the
international promotional sales agreement between BIA and the Company.
The Company uses the accrual basis of accounting for its expenses and
other investments. The Company has incurred consulting expenses for
services rendered by an unrelated party in connection with the
acquisition of aircraft and for marketing and sales services rendered
by an affiliate of Mr. Davier.

Property and equipment includes computers and other office
equipment, is stated at cost, and depreciated to estimated residual
value using the straight-line method over the estimated useful lives
of three to twenty years.

In December 1993, the Company issued 116,800 options exercisable
over a three-year period at $.50 per share which will result in a
compensation expense to the Company amortized over a three-year
period. Options to purchase 21,000 shares of common stock have been
canceled unexercised. The compensation expense recorded by the
Company for options issued at an exercise price lower than the market
price at the date of grant was $190,145 and $97,668 for the years
ended December 31, 1995 and 1994, respectively.

From January through March 1995, the Company issued $800,000 in
bridge financing notes payable, pursuant to which warrants to purchase
80,000 shares of Common Stock of the Company at $1.00 per share were
issued. In the third quarter of 1995, the Company issued additional
warrants to purchase an aggregate of 171,000 shares to consultants for
services rendered. These warrants are exercisable for $1.00 per share
and expire in August 2000. Effective June 30, 1995, an aggregate
principal amount of $1,185,000 of bridge notes payable was converted
to 118,500 shares of Series A Preferred Stock convertible into 592,500
shares of Common Stock, and $145,000 in short-term debt was converted
into 116,000 shares of Common Stock. In September 1995, an additional
$45,000 of bridge notes were converted to 4,500 shares of Series A
Preferred Stock convertible into 22,500 shares of Common Stock. Also
from March through December 1995, the Company received proceeds of
approximately $2,660,943 relating to the issuance of 2,693,841 shares
of Common Stock pursuant to private sales and the exercise of
outstanding stock options. In November 1995, the Company issued
warrants for an aggregate of 15,000 shares of Common Stock to
employees at an exercise price of $2.25 per share for services
rendered. In December 1995, the Company issued $100,000 in bridge
financing notes payable, pursuant to which warrants to purchase 10,000
shares of Common Stock at $1.00 per share were issued. These notes
were repaid in March 1996. Also in December 1995, the Company issued
warrants to purchase an aggregate of 90,000 shares of Common Stock to
employees at an exercise price of $1.375 per share and options to
purchase an aggregate of 213,000 shares of Common Stock to employees
and directors at an exercise price of $1.375 per share.

Effective February 22, 1996, the Company created its Series B
Convertible Redeemable Preferred Stock ("Series B Preferred Stock").
The Company is authorized to issue 70 shares of Series B Preferred
Stock, $25,000 stated value and $10 par value per share. The Company
issued 50 shares thereof for aggregate net proceeds of $1,093,750 in
February and March 1996. The Series B Preferred Stock; (i) is not
entitled to receive dividends; (ii) is convertible at any time by the
holders thereof on or after the 55th day after the date that the
shares were issued at a conversion price equal to the lesser of $2 per
share or 82% of the 5-day average closing bid price of the Company's
Common Stock; (iii) is non-voting; (iv) carries a liquidation
preference of $25,000 per share plus interest equal to 10% of the
stated value per annum since the issuance date, and after payment in
full of the Series A Preferred Stock; and (v) is redeemable only at
the option of the Company if the conversion price is $0.75 or less per
share. In connection with the sale of Series B Preferred Stock, the
Company issued warrants to purchase an aggregate of 78,125 shares of
Common Stock at an exercise price of $2.40 per share, which warrants
expire in March 2001.

The Company's Joint Ventures

Baltic International Airlines. BIA utilizes the accrual basis of
accounting, and revenues are recognized when earned and expenses are
recognized when goods and services are acquired or provided. Revenues
are recognized when the transportation is provided rather than when
the ticket is sold. Passenger traffic commissions are recognized when
the transportation is provided and the related sales are recognized.
Revenues not yet recognized are reflected as unearned revenue, a
current liability. However, since October 1995, BIA has not conducted
any substantive business operations.

BIA's intangible assets included developmental and preoperating
costs, most of which were incurred prior to commencement of operations
in June 1992. Developmental and preoperating costs include the cost
associated with inaugurating service over BIA's routes, the
development of such routes, pilot training and the cost of acquiring
aircraft and access to airports, reservation systems and other
operating assets, which costs are amortized over a three-year period.
BIA had intangible assets consisting of net developmental and
preoperating costs of $548,754, $217,755 and $0 at December 31, 1993,
1994 and 1995, respectively.

Property and equipment consist of aircraft and improvements,
furniture and fixtures, leasehold improvements and ground
transportation equipment, depreciated over the estimated useful lives
of such assets. The salvage value of aircraft and improvements has
been assumed to be zero. BIA uses the deferral method of accounting
for overhauls whereby overhaul costs are capitalized when incurred and
amortized until the next expected overhaul. In February 1996, BIA and
the Company entered into an agreement to return the two leased
aircraft to the owner. As a result, BIA accelerated the depreciation
on leasehold improvements which have a net book value of $0 at
December 31, 1995.

In November 1991, the Republic of Latvia enacted a law on foreign
investments, which provides certain exemptions from profit taxes on
foreign-owned joint ventures beginning with the year in which the
first profit is made. There are no income tax benefits associated
with losses incurred.

Air Baltic. Air Baltic utilizes the accrual basis of accounting,
and revenues are recognized when earned and expenses are recognized
when goods or services are acquired or provided. Revenues are
recognized when the transportation is provided rather than when the
ticket is sold. Passenger traffic commissions are recognized when the
transportation is provided and the related sales are recognized.
Revenues not yet recognized are reflected as unearned revenue, a
current liability. Air Baltic produces its financial reports
consistent with international GAAP. While Air Baltic's operations did
not commence until October 1, 1995, the company was formed in January
1995, which permitted Air Baltic the opportunity to take advantage of
the Republic of Latvia's Law on Foreign Investments, which provides
for certain exemptions from profit taxes on foreign-owned joint
ventures beginning with the year in which the first profit is made.
However, there will be no income tax benefits associated with losses
incurred.

Other Joint Ventures. Prior to 1995, the Company has not earned
significant equity in the net income nor has it received significant
distributions from its joint venture interest in BCS or from BWAF
and, accordingly, such impact on the Company's operations has not been
material. During 1994, the Company received cash distributions from
BCS of approximately $132,000. The operations of BWAF have been
consolidated for 1995.

On September 28, 1995, the Company executed Articles of
Incorporation with the joint stock company Siauliai Aviacija,
presently 100% owned by the Ministry of Transportation of the Republic
of Lithuania, and the Municipality of Siauliai City to form Lithuanian
Aircraft Maintenance Corporation ("LAMCO"), a Lithuanian closed stock
company, for the purpose of establishing an aircraft maintenance
facility in Lithuania. The Company has the right to own up to 50% of
LAMCO. The Company's initial investment will total only 2.8% of
LAMCO. Further purchases of shares are anticipated during 1996 as the
business plans for the operating entities of LAMCO are concluded.,
Siauliai Aviacija owns 96.7% of LAMCO and .25% is owned by the
Municipality of Siauliai City. The Company will have the right to
recommend the general manager, chief financial officer and department
heads for approval by LAMCO's board for a period of 10 years.

The Company will also have the authority to negotiate a line of credit for
LAMCO. The Company does not expect LAMCO to be fully operational
until late 1996 or early 1997, if at all.

LAMCO has a charter capital of $1.845 million. The LAMCO
Articles will not be registered until the parties have contributed at
least 25% of their respective capital obligations. The Lithuanian
partners have made their cash capital contributions. The Company's
initial capital contribution is $40,000 of which 25% was contributed
on March 26, 1996, with the remainder paid in May 1996.

In connection with the creation of Air Baltic in August 1995, the
Company purchased a 25% interest in Latvian Airlines, which was
formerly owned 100% by the Latvian government. The Company also took
over the operational management of Latvian Airlines and transferred
its routes to Air Baltic. Subsequent to the Company's purchase of its
25% interest in Latvian Airlines in September 1995, the Commercial
Court of the Republic of Latvia ruled to temporarily halt the further
privatization and restructuring of the charter and cargo operations of
Latvian Airlines proposed by the Company. The Court in March 1996
ruled that Latvian Airlines is to be liquidated. The Company cannot
yet determine the potential recovery of its investment in Latvian
Airlines and currently has a 100% reserve against the investment in
Latvian Airlines.

Results of Operations

Baltic International USA, Inc.

Years Ended December 31, 1995 and 1994. Revenues for 1995
increased by $4,201,167 to $4,527,295 compared to $326,128 for 1994.
This increase is principally due to a non-recurring fee of $1,500,000
collected from Air Baltic in payment of market development and
training for Latvian pilots, flight attendants and mechanics and non-
recurring wet lease revenue of $1,500,000 received from Air Baltic.
Also, payments made to the Company from BIA for aircraft rental
income, commissions paid on the sale of airline tickets, and freight
revenue contributed to the increase of which no such corresponding
revenue was recorded in the prior year. The revenue improvement was
also due to an increase in the Company's earnings from its investment
in BCS and the consolidation of BWAF and its freight revenue beginning
October 1, 1994.

Operating expenses increased 5% to $6,805,079 for 1995 compared to
$6,498,872 for 1994. This increase was due to an increase in costs
related to aircraft rental, freight, food distribution, personnel and
consulting and in general and administrative expenses partially offset
by a decrease in net equity in losses of BIA. The increase in general
and administrative expenses was due primarily to the reserve of the
Latvian Airlines investment of $468,950. The additional increase in
cost of revenue is due to freight costs related to BIUSA's purchase in
October 1994 of its joint venture partner's interest in BWAF. The
purchase of the joint venture partner's interest in BWAF changed the
accounting treatment of BWAF from the net equity method to
consolidated accounting, resulting in the expenses of BWAF being
reflected in BIUSA's operating expenses. The additional increase in
rental expense is from the addition of the second Boeing 727 aircraft
lease which was not in place for the full comparable period in 1994.

Interest expense increased by $76,271 or 63% to $197,505 for 1995
from $121,234 in 1994, due to higher borrowings in 1995.

Interest income increased from $8,510 for 1994 to $195,415 for
1995. This increase is due primarily to interest paid by BIA on
outstanding debt to the Company.

The Company had a net loss of $2,127,624 for 1995 compared to a
net loss of $6,343,195 for 1994. The decrease in net loss is due
primarily to the decrease in the Company's net equity in losses of BIA
and the revenues received from Air Baltic.

Years Ended December 31, 1994 and 1993. Revenues for 1994
decreased 16% to $326,128 compared to $389,299 for 1993. This
decrease was due to the Company deferring revenues earned from BIA in
1994, offset by an increase of $187,601 or 351% in the Company's
equity in earnings of BWAF and BCS during the same period and an
increase of $85,000 in revenues earned on freight transportation since
the acquisition in October 1994 of the remaining interest in BWAF.

The Company's operating expenses for 1994 were $6,498,872 compared
to $799,774 for 1993. This increase was attributable to (i) the
increased level of operations in 1994; (ii) the addition of Boeing 727
aircraft leases in 1994 resulting in rental expenses of $370,196 in
1994 versus $0 in 1993; and (iii) an increase in equity in losses of
BIA. The Company's portion of the losses of BIA was $4,580,752 for
1994 as compared to $490,954 for 1993, an increase of $4,089,798 or
833%. This increase is attributable to three factors: (i) increased
net losses incurred by BIA from $1,311,955 for 1993 to $5,112,664 for
1994, reflecting BIA's additional start-up and development activities
during

1994 and a loss on the sale of an aircraft of $876,677; (ii)
the Company's increased percentage ownership of BIA from 33% to 40% in
July 1993 and further to 49% on September 15, 1994; and (iii) the
provision for loss by the Company in 1994 of $2,322,682 relating to
its investment in and advances to BIA due to the uncertain
realization of such investment in and advances to the extent that the
Company has funded losses of BIA attributable to the Latvian Partner's
interest.

Personnel and consulting expenses increased to $461,490 for 1994
from $194,801 in 1993; an increase of 137%, due to the hiring of
additional contract and full time personnel, salaries of executive
officers which commenced in May 1994, recognition of stock option
compensation expenses, and the use by the Company of consultants and
advisors in connection with its strategy of participating in
investment opportunities. Aircraft rent expense increased $370,196
for 1994 from zero in 1993 due to the acquisition of two Boeing 727
aircraft leases in May 1994. Legal, professional, and other general
and administrative expenses increased 473% to $654,171 for 1994 from
$114,019 for 1993, due primarily to increased occupancy costs, travel,
and professional fees associated with the increased level of
operations and the investigation and negotiation of additional joint
venture opportunities. Additionally, in 1994, the Company incurred
expenses of approximately $374,000 related to a postponed public debt
offering.

Interest expense increased $78,449 to $121,234 for 1994 as
compared to $42,785 for 1993. The increase resulted primarily from
borrowings of $1,393,340 of bridge financing notes between August 1993
and April 1994, at interest rates ranging from prime plus 1% to 15%.
Such borrowings were repaid in May 1994. Subsequently, the Company
borrowed $955,000 in deferred lease credits and in bridge financing
between October and December 1994, the majority of which bears
interest at 10%.

During 1994, the Company recorded an extraordinary loss of $78,587
resulting from the write off of the unamortized discount on debt which
was retired early upon completion of the Company's initial public
offering, and an extraordinary gain of $14,000 upon settlement of a
long-term obligation for less than the recorded amount of such
obligation.

The Company had a $6,285,468 loss before income taxes and
extraordinary item for 1994 compared to a loss before income taxes of
$423,837 for 1993. Net loss for 1994 and 1993 was $6,343,195 and
$430,697, respectively.

The Company conducts all of its transactions in U.S. dollars.

Baltic International Airlines

Years Ended December 31, 1995 and 1994. Revenues for 1995
increased by $1,250,628 (17%) to $8,760,990 compared to $7,510,362 for
1994. The increase was due primarily to an increase in passenger
revenues reflecting an increase in the number of passengers per sector
flown. This was offset by the transfer of the scheduled passenger
carrier service effective October 1, 1995 to Air Baltic which
resulted in no passenger revenue for the fourth quarter of 1995.
Actual load factors remained constant for the comparable period;
however, capacity was increased, through the completion of the
introduction of Boeing equipment, from 72 seats to 108 seats per
flight, effective February 1995. While capacity has been increased by
50%, load factors have remained constant for 1995 versus 1994.
Additionally, passenger service revenue increased with the addition of
expansion of service to Amsterdam twice a week which began in February
1995. BIA carried 34,920 revenue passengers for the nine months ended
September 30, 1995 versus 30,437 revenue passengers for the year ended
December 31, 1994.

Operating expenses for 1995 increased 33% to $16,518,257 compared
to $12,406,159 for 1994. The increase was due primarily to (i) higher
operating costs of the two Boeing 727 aircraft compared to the Tupolev
134 aircraft previously used by BIA; (ii) additional operating expense
related to the addition of the service to Amsterdam; (iii) increased
lease training; and (iv) increased depreciation of leasehold
improvements on the Boeing 727 aircraft which were put in service in
February 1995.

Airport handling and navigation expense increased 42% to
$7,081,284 from $5,003,261 for 1994 reflecting increased costs of
navigation and handling of the larger and heavier 727 aircraft. As a
percentage of revenue, airport handling and navigation expense was 81%
for 1995, versus 67% of revenue for 1994.

Fuel costs increased 21% to $2,060,950 from $1,701,436 for 1994.
The increase is due primarily from the increased fuel consumption of
the 727 over the Tupolev 134 due to heavier weight and a third engine
on the Boeing 727 versus two on the Tupolev. Fuel costs as a
percentage of revenue increased slightly at approximately 24% for 1995
versus 23% for 1994. Fuel prices remain relatively consistent to
prices paid in 1994 and did not impact the increased cost of fuel for
1995.

Lease costs increased 32% to $856,482 from $648,823 for 1994. The
lease expense increase is attributable to the use of both Boeing 727
aircraft for 1995 versus possession for only approximately four months
of 1994.

Other costs of services include aircraft maintenance and reserve,
training and education, insurance, flight payroll and interline
payments. Such costs in the aggregate increased 133% to $3,759,095
from $1,613,633 for 1994. Approximately 48% of the increase is
attributable to the use of the 727 aircraft for much of 1995 versus
approximately four months of possession but no use of the Boeing 727
aircraft for 1994. Insurance increased 63% to $523,070 from $321,794
for 1994. The increase is attributable to insurance coming into
effect reflecting passenger service use of the Boeing 727 aircraft
versus insurance costs at December 31, 1994 reflecting possession of
the 727 aircraft but prior to implementation of service. Aircraft
maintenance and repair and maintenance reserve expense increased to
$1,688,028 from $270,454 for 1994. The increase is attributable to
routine maintenance performed on the 727 aircraft for passenger
service operation which did not exist at December 31, 1994. Catering
costs increased 83% to $518,334 from $283,260 for 1994. The increase
was primarily due to the increased level of passengers, an increase in
prices for both business and economy meals and the enhanced business
class menu on the Boeing 727 service.

BIA uses the deferred method of accounting for overhaul costs on
its owned aircraft, whereby overhaul costs will be capitalized when
incurred and amortized over the period until the next expected
overhaul. BIA uses the accrual method of accounting for overhaul
costs on its leased aircraft. The two leased aircraft are being
returned to the owner. The next scheduled overhaul on the reserve
Tupolev aircraft is scheduled for May 1996 and is expected to cost
approximately $50,000.

General and administrative expenses increased 48% to $1,694,578
from $1,146,834 for 1994. The increase was primarily due to increased
travel and lodging expense associated with training of Latvian cockpit
and cabin personnel in the operation of the 727 aircraft, increased
salary expense and payroll taxes and communication expense.
Depreciation and amortization increased 27% to $657,078 from $516,643
for 1994. The increase was due primarily to increased depreciation on
the Boeing 727 aircraft which were put in service in February 1995.

Interest expense increased by $223,202 or 106% to $433,613 for
1995 from $210,611 in 1994 due to higher borrowings in 1995.

On August 29, 1995, the joint venture partners of BIA entered into
the Air Baltic Joint Venture Agreement, pursuant to which they
contributed the scheduled passenger carrier service of BIA to Air
Baltic. These business operations were transferred on October 1,
1995. The losses of BIA related to these discontinued operations are
$8,010,374 and $4,943,820 for the years ended December 31, 1995 and
1994, respectively. BIA recorded a loss on the disposal of these
operations of $1,712,237 included in the statement of operations for
the year ended December 31, 1995. At September 30, 1995, the Company
elected to forgive $4,042,255 of debt from BIA and this forgiveness
has been recorded as an extraordinary item on the statement of
operations of BIA.

Years Ended December 31, 1994 and 1993. Revenues for 1994
increased 108% to $7,510,362 compared to $3,608,575 for 1993. This
increase was due primarily to an increase in passenger revenues
reflecting increased load factors from 22% to 34%, and a 49% increase
in available seat miles resulting from increased frequencies during
certain months, the addition of a DC9 aircraft during January and
February 1994, and the addition of service to Estonia in September
1994. These factors were partially offset by an approximate 5%
decrease in yield during 1994 from $0.21 per revenue passenger mile to
$0.20 per revenue passenger mile. BIA carried 32,264 revenue
passengers in 1994 as compared to 14,142 in 1993.

Operating expenses for 1994 increased 155% to $12,406,159 compared
to $4,873,490 for 1993, due primarily to (a) increased costs for
developing new routes; (b) leasing additional aircraft for seven
months in 1994; (c) increased ground handling and navigation fees; (d)
increased management fees and pilots' salaries charged by the Company;
and (e) a loss of $876,677 on the sale in December 1994 of a TU134
aircraft. BIA recorded $648,823 in aircraft rental expense in 1994 as
compared to $0 in 1993. For 1994, BIA recorded $590,823 in aircraft
rental expense on the Boeing 727 aircraft which are subleased from the
Company but were not operational during that time. The remaining
$58,000 related to rentals on a DC9 aircraft operated in January and
February 1994 and on a charter flight.

Fuel costs increased 94% from $875,897, or 24% of revenues for
1993, to $1,701,436, or 23% of revenues for 1994. The increase is
attributable almost entirely to increased level of operations as fuel
prices remained relatively constant during the periods, averaging
approximately $0.87 per gallon. BIA's results of operations are
sensitive to fluctuations in fuel prices. There can be no assurances
that fuel prices will not increase in the future.

Ground handling, airport charges and navigational charges
increased 147% from $2,059,104 during 1993 to $5,003,261 for 1994, due
to the increased frequencies operated in 1994. In addition to adding
service to Estonia in

September 1994, BIA increased its frequencies to
Frankfurt, London and Hamburg during the year ended December 31, 1994
as compared to the same period in 1993, which increased its costs of
ground handling, airport and navigational fees accordingly.

Commission expenses increased from $295,120, or 8% of revenue in
1993 to $345,553, or 5% of revenue in 1994. The increase in
commissions is a result of the increase in operations and revenues.
The decrease in commissions as a percent of revenues relates to the
increase in sales in 1994 from airport ticket locations, particularly
in Riga, Latvia.

Other costs of services includes primarily catering, insurance,
maintenance and flight payroll. Such costs in the aggregate increased
206% from $527,997 to $1,613,633 in 1994. Approximately 20% of the
increase was the result of insuring the additional western aircraft
acquired in 1994. Insurance costs increased from $100,280 during 1993
to $321,794 during 1994, resulting from the fact that BIA has insured
its Boeing 727 aircraft acquired in May 1994 and does not carry hull
insurance on its Tupolev aircraft because it would be uneconomical.
Additionally, maintenance expenses totaled $270,453 in 1994 as
compared to $26,704 in 1993, a 913% increase resulting from the
western aircraft.

BIA uses the deferred method of accounting for overhaul costs on
its aircraft, whereby overhaul costs will be capitalized when incurred
and amortized over the period until the next expected overhaul.

General and administrative expenses increased 91% to $1,146,834
for 1994 from $599,998 for 1993, primarily reflecting increased
salaries, consulting costs and travel costs. Depreciation and
amortization increased 19% to $516,643 for 1994 from $434,506 for
1993. As a result of the aforementioned factors, including BIA's
expansion and efforts to obtain and insure Western aircraft, BIA's
operating expenses per available seat mile increased from $.05 for
1993 to $.08 for 1994. The increase, when combined with a reduction
in yield per revenue passenger mile from $0.21 for 1993 to $.20 for
1994, resulted in an increase of BIA's break-even load factor from 30%
for 1993 to 45% for 1994.

During 1994, BIA incurred $553,299 of nonrecurring costs relating
to acquiring the Boeing 727 aircraft and developing new markets and
routes. BIA began service on a code-share basis on one of the new
routes, from Riga to Tallinn, in September 1994. BIA commenced
service between Riga and Amsterdam two times a week in January 1995.
Management of the Company and BIA anticipate that substantially all of
the expenses related to acquiring the Boeing 727 aircraft and
developing these routes have been incurred and are reflected in BIA's
results of operations for 1994.

In December 1994, BIA sold one of its TU134 aircraft for $350,000.
As a result, BIA incurred a loss of $876,677.

BIA had a loss from operations of $4,895,797 for 1994 compared to
$1,264,915 for 1993, due primarily to increased costs incurred in
developing new routes and the loss on the sale of the aircraft.
During 1994, the Company had non-operating expenses comprised
primarily of interest expense to the Company of $210,411. Net loss
for 1994 was $5,112,664 compared with $1,311,955 for 1993.

BIA conducts its operations in several currencies and as such is
subject to foreign currency exchange gains and losses. BIA's sales
revenues are collected primarily in Latvian Lats or U.S. Dollars, and
to some extent in German Marks and British Pounds Sterling
Historically, BIA's gains and losses on translation of its sales
revenues have been immaterial due to the close relationship between
the values of the Lat and the U.S. Dollar. BIA's expenses are
incurred and paid in U.S. Dollars, Marks and Pounds Sterling.

BIA continued to expand its route structure and increase the
frequency of its service during 1994. The expenses associated with
the opening of additional routes in 1994, and the costs of introducing
Western aircraft service are primarily responsible for the increased
loss for 1994.

Liquidity and Capital Resources

At December 31, 1995 the Company had a working capital deficit of
$2,129,2365 compared to a working capital deficit of $401,285 at
December 31, 1994. The increase in working capital deficit is due
primarily to the accrual of $1,019,521 for the commitments for
guarantees on BIA liabilities. The Company had stockholders' equity of
$1,029,226 at December 31, 1995.

Net cash provided by operating activities was $2,531,097 for 1995,
compared to net cash used by operating activities of $1,410,874 for
1994. The increase in cash provided by operating activities was
primarily due to the non-recurring fee of $1,500,000 collected from
Air Baltic in payment of training of Latvian pilots, flight attendants
and mechanics and the non-recurring $1,500,000 wet lease payment from
Air Baltic. Net cash used by investing activities

was $5,825,258 for
1995, compared to $2,752,817 for 1994. The increase in cash used by
investing activities was attributable to the increase in advances made
to BIA. Net cash provided by financing activities was $3,338,134 for
the 1995, compared to $4,244,746 for 1994. The decrease in cash
provided by financing activities in these periods was attributable
primarily to the decrease in the price of the issuance of stock.

The Company has financed its growth primarily from the issuance of
Common Stock and borrowings. During 1993 and through April 1994, the
Company borrowed $1,343,340. Net proceeds available to the Company
from its initial public offering completed in May 1994 were
approximately $4.4 million. All of the Company's outstanding debt was
retired in May 1994 using proceeds from the Company's initial public
offering. From October 1994 through December 1995, the Company
borrowed an aggregate principal amount of $2,136,000 including
deferred lease credits, bridge financing and bank debt. From March
through December 1995, the Company issued 2,693,841 shares of Common
Stock for proceeds of an aggregate of $2,660,943. The Company's other
long-term liabilities include deferred compensation expense for the
vested portion of certain stock options granted in 1993.

The Company contributed 25% of its initial capital contribution
($40,000) to LAMCO on March 26, 1996. The remainder of the Company's
initial capital contribution must be contributed by May 1, 1996. If
the Company is unable to meet its capital contribution obligations,
any interest it may have in LAMCO will be forfeited.

The Company has negotiated an early termination of the leases on
the Boeing aircraft which represent the Company's only significant
cash commitments. The Company will be required to pay approximately
$500,000 to the owner of the Boeing aircraft for the early termination
of the leases. BIA has accrued for this expense as of December 31,
1995. This cash requirement will be paid from financings that the
Company has received during the first quarter of 1996.

The Company will likely be required to seek external financing to
meet its goals with respect to ACS. The Company anticipates that its
capital requirements with respect to ACS over the next 12 months will
be approximately $450,000. However, the amount of capital to be
contributed to ACS by the Company will depend on the number of
catering kitchens started in this period of time. Therefore, the
actual amount to be contributed may be higher or lower. Furthermore,
the Company cannot currently determine when any such amounts may
become payable. The Company's activities related to ADC's
distribution of Kraft and Miller products are financed through the
internal resources of ADC and the Company does not expect to seek any
external financing to fund these activities.

As of December 31, 1995, the Company's sources of external and
internal financing were limited. It is not expected that the internal
source of liquidity will improve until net cash is provided by
operating activities, and, until such time, the Company will rely upon
external sources for liquidity. The Company has not established any
lines of credit or other significant financing arrangements with any
third-party lenders. Historically, the Company has identified and
negotiated on an individual-by-individual basis its financing
arrangements. There can be no assurance that the Company will be able
to obtain additional financing on reasonable terms, if at all, in the
future. Lower than expected earnings from the joint ventures
resulting from adverse economic conditions or otherwise, could
restrict the Company's ability to expand its business as planned, and,
if severe enough, may curtail operations, or cause the Company to sell
assets.

At December 31, 1995, BIA had a working capital deficit of
$3,747,181 compared to a working capital deficit of $946,925 at
December 31, 1994. For the years ended December 31, 1995 and 1994,
BIA used $5,278,344 and $2,942,993, respectively, in operating
activities, resulting primarily from its continued losses from
start-up operations. These continued losses from operations and the
nonrecurring losses and expenses have resulted in BIA having an
accumulated deficit of $12,408,524 at December 31, 1995.
Historically, BIA has relied upon capital contributions and advances
from the Company in order to meet its capital requirements and it
continues to so rely upon such financing.

The Company advanced $5,380,804, $2,478,136 and $692,700 to BIA
during the years ended December 31, 1995, 1994 and 1993, respectively.
At September 30, 1995, the Company elected to forgive $4,042,255 of
debt from BIA as it was deemed to be uncollectible.

As of December 31, 1995, BIA owed the Company, pursuant to
advances for payment of liabilities incurred by BIA from operating the
scheduled passenger carrier service, approximately $2.8 million.
However, the Company does not anticipate any further advances to BIA
which would adversely impact earnings. The Company will be dependent
upon BIA generating sufficient cash flows from operations, or
obtaining alternative financing, to repay these advances or the
Company will forgive additional debt or the Latvian Partner will make
additional contributions. Furthermore, the Company may in the future
convert additional advances to increase its percentage ownership of
BIA, if appropriate. In September 1994, the Company converted
$2,000,000 of its advances to BIA into equity, thereby, increasing its

percentage ownership of BIA to 49% from 40%. This action was a part
of a long-range plan between the Company and the Latvian Partner. In
connection with the Company's action, the Latvian Partner has agreed
to contribute real property and/or other operating assets with a value
of approximately $500,000 to $2,000,000 to BIA. However, as of
December 31, 1995, the Latvian Partner had not yet completed its
contribution. Management of the Company believes that the Latvian
Partner's contribution has been delayed by political factors in the
Republic of Latvia relative to new privatization laws. Other than the
delay in the contribution by the Latvian Partner, each party has
performed its obligations pursuant to their agreement. Management
believes that the Latvian Partner's contribution will be made during
1996. There will be no change in the percentage ownership interests
of either party as a result of the Latvian Partner's contribution.
Also in 1994, the Company contributed $969,521 of charges previously
billed to BIA. From January to March 1996 the Company advanced an
additional $636,156 to BIA. The proceeds from the sale of the Air
Baltic stock to SAS will primarily be used to pay liabilities of BIA.

The TU134 aircraft currently owned by BIA will not be able to fly
into certain Western European airports because of noise limitations
after 1997. However, BIA terminated its leases on the Boeing
aircraft, and therefore, will not be responsible for compliance with
noise limitation practices relative to the Boeing aircraft. The TU134
aircraft will not be subject to noise reduction requirements at most
Western European airports for at least five years due to the moderate
age of the aircraft.

BIA elected not to carry property insurance on the TU134 aircraft
as the market value for such aircraft, when measured against the
annual premium for such insurance, render such insurance uneconomical.
In the event that BIA expands its fleet with Boeing 727 aircraft, the
amount of insurance premiums will likely increase. Furthermore, BIA
does not insure certain ground equipment. In the event that BIA
elects in the future to insure such ground equipment, such insurance
will result in additional premiums.

BIA operated its TU134 aircraft at its historical utilization rate
until the third quarter of 1995, when BIA began full utilization of
its second Boeing 727 aircraft. At that time, the TU134 was used
principally as a spare and for charter flights. This is estimated to
result in utilization of approximately 35 hours per month. Based upon
this expected utilization and the timing of future scheduled
maintenance, along with the current age of the TU134 aircraft, the
Company has elected to depreciate the TU134 over its remaining
expected useful life of approximately 18 years to an assumed residual
value of zero. The Company believes its costs associated with the
TU134 aircraft are fully recoverable within three to five years.

On January 10, 1996, the Company entered into an agreement to sell
12% of Air Baltic stock to SAS for $1.7 million in cash and the
assumption by SAS of the remaining subordinated debt obligations of
the Company to Air Baltic of $2,175,000. SAS assumed and funded the
Company's share of the subordinated debt immediately after agreement
of the terms of the share purchase were reached in January 1996. The
Company will retain a 8.02% interest in Air Baltic. The Company
expects this transaction to close in April 1996.

Seasonality

The airline business is significantly affected by seasonal
factors. Historically, BIA experienced reduced demand for scheduled
passenger services from January to March due to a decrease in the
seasonal demand for leisure travel during these months. The Company
expects Air Baltic to experience similar seasonal fluctuations. The
Company has historically experienced its strongest operating results
for its scheduled passenger and charter services during the period
from April through December.

Inflation

Inflation has not had a significant impact on the Company during
the last two years. However, an extended period of inflation could be
expected to have an impact on the Company's earnings by causing
operating expenses to increase. It is likely that Air Baltic and BIA
would attempt to pass increased expenses to customers. If Air Baltic
and BIA are unable to pass through increased costs, their operating
results could be adversely affected which would adversely affect the
Company's operating results.

Item 7. FINANCIAL STATEMENTS

The information required hereunder is included in this report as
set forth in the "Index to Financial Statements" on page F-1.

Item 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE

On July 14, 1995, the Company dismissed Price Waterhouse LLP
("Former Accountant") as the Company's independent accountants and, on
July 28, 1995, approved the engagement of BDO Seidman, LLP ("Current
Accountant") as the Company's independent accountant. This change was
approved by the Company's stockholders at its annual meeting on August
29, 1995.

The Former Accountant's report to the Company's financial
statements for 1993 and 1994 as well as, the Current Accountant's
report on the Company's financial statements for 1995, contained a
qualified opinion to reflect that incurred losses from operations have
raised substantial doubt about the ability of the Company to continue
as a going concern. There have been no disagreements with either the
Former Accountant or the Current Accountant on any matter of
accounting principles or practices, financial statement disclosure, or
auditing scope or procedure.

PART III

Item 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT

Executive Officers and Directors

The following table gives certain information with respect to the
executive officers and directors of the Company:

Name Age Position
---- --- --------
Robert L. Knauss(1) 65 Chairman of the Board and Chief
Executive Officer
James W. Goodchild 40 Chief Operating and Financial
Officer
Thomas E. Glenister 46 President, Aviation Group
Homi M. Davier (1) 47 Director
Paul R. Gregory(1) 54 Director
Juris Padegs(2)(3) 64 Director
Ted Reynolds(2)(3) 64 Director
Morris Sandler(2)(3) 48 Director
Jo Ann Johnson 38 Secretary
____________________________
(1) Member of the Executive Committee.
(2) Member of the Audit Committee.
(3) Member of the Compensation Committee.

Robert L. Knauss has served as chairman of the board of the
Company since its inception in March 1991 and also as chief executive
officer since January 1994. Mr. Knauss also serves as a member of the
board of BIA. Mr. Knauss served as Dean of the University of Houston
Law Center from 1981 through December 1993. Mr. Knauss was involved
in establishing the relationship between the University of Houston Law
Foundation and the former Soviet Union in 1991 whereby the University
of Houston Law Foundation assisted the former Soviet Union in creating
the Petroleum Legislation Project, and was involved with the
government of Russia in the development of privatization legislation.
Mr. Knauss has served as a director of Equus Investments, Inc. since
1984, as one of two United States directors for the Mexico Fund since
1985, and as a director of Allwaste, Inc. since 1986. Mr. Knauss is a
graduate of Harvard University and the University of Michigan Law
School. Mr. Knauss has traveled extensively to the former Soviet
Union.

James W. Goodchild has served as chief operating officer since
October 1994 and also as chief financial officer of the Company since
September 1993. Mr. Goodchild served as the Company's vice president
of finance and development from July 1992 to August 1993. From August
1989 through June 1992, Mr. Goodchild attended the University of
Houston where he acquired a B.A. degree in Russian and Soviet Studies,
and a B.A. degree in International Relations. Mr. Goodchild is fluent
in Russian. Mr. Goodchild was project administrator of the Russian
Petroleum Legislation Project from July 1992 to December 1992. From
1984 to March 1989, Mr. Goodchild was employed with MCorp, formerly a
Dallas-based bank holding company, where he served as senior vice
president and manager of credit administration of MCorp's Collection
Bank. Additionally, Mr. Goodchild acquired a B.S. degree in finance
from the University of Houston in 1978.

Thomas E. Glenister has served as president of the aviation group
for the Company since October 1994 and is the Company's liaison to BIA
and serves as the Company's advisor to the president of BIA. From
September 1988 through September 1994, Mr. Glenister was employed by
Northwest Airlines. While at Northwest Airlines, Mr. Glenister was
the director of several major business development projects including
the establishment of a heavy maintenance facility at Shanghai, China
and the construction of a heavy maintenance facility at Duluth,
Minnesota. In addition to project management responsibility, Mr.
Glenister had considerable experience at Northwest Airlines in the
areas of flight operations and marketing. Mr. Glenister developed the
first all computer based pilot training program and marketed it
worldwide. Prior to joining Northwest Airlines, Mr. Glenister served
for 21 years in the U.S. Air Force. Mr. Glenister received an MBA
from New Hampshire College and a B.S. degree in business management
from the University of New Hampshire.

Paul R. Gregory has served as a director of the Company since its
inception in March 1991 and also served as treasurer, on a part-time
basis, from March 1991 to August 1995. Mr. Gregory also serves as a
member of the board of BIA. Mr. Gregory is the Cullen Professor of
Economics and Finance at the University of Houston where he has been a
faculty member since 1972. Mr. Gregory was involved in creating the
Petroleum Legislation Project with Russia and he served as project
coordinator of the Russian Securities Project in conjunction with the
Russian State Committee for Property Management and the various
Russian stock exchanges. Mr. Gregory serves as advisor to a number of
major United States corporations on their Russian business activities,
and has been active in the former Soviet Union for 25 years. Mr.
Gregory has served as chairman of the board of Amsovco International
Consultants, Inc. since 1988. Mr. Gregory has also served as a
consultant to the World Bank. Mr. Gregory graduated from Harvard
University with a Ph.D. in economics and is fluent in Russian and
German. Mr. Gregory is the author of a text on Soviet and Russian
economies.

Juris Padegs has served as a director of the Company since
December 1993. Mr. Padegs also serves as vice chairman of the board
of BIA. Mr. Padegs has served as a managing director of Scudder,
Stevens & Clark, an international investment firm, since 1985 and has
been employed with Scudder, Stevens & Clark since 1964. Mr. Padegs is
a director of a number of international investment companies,
including Scudder New Europe Fund and Scudder New Asia Fund. Mr.
Padegs is the chairman and a director of the Korea Fund, the Brazil
Fund, and First Iberian Fund. Mr. Padegs was born in Latvia and holds
a Bachelor of Arts and a law degree from Yale University. Mr. Padegs
is fluent in Latvian and German. In July 1994, he was appointed by
President Clinton to the board of the Baltic America Enterprise Fund,
a $50 million fund to promote private enterprise in the Baltic
States.

Ted Reynolds has been a director of the Company since December
1993. He has been president of the Houston Grain Company since 1983
and vice president of Mid-America Grain Commodities since 1976. He
recently formed and is owner of Red River Grain Company. He is
actively involved in various international business transactions. Mr.
Reynolds is a graduate of Texas Christian University.

Morris A. Sandler has been a director of the Company since August
1995. Mr. Sandler has served as executive vice president - strategic
relations and director of Global TeleSystems Group, Inc., an
independent telecommunications company in Russia, since 1994. From
1990 to 1994, Mr. Sandler was an employee of Alan B. Slifka and
Company. From 1984 to 1990, he was a general partner of Griffis
Sandler & Co., an international private investment banking firm. Mr.
Sandler served as vice president and director of marketing of the
merchant banking firm of J. Aron & Company, Inc. from 1976 until its
acquisition by Goldman, Sachs & Co. ("Goldman Sachs") in 1981 at which
time he became vice president of Goldman Sachs, which position he held
until 1984. He has also served as a director of Vesta Technology,
Ltd. since 1986. Mr. Sandler received a B.A. degree from Cornell
University in 1969, and an M.B.A. from the University of Chicago
Graduate School of Business in 1976.

Jo Ann Johnson has served as executive assistant for the Company
since January 1993 and as secretary since October 1993. Prior
thereto, Ms. Johnson was employed by the University of Houston Law
Center since 1984 in the capacity of assistant director of the Russian
Petroleum Legislation Project and as executive assistant to the Dean
of the University of Houston Law Center.

Directors are elected annually and hold office until the next
annual meeting of the stockholders of the Company and until their
successors are elected and qualified. The Executive Committee of the
Board reviews and monitors the operating decisions and strategies of
management. The Audit Committee reviews and reports to the Board on
the financial results of the Company's operations and the results of
the audit services provided by the Company's independent accountants,
including the fees and costs for such services. The Compensation
Committee reviews compensation paid to management and recommends to
the Board of Directors appropriate executive compensation. Officers
are elected annually and serve at the discretion of the Board of
Directors. There is no family relationship between or among any of
the directors and executive officers of the Company. Under the terms
of the underwriting agreement in connection with the Company's initial
public offering, Messrs. Knauss, Gregory and Davier agreed to support
a designee of the representative of the underwriters of that offering
as an additional member of the Board of Directors of the Company for a
period ending April 1996; to date, no such designee has been
appointed.

The Company's Restated Articles of Incorporation ("Articles")
provide for a staggered Board in the event the number of directors is
increased to nine. A staggered Board may deter coercive or unfair
takeover tactics or offers and encourage potential bidders in any
takeover attempt to negotiate directly with the Board of Directors. As
a result, the staggered Board may discourage a change of, or future
attempt to acquire, control of the Company that a substantial number
and perhaps even a majority of the stockholders of the Company might
believe to be in the Company's best interests, or in which
stockholders might receive a substantial premium for their shares over
then-current market prices. Upon classification, the Board will be
divided into three classes, as nearly equal in number as possible,
each of which will serve for a term of three years, with one class to
be selected each year.

Other Key Personnel

The Company employs a number of persons to develop, manage, and
operate its aviation-related interests. They are assigned to the
Company's different ventures to manage operations, develop business
opportunities and to train local specialists.

Daniel P. Solon (64) has served as vice president of marketing
for BIA in Europe since January 1993 and has offices in London. Since
1982, Mr. Solon has been an independent corporate relations and
marketing consultant specializing in shipping and aviation industries.
Mr. Solon has over 30 years of experience in the international
aviation business and has worked in executive management positions
with American Airlines and TWA and as a consultant to People Express.
Mr. Solon received an M.B.A. from Harvard University and a B.A. degree
in Russian studies from Fordham University.

Donald D. Janacek (26) is assigned to assist in the management of
Baltic Catering Services, to manage the day-to-day operations of BWAF,
and to develop new business prospects in the Baltic region. He has
been employed as manager of the Company's aviation group since April
1994. From July 1993 to April 1994, Mr. Janacek was president of
Mosher International, an international investment firm. From August
1992 through July 1993, he was vice president of international
marketing for Dockside Incorporated, an international trading company
focusing on Eastern Europe and the former Soviet Union. Mr. Janacek
graduated from the University of Texas at Austin in 1991 with a B.A.
degree in economics.

David A. Grossman (32) has served as comptroller since November
1995. From July 1985 to November 1995, Mr. Grossman was Audit Senior
Manager for Deloitte & Touche LLP. Mr. Grossman was certified as a
CPA in 1986. Mr. Grossman graduated from Indiana University in 1985
with a B.S. degree in Accounting.

Director Compensation

Outside directors are entitled to receive options to purchase
10,000 shares in their first year of service and 5,000 shares of
Common Stock per year thereafter as compensation and reimbursement of
out-of-pocket expenses to attend board meetings. Messrs. Padegs and
Reynolds have each received options to purchase 5,000 shares of Common
Stock pursuant to this arrangement. In addition, Mr. Padegs received
an option to purchase 5,000 shares of Common Stock for consulting
services rendered. Such options are exercisable for $1.125 per share
and expire in October 1999. In December 1995, Messrs. Padegs, Reynolds
and Sandler each received options to purchase 15,000 shares of Common
Stock at a price of $1.375 per share pursuant to this arrangement.
Also in December 1995, Messrs. Davier and Gregory each received
options to purchase 50,000 shares at a price of $1.375 per shares for
services rendered. Such options expire in December 2000. In
addition, consulting fees in the amount of $10,000 and $20,000,
respectively, were paid to Capricorn Travel, a company controlled by
Mr. Davier, during 1993 and 1994.

Reports

In April 1994, the Company's Common Stock was registered
pursuant to Section 12 of the Securities Exchange Act of 1934, as
amended ("Exchange Act"), and Messrs. Knauss, Gregory, Davier, Padegs,
Reynolds and Goodchild, and Ms. Johnson became subject to the filing
and reporting requirements of Section 16(a) of the Exchange Act. In
October 1994, Mr. Glenister became subject to such requirements. In
August 1995, Mr. Sandler became subject to such requirements. The
Company believes that all filing requirements required under Section
16 of the Exchange Act applicable to its officers, directors and
greater than ten-percent beneficial owners were complied with during
1995.

Item 10. EXECUTIVE COMPENSATION

The following table sets forth information with respect to the
Chief Executive Officer, as well as the executive officers of the
Company who received total annual salary and bonus for the fiscal year
ended December 31, 1995 in excess of $100,000:

Long-Term Compensation
--------------------------
Annual Compensation (1) Securities
----------------------------------------- Restricted Underlying
Name and Principal Fiscal All Other Stock Options and
Position Year Salary Bonus Compensation Awards Warrants
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Robert Knauss, Chief 1995 $120,000 $75,000(2) $0 $0 125,000 (4)
Executive Officer 1994 33,967 0 0 0 35,000
1993 0 0 0 0 0

James Goodchild, Chief 1995 $120,000 $50,000(2) $0 $0 140,000 (4)
Operating and Financial 1994 115,583 30,000 0 0 50,000
Officer 1993 45,250 0 0 0 40,000

Thomas Glenister, 1995 $121,500 $50,000(2) $0 $0 80,000 (4)
President-Aviation 1994 35,000 0 0 60,000 (3) 20,000
Group 1993 -- -- -- -- --
</TABLE>
_______________________
(1) Neither of the named executive officers received perquisites or
other benefits valued in excess of 10% of the total of reported
annual salary and bonus.
(2) The bonus for 1995 will consist of cash payments of $37,500,
$25,000 and $25,000 and the issuance of 25,000, 16,667 and
16,667 shares of the Company's common stock to Messrs. Knauss,
Goodchild and Glenister, respectively.
(3) The restricted stock award for Mr. Glenister in 1994 consists
of a grant of 20,000 shares of the Company's common stock of
which 10,000 shares vested in October 1995 and 10,000 shares
will vest in October 1996.
(4) Of these options and warrants, 35,000, 50,000, and 20,000 stock
options were originally granted in October 1994 to Messrs.
Knauss, Goodchild and Glenister, respectively, at an exercise
price of $2.875 per share. In August 1995, these options were
repriced at $1.125 per share.

Employment Agreements

In January 1994, the Company entered into one-year employment
agreements with Messrs. Knauss and Davier which provided for an annual
base salary of $120,000 each. As of December 31, 1994, Messrs. Knauss
and Davier received only an aggregate of $63,967 pursuant to these
agreements. Mr. Davier and Mr. Knauss will receive an additional
$40,000 under their agreements in 1996, and no additional amounts for
1994 compensation will be paid. These agreements included provisions
which prohibit the employee from competing with or engaging in the
same business as the Company in any geographic area in which the
Company is then doing business for a period of one year following the
expiration of the employment period. The Company extended its
agreement with Mr. Knauss for an additional year on the same terms and
expects to extend the agreement again during the first quarter of
1996.

Stock Options

In September 1992, the Company adopted its 1992 Equity Incentive
Plan ("Plan"), which was amended effective March and December 1995.
The Plan provides for the issuance of incentive stock options and non-
qualified options. An aggregate of 1,500,000 shares of the Company's
Common Stock may be issued pursuant to options granted under the Plan
to employees, non-employee directors and consultants. The Plan is
administered by the compensation committee of the Company's Board of
Directors, subject to evergreen provisions included in the Plan. The
compensation committee has the authority to determine, among other
things, the size, exercise price, and other terms and conditions of
awards made under the Plan. Subject to certain restrictions, the
exercise price of incentive stock options may be no less than 100% of
fair market value of a share of Common Stock on the date of grant. As
of the date of this report, options to purchase an aggregate of
592,800 shares were outstanding under the Plan.

The following table shows, as to the named executive officers,
information concerning individual grants of stock options and warrants
during 1995.
<TABLE>
Option/Warrant Grants in Last Fiscal Year

<CAPTION>
Number of % of Total Options/
Securities Warrants
Underlying Granted to Exercise
Options/Warrants Employees Price Expiration
Name Granted in 1995 Per Share Date
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Robert L. Knauss 90,000 20.59 $1.375 December 2000
35,000 8.01 $1.125(1) October 1999
James W. Goodchild 90,000 20.59 $1.375 December 2000
50,000 11.44 $1.125(1) October 1999
Thomas Glenister 60,000 13.73 $1.375 December 2000
20,000 4.58 $1.125(1) October 1999
</TABLE>
_______________________
(1) These options were originally granted in October 1994 at an
exercise price of $2.875 per share. In August 1995, these
options were repriced at $1.125 per share.

The following table shows, as to the named executive officers,
information concerning aggregate stock option and warrant exercises
during 1995 and the stock option and warrant values as of December
31, 1995.

<TABLE>
Aggregated Option and Warrant Exercises in Last Fiscal Year
and Year End Option and Warrant Values
<CAPTION>

Number of
Securities Value of
Underlying Unexercised
Unexercised In-the-Money
Options/Warrants at Options/Warrants at
December 31, 1995 December 31, 1995
Shares Acquired Exercisable/ Exercisable/
Name on Exercise Value Realized Unexercisable Unexercisable
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Robert L. Knauss 0 $0 79,500/60,000 $44,000/$22,500
James W. Goodchild 0 0 113,667/73,333 $81,084/$39,166
Thomas Glenister 0 0 40,000/40,000 $20,000/$15,000

</TABLE>

The Company has not established, nor does it provide for, long-
term incentive plans or defined benefit or actuarial plans.

Item 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table presents certain information regarding the
beneficial ownership of all shares of Common Stock at March 29, 1996
by (i) each person who owns beneficially more than five percent of the
outstanding shares of Common Stock, (ii) each director of the Company,
(iii) each named executive officer and (iv) all directors and officers
as a group.

Shares Beneficially Owned
Name of Beneficial Owner(1) Number Percent
- ---------------------------------------------------------------------
Citibank Switzerland 1,000,000 16.93
Paul R. Gregory 742,000(2) 12.09
Robert L. Knauss 672,000(3) 11.07
Homi M. Davier 615,000(4) 10.21
Richard H. Gibson 378,331(5) 6.02
Juris Padegs 235,333(6) 3.93
James Goodchild 155,334(7) 2.56
Morris Sandler 95,000(8) 1.59
Ted Reynolds 70,000(9) 1.18
Thomas Glenister 66,667(10) 1.12
Jo Ann Johnson 19,000(11) 0.32
All directors and officers
as a group (9 persons) 2,670,334(12) 39.06
_________________________
(1) The business address of each individual is the same as the
address of the Company's principal executive offices except for
Citibank Switzerland whose business address is P.O. Box 244,
Zurich, Switzerland 8021; Mr. Gibson whose business address is
2321 A. West Loop 281, Longview, Texas 75604; Mr. Padegs whose
business address is 345 Park Avenue, New York, New York 10154;
Mr. Reynolds whose business address is 1300 Post Oak Boulevard,
Suite 770, Houston, Texas 77056; and Mr. Sandler whose business
address is 477 Madison Avenue, 8th Floor, New York, New York
10022.

(2) Includes 233,000 shares subject to options, warrants and
Preferred Stock which are currently exercisable.

(3) Includes 142,000 shares subject to options, warrants and
Preferred Stock which are currently exercisable and 25,000
shares to be issued for services rendered..

(4) Includes 115,000 shares subject to options, warrants and
Preferred Stock which are currently exercisable.

(5) Includes 378,331 shares subject to options, warrants and
Preferred Stock which are currently exercisable.

(6) Includes 74,833 shares subject to options, warrants and
Preferred Stock which are currently exercisable.

(7) Includes 138,667 shares subject to options, warrants and
Preferred Stock which are currently exercisable and 16,667
shares to be issued for services rendered.

(8) Includes 70,000 shares subject to options and a warrant which
are currently exercisable.

(9) Includes 20,000 shares subject to options which are currently
exercisable.

(10) Includes 40,000 shares subject to options and warrants which are
currently exercisable and 26,667 shares to be issued for
services rendered.

(11) Includes 19,000 shares subject to options which are currently
exercisable.

(12) Includes an aggregate of 852,500 shares subject to options,
warrants and Preferred Stock which are currently exercisable and
68,334 shares to be issued for services rendered.

Item 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

In March 1991, Messrs. Knauss, Davier and Gregory were each
issued 500,000 shares of Common Stock for $37,000 each. In March
1991, Mr. Padegs subscribed for, and subsequently purchased, for an
aggregate amount of $88,140, a total of 150,000 shares of Common
Stock. In April 1992, Mr. Reynolds purchased 40,000 shares for
$100,000. In June 1993, Mr. Reynolds purchased an additional 10,000
shares of Common Stock for $25,000.

From March 1991 through December 1994, Mr. Knauss advanced to
the Company a total of $253,220 of which $128,220 was on an interest-
free basis. Of this amount, $40,000 was repaid in 1993, and $88,220
was repaid in May 1994 with proceeds from the Company's initial public
offering. In October and December 1994, Mr. Knauss advanced an
aggregate of $125,000, bearing interest at a rate of 10% per annum,
and maturing on March 31, 1996. In connection with these advances,
the Company issued Mr. Knauss warrants to purchase an aggregate of
12,500 shares of Common Stock at a price of $1.00 per share, which
warrants became exercisable in August 1995 and expire in October 1999.
Effective June 30, 1995, $125,000 in aggregate principal amount of
notes payable to Mr. Knauss was converted to 12,500 shares of Series A
Preferred Stock, convertible into 62,500 shares of Common Stock. In
August 1995, the Board of Directors approved a bonus to Mr. Knauss for
his efforts in connection with the Air Baltic transaction. Such bonus
will consist of 25,000 shares to be issued and a $37,500 cash payment
to be paid in 1996. In December 1995, Mr. Knauss advanced an
aggregate of $20,000 bearing interest at a rate of 10% per annum,
which matured on January 6, 1996. The Company repaid this advance in
March 1996. In connection with this advance, the Company issued Mr.
Knauss warrants to purchase an aggregate of 2,000 shares of Common
Stock at a price of $1.00 per share, which warrants are currently
exercisable and expire in December 2000. In December 1995, the
Company granted Mr. Knauss warrants to purchase 90,000 shares of
Common Stock at a price of $1.375 per share for services rendered,
which one-third of the warrants became exercisable in December 1995,
one-third in December 1996, and one-third in December 1997.

From January 1992 through March 1995, an affiliate of Dr.
Gregory, Gregory Family Partnership, advanced to the Company a total
of $447,161, of which $212,161 was on an interest-free basis. Of this
amount, $53,614 was repaid in 1993, and $158,547 was repaid in May
1994 with proceeds from the Company's initial public offering. In
October and December 1994, this affiliate advanced an aggregate of
$135,000, bearing interest at a rate of 10% per annum, and maturing on
March 31, 1996. In connection with these advances, the Company issued
Dr. Gregory's affiliate warrants to purchase an aggregate of 13,500
shares of Common Stock at a price of $1.00 per share, which warrants
became exercisable in August 1995 and expire in October 1999. In
March 1995, this affiliate loaned an additional $100,000 to the
Company, which loan bears interest at a rate of 10% per annum, and
matured on June 30, 1995. In connection with this loan, Dr. Gregory's
affiliate received a warrant to purchase 10,000 shares at an exercise
price of $1.00 per share, which warrant became exercisable in August
1995 and expires in October 1999. Effective June 30, 1995, $235,000
in aggregate principal amount of notes payable to Dr. Gregory or his
affiliates was converted to 23,500 shares of Series A Preferred Stock,
which are convertible into 117,500 shares of Common Stock. In
December 1995, an affiliate of Dr. Gregory advanced an aggregate of
$20,000 bearing interest at a rate of 10% per annum, which matured on
January 6, 1996. The Company repaid this advance in March 1996. In
connection with this advance, the Company issued Dr. Gregory's
affiliate warrants to purchase an aggregate of 2,000 shares of Common
Stock at a price of $1.00 per share, which warrants are currently
exercisable and expire in December 2000.

From January 1992 through October 1994, Mr. Davier advanced to
the Company a total of $150,736, of which $100,736 was on an interest-
free basis. Of this amount, $14,980 was repaid in 1993 and $85,756
was repaid in May 1994 with proceeds from the Company's initial public
offering. The remaining balance of $50,000 was advanced in October
1994, bears interest at a rate of 10% per annum and matures on March
31, 1996. In connection with the October 1994 advance, the Company
issued Mr. Davier a warrant to purchase 5,000 shares of Common Stock
at a price of $1.00 per share, which warrant became exercisable in
August 1995 and expires in October 1999. Effective June 30, 1995, the
50,000 note payable to Mr. Davier was converted to 5,000 shares of
Series A Preferred Stock, which are convertible into 25,000 shares of
Common Stock.

In June 1993, Baltic World Holdings, owned by Messrs. Davier,
Knauss and Gregory, on behalf of the Company, advanced $144,000 to
BIA, bearing interest at a rate of 12% per annum, payable in four
quarterly payments of principal and accrued interest. In September
1993, such affiliate assigned all of its rights as creditor to the
Company and to date BIA has made no payments to the Company. In
addition, this affiliate originally owned 50% of BCS on behalf of the
Company, and, in September 1993, assigned its 50% interest in BCS to
the Company, effective March 1994.

Consulting fees in the amount of $10,000 and $20,000 were paid
to Capricorn Travel, a company controlled by Mr. Davier, during 1993
and 1994, respectively.

During 1993, Messrs. Knauss, Davier and Gregory pledged 15% of
the then issued and outstanding shares of Company Common Stock to
secure the repayment of an aggregate principal amount of $623,340 of
bridge loan financing. Such bridge loans were repaid in May 1994 with
proceeds from the Company's initial public offering and the pledged
shares were released.

In May 1994, Baltic World Holdings, owned by Messrs. Knauss,
Davier and Gregory leased two Boeing 727 aircraft from an unaffiliated
third party for an aggregate monthly lease payment of $61,378. These
airplanes are subleased by this affiliate to BIA for an aggregate
monthly lease payment of $80,000. The Company believes that this
arrangement is fair for the following reasons: (i) the Company
guarantees the lease payments and manages the lease of the aircraft;
(ii) as a foreign entity, it is unlikely that BIA would have had
access to the aircraft without the assistance of the Company; and
(iii) the Company was able to negotiate a favorable lease rate. The
affiliate has assigned all of the revenues and expenses under the
leases and subleases to the Company and the Company guarantees the
affiliate's obligations under the leases. The leases and subleases
terminate in July 1996.

In October 1994, Mr. Padegs advanced to the Company $25,000.
This indebtedness bears interest at a rate of 10% per annum and
matures on March 31, 1996. In connection with the October 1994
advance, the Company issued Mr. Padegs a warrant to purchase 2,500
shares of Common Stock at a price of $1.00 per share, which warrant
became exercisable in August 1995 and expires in October 1999. In
March 1995, Mr. Padegs advanced $50,000 to the Company, which loan
bears interest at a rate of 10% per annum, and matured on June 30,
1995. In connection with this loan, Mr. Padegs received a warrant to
purchase 5,000 shares at an exercise price of $1.00 per share, which
warrant became exercisable in August 1995 and expires in October 1999.
Effective June 30, 1995, $75,000 in aggregate principal amount of
notes payable to Mr. Padegs was converted to 7,500 shares of Series A
Preferred Stock, which are convertible into 37,500 shares of Common
Stock. In December 1995, Mr. Padegs advanced an aggregate of $20,000,
bearing interest at a rate of 10% per annum, which matured on January
6, 1996. The Company repaid this advance in March 1996. In
connection with this advance, the Company issued Mr. Padegs warrants
to purchase an aggregate of 2,000 shares of Common Stock at a price of
$1.00 per share, which warrants are currently exercisable in December
1995 and expire in December 2000.

In December 1994, Mr. Goodchild advanced to the Company $50,000.
This indebtedness bears interest at a rate of 10% per annum and
matures on March 31, 1996. In connection with this advance,
Mr. Goodchild received a warrant to purchase 5,000 shares at an
exercise price of $1.00 per share, which warrant became exercisable in
August 1995 and expires in October 1999. Effective June 30, 1995, the
$50,000 note payable to Mr. Goodchild was converted to 5,000 shares of
Series A Preferred Stock, which are convertible into 25,000 shares of
Common Stock. In August 1995, the Board of Directors approved a bonus
to Mr. Goodchild for his efforts in connection with the Air Baltic
transaction. Such bonus will consist of 16,667 shares to be issued
for services rendered and a $25,000 cash payment to be paid in 1996.
In December 1995, Mr. Goodchild advanced an aggregate of $20,000,
bearing interest at a rate of 10% per annum, which matured on January
6, 1996. The Company repaid this advance in March 1996. In
connection with this advance, the Company issued Mr. Goodchild
warrants to purchase an aggregate of 2,000 shares of Common Stock at a
price of $1.00 per share, which warrants are currently exercisable and
expire in December 2000. In December 1995, the Company granted Mr.
Goodchild warrants to purchase 90,000 shares of Common Stock at a
price of $1.375 per share, which one-third of the warrants became
exercisable in December 1995, one-third in December 1996, and one-
third in December 1997.

In December 1994, Mr. Knauss guaranteed a $50,000 bank loan to
the Company. In March 1995, the principal amount of this loan was
increased to $100,000, the interest rate was increased from 10.5% to
11.25% per annum, and Mr. Davier was added as a guarantor. The
balance of the loan is $75,000 at December 31, 1995 which matured in
January 1996. The Company has negotiated an extension to July 1996
with a $25,000 principal reduction which the Company has made.

In June 1995, Mr. Sandler purchased 25,000 shares of Common
Stock for $25,000. In August 1995, the Company issued a warrant to
purchase 55,000 shares at an exercise price of $1.00 per share to
Mr. Sandler for services rendered prior to his election to the board.
This warrant expires in August 2000.

Management believes that all prior related party transactions
are on terms no less favorable to the Company as could be obtained
from unaffiliated third parties. All ongoing and future transactions
with such persons, including any loans to such persons, will be
approved by a majority of disinterested, independent outside members
of the Company's Board of Directors.

Item 13. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits.

Exhibit No. Identification of Exhibit

2.1(2)-- Plan and Agreement of Recapitalization
3.1(a)(2)-- Restated Articles of Incorporation
3.1(b)(2)-- Amended Articles of Incorporation
3.1(c)(2)-- Articles of Correction
3.2(2)-- Bylaws
3.3(2)-- Statement of Resolution Establishing and
Designating a Series of Shares of the Company, Series A
Cumulative Preferred Stock, $10.00 par value
3.4(5)-- Certificate of Elimination of Shares Designated
as Series A Cumulative Preferred Stock
3.5(5)-- Certificate of the Designation, Preference,
Rights and Limitations of Convertible Redeemable Series A
Preferred Stock
4.1(2)-- Common Stock Specimen
5.1(1)-- Opinion Regarding Legality
10.1(2)-- Form of August 1993 through January 1994 Loan
Documents
10.2(2)-- Form of August 1993 through January 1994 Common Stock Warrants
10.3(4)-- 1992 Equity Incentive Plan, as amended
10.4(2)-- Employment Agreement between the Company and Robert L. Knauss
10.5(2)-- Employment Agreement between the Company and Homi M. Davier
10.6(2)-- Employment Agreement between the Company and Michael Pemberton
10.7(2)-- Baltic International Airlines Joint Venture
Limited Liability Company Agreement between the Latvian
Civil Aviation Board and the Company
10.8(2)-- Protocol No. 1 dated July 1991
10.9(2)-- Protocol No. 4 dated May 9, 1992
10.10(2)-- Protocol No. 5 dated July 21, 1992
10.11(2)-- Protocol No. 6 dated February 5, 1993
10.12(2)-- Settlement Agreement between the Company and
Latvian Airlines and Ministry of Transportation of the
Republic of Latvia
10.13(2)-- Partnership Agreement of Baltic World Air Freight
between the Company and T.G. Shown & Associates, Inc.
10.14(2)-- Baltic Catering Limited Liability Company
Agreement between the Company and ARVO, Ltd.
10.15(2)-- Assignment to the Company from Baltic World
Holdings, Ltd.
10.16(2)-- Baltic Travel Services Joint Venture Agreement
between the Company and Chapman Freeborn GmbH
10.17(2)-- Agreement of Representation between the Latvian
Civil Aviation Department and the Company
10.18(2)-- DC9 Lease Agreement
10.19(2)-- Letter of Intent between the Company and
Northwest Airlines
10.20(2)-- Facilities Lease Agreement
10.21(2)-- Management Services Agreement between the Company
and Baltic International Airlines
10.22(2)-- Memorandum of Understanding between the Company
and the Department of Air Transport of the Republic of
Georgia
10.23(2)-- Maintenance Training Services Agreement
10.24(2)-- Bank Settlement Plan Agreement
10.25(2)-- Letter of Intent regarding lease of Boeing
aircraft
10.26(2)-- Extension Agreement regarding lease of Boeing
aircraft
10.27(3)-- Lease Agreement for Boeing aircraft
10.28(3)-- Amendment to Lease of Boeing aircraft
10.29(3)-- Baltic Aerospace Interiors Letter of Intent
10.30(3)-- BIUSA/SAS Letter of Intent
10.31(3)-- Lithuania/Northwest Airlines/BIUSA Letter of
Intent
10.32(3)-- Assignment Agreement between Baltic World
Holdings, Ltd. and the Company
10.33(3)-- Acquisition Agreement with T.G. Shown &
Associates, Inc.
10.34(3)-- Memorandum of Understanding between the Company,
BIA and SAS

10.35(3)-- Loan Agreement with Charter Bank
10.36(7)-- Air Baltic Joint Venture Agreement
10.37(9)-- Wet Lease Agreement with Air Baltic
10.38(9)-- Articles of Incorporation of LAMCO
10.39(9)-- Memorandum of Understanding with TopFlight
10.40(9)-- Amendment to Air Baltic Joint Venture Agreement
10.41(8)-- Share Purchase Agreement with SAS

10.42(10)-- Airo Catering Services Joint Venture Agreement
10.43(10)-- Riga Catering Services Shareholders' Agreement

16.1(6)-- Letter on Change in Certifying Accountant
_____________________
(1) Filed herewith.

(2) Previously filed as an exhibit to the Company's Registration
Statement on Form SB-2 (No. 33-74654-D), as amended, and
incorporated herein by reference thereto.

(3) Previously filed as an exhibit to the Company's Registration
Statement on Form SB-2 (No. 33-86378), as amended, and
incorporated herein by reference thereto.

(4) Previously filed as an exhibit to the Company's Registration
Statement on Form S-8 (33-90030), and incorporated herein by
reference thereto.

(5) Previously filed as an exhibit to the Company's Quarterly Report
on Form 10-QSB for the quarter ended June 30, 1995, and
incorporated herein by reference thereto.

(6) Previously filed as an exhibit to the Company's Current Report on
Form 8-K dated July 14, 1995, and incorporated herein by
reference thereto.

(7) Previously filed as an exhibit to the Company's Current Report on
Form 8-K dated August 29, 1995, and incorporated herein by
reference thereto.

(8) Previously filed as an exhibit to the Company's Current Report on
Form 8-K dated January 10, 1996, and incorporated herein by
reference thereto.

(9) Previously filed as an exhibit to the Company's Registration
Statement on Form SB-2 (File No. 333-860), and incorporated
herein by reference thereto.

(10) Previously filed as an exhibit to the Company's Annual Report on
Form 10-KSB for the year ended December 31, 1995, and
incorporated herein by reference thereto.

(b) Reports on Form 8-K

No reports on Form 8-K were filed during the fourth quarter of 1995.

BALTIC INTERNATIONAL USA, INC.

INDEX TO FINANCIAL STATEMENTS
Page

Baltic International USA, Inc.

Independent auditors' report F-2

Report of independent accountants F-3

Consolidated balance sheets at December 31, 1995 and 1994 F-4

Consolidated statements of operations for the years ended
December 31, 1995, 1994 and 1993 F-5

Consolidated statements of stockholders' equity (deficit) for the years
ended December 31, 1995, 1994 and 1993 F-6

Consolidated statements of cash flows for the years ended
December 31, 1995, 1994 and 1993 F-8

Notes to consolidated financial statements F-10

Baltic International Airlines

Independent auditors' report F-22

Report of independent accountants F-23

Balance sheets at December 31, 1995 and 1994 F-24

Statements of operations for the years ended
December 31, 1995, 1994 and 1993 F-25

Statements of joint venture partners' equity (deficit) for
the years ended December 31, 1995, 1994 and 1993 F-26

Statements of cash flows for the years ended December 31, 1995, 1994
and 1993 F-27

Notes to financial statements F-28

F-1

INDEPENDENT AUDITORS' REPORT

To the Board of Directors and Stockholders of
Baltic International USA, Inc.

We have audited the consolidated balance sheet of Baltic International
USA, Inc. as of December 31, 1995, and the related consolidated
statements of operations, stockholders' equity and cash flows for the
year then ended. 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 audit.

We conducted our audit 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 audit provides a reasonable basis for our opinion.

Baltic International USA, Inc. is a joint venture partner in a group
of affiliated companies and, as disclosed in the financial statements,
has extensive transactions and relationships with members of the
group. Because of these relationships, it is possible that the terms
of these transactions are not the same as those that would result from
transactions among wholly unrelated parties.

In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial position
of Baltic International USA, Inc. at December 31, 1995, and the
results of its operations and its cash flows for the year then ended
in conformity with generally accepted accounting principles.

The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As
discussed in Note 2 to the consolidated financial statements, the
Company has a significant interest in Baltic International Airlines
which has incurred losses from operations that raise substantial doubt
about the Company's ability to continue as a going concern. The
consolidated financial statements do not include any adjustments that
might result from the outcome of this uncertainty.

/s/ BDO Seidman, LLP
BDO Seidman, LLP

Houston, Texas
April 2, 1996

F-2

REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Stockholders of
Baltic International USA, Inc.

In our opinion, the accompanying consolidated balance sheet and the
related consolidated statements of operations, stockholders' equity
(deficit) and cash flows present fairly, in all material respects, the
financial position of Baltic International USA, Inc. at December 31,
1994, and the results of its operations and its cash flows for each of
the two years in the period ended December 31, 1994, in conformity
with generally accepted accounting principles. 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 of these statements in
accordance with generally accepted auditing standards which 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,
assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.

The accompanying financial statements have been prepared assuming that
the Company will continue as a going concern. The Company's financial
statements include a significant investment in Baltic International
Airlines which has incurred losses from operations that raise
substantial doubt about the Company's ability to continue as a going
concern. Management's plans in regard to these matters are described
in Note 2. The financial statements do not include any adjustments
that might result from the outcome of this uncertainty.

/s/ Price Waterhouse LLP
PRICE WATERHOUSE LLP

Houston, Texas
March 30, 1995

F-3

BALTIC INTERNATIONAL USA, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>

DECEMBER 31,
-------------------------------------
1995 1994
--------------- ---------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents,
<S> <C> <C>
including time deposits of $50,000 in 1994 ................... $ 139,240 $ 98,757
Accounts receivable:
Trade ........................................................ 87,178 67,690
Affiliates.................................................... 100,000 --
Income taxes receivable.......................................... 16,860 16,860
Inventory........................................................ 14,265 --
Prepaids and deposits............................................ 6,418 50,000
--------------- ---------------
Total current assets............................................. 363,961 233,307
PROPERTY AND EQUIPMENT, net ........................................ 20,035 7,635
ADVANCES TO AIR BALTIC CORPORATION.................................. 2,630,000 --
INVESTMENT IN BALTIC CATERING SERVICES ............................. 284,834 198,610
GOODWILL, NET....................................................... 223,593 160,785
--------------- ---------------
Total assets..................................................... $ 3,522,423 $ 600,337
=============== ===============

LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIT)
CURRENT LIABILITIES
Accounts payable and accrued liabilities ..................... $ 807,470 $ 439,592
Short-term debt, net.......................................... 324,063 195,000
Commitments for guarantees on BIA liabilities................. 1,019,521 --
Other current liabilities..................................... 342,143 --
--------------- ---------------
Total current liabilities..................................... 2,493,197 634,592
LONG-TERM DEBT, net................................................. -- 276,991
NOTES PAYABLE TO STOCKHOLDERS....................................... -- 346,739
OTHER LONG-TERM LIABILITIES......................................... -- 327,188
--------------- ---------------
Total liabilities............................................. 2,493,197 1,585,510
--------------- ---------------
COMMITMENTS AND CONTINGENCIES.......................................

STOCKHOLDERS' EQUITY (DEFICIT)
Preferred stock, $2 convertible, $10 par value, 500,000 shares
authorized, 123,000 shares issued and outstanding............. 1,230,000 --
- -
Common stock, $.01 par value, 20,000,000 share authorized,
5,758,241 and 2,919,400 shares issued and outstanding ...... 57,582 29,194
Additional paid-in capital.................................... 8,703,883 5,760,123
Accumulated deficit........................................... (8,962,239) (6,774,490)
---------------- ---------------
Total stockholders' equity (deficit).......................... 1,029,226 (985,173)
--------------- ---------------
Total liabilities and stockholders'
equity (deficit)............................................. $ 3,522,423 $ 600,337
=============== ===============

</TABLE>

See accompanying notes to consolidated financial statements.

F-4

BALTIC INTERNATIONAL USA, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>

Year Ended December 31,
------------------------------------------------
1995 1994 1993
-------------- -------------- --------------
REVENUES:
<S> <C> <C> <C>
Wet Lease Agreement with Air Baltic......... $ 1,500,000 $ -- $ --
Aircraft rental income from BIA............. 480,000 -- --
Freight revenue............................. 577,542 85,052 8,264
Fee revenue................................. 1,500,000 -- 180,000
Commissions from BIA........................ 78,845 -- 147,560
Food distribution........................... 21,685 -- --
Net equity in earnings of BCS and BWAF...... 369.223 241,076 53,475
-------------- -------------- --------------
Total operating revenues.................... 4,527,295 326,128 389,299
-------------- -------------- --------------

OPERATING EXPENSES:
Cost of revenue:
Aircraft rental........................... 605,289 370,196 --
Freight................................... 342,652 58,597 --
Food distribution......................... 21,373 -- --
Personnel and consulting.................... 1,108,946 461,490 194,801
Legal and professional...................... 324,916 196,181 9,925
Other general and administrative............ 961,458 831,656 104,094
Net equity in losses of BIA................. 3,440,445 4,580,752 490,954
-------------- -------------- --------------
Total operating expenses.................... 6,805,079 6,498,872 799,774
-------------- -------------- --------------
LOSS FROM OPERATIONS.......................... (2,277,784) (6,172,744) (410,475)
--------------- --------------- ---------------

OTHER INCOME (EXPENSE):
Interest expense............................ (197,505) (121,234) (42,785)
Interest income............................. 195,415 8,510 29,423
Other ..................................... 152,250 -- --
-------------- --------------- --------------
TOTAL OTHER INCOME (EXPENSE).................. 150,160 (112,724) (13,362)
-------------- --------------- ---------------

LOSS BEFORE INCOME TAXES
AND EXTRAORDINARY ITEM...................... (2,127,624) (6,285,468) (423,837)

INCOME TAX (EXPENSE) BENEFIT.................. -- 6,860 (6,860)
--------------- -------------- --------------

LOSS BEFORE
EXTRAORDINARY ITEM.......................... (2,127,624) (6,278,608) (430,697)

EXTRAORDINARY LOSS - EARLY
EXTINGUISHMENT OF DEBT...................... -- (64,587) --
-------------- --------------- --------------

NET LOSS ..................................... (2,127,624) $ (6,343,195) $ (430,697)
============== ============== ==============

LOSS PER COMMON SHARE

Loss before extraordinary item.............. $ (0.51) $ (2.37) $ (0.21)
Net loss.................................... $ (0.51) $ (2.40) $ (0.21)

WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING................................. 4,273,858 2,645,427 2,025,207
============== ============== ==============

</TABLE>

See accompanying notes to consolidated financial statements.

F-5

BALTIC INTERNATIONAL USA, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
Common Stock
Convertible Issued/subscribed Stock
Preferred Preferred ------------------------ Subscriptions
Stock Stock Shares Amount Receivable
-------- ---------- --------- ------- ---------
<S> <C> <C> <C> <C>
Balance, January 1, 1993 ...................... -- -- 1,942,200 $19,422 $ (50,000)

Shares issued ................................. $ 16,660 -- 177,200 1,772 --
Warrants issued in connection
with Bridge Notes ........................... -- -- -- -- --
Contribution of BWH ........................... -- -- -- -- --
Collection of stock
subscription receivable ..................... -- -- -- -- 50,000
Net loss ...................................... -- -- -- -- --
-------- ---------- --------- ------- ---------
Balance, December 31, 1993 .................... 16,660 -- 2,119,400 21,194 --
Warrants and stock issued in
conjunction with Bridge Notes ............... 30,000 -- -- -- --
Net proceeds from initial
public offering ............................. -- -- 800,000 8,000 --
Redemption of stock ........................... (46,660) -- -- -- --
Net loss ...................................... -- -- -- -- --
Dividends paid on preferred
stock ....................................... -- -- -- -- --
-------- ---------- --------- ------- ---------
Balance, December 31, 1994 .................... -- -- 2,919,400 29,194 --

Shares issued ................................. -- -- 2,722,841 27,228 (109,000)

Debt converted to common
stock ....................................... -- -- 116,000 1,160 --
Debt converted to
preferred stock ............................. -- $1,230,000 -- -- --
Collection of stock
subscription receivable ..................... -- -- -- -- 109,000
Net loss ...................................... -- -- -- -- --
Dividends on preferred stock .................. -- -- -- -- --
-------- ---------- --------- ------- ---------
Balance, December 31, 1995 .................... $ 0 $1,230,000 5,758,241 $57,582 $ 0
======== ========== ========= ======= =========
</TABLE>
See accompanying notes to consolidated financial statements.

F-6

BALTIC INTERNATIONAL USA, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(CONTINUED)

Additional
Paid-in Accumulated
Capital Deficit Total
----------- ----------- -----------
Balance, January 1, 1993 ...... $ 727,246 -- $ 696,668

Shares issued ................. 462,235 -- 480,667
Warrants issued in connection
with Bridge Notes ........... 64,243 -- 64,243
Contribution of BWH ........... 38,414 -- 38,414
Collection of stock
subscription receivable ..... -- -- 50,000
Net loss ...................... -- $ (430,697) (430,697)
----------- ----------- -----------

Balance, December 31, 1993 .... 1,292,138 (430,697) 899,295

Warrants and stock issued in
conjunction with Bridge Notes 124,220 -- 154,220
Net proceeds from initial
public offering ............. 4,343,765 -- 4,351,765
Redemption of stock ........... (46,660)
Net loss ...................... -- (6,343,195) (6,343,195)
Dividends paid on preferred
stock ....................... -- (598) (598)
----------- ----------- -----------

Balance, December 31, 1994 .... 5,760,123 (6,774,490) (985,173)

Shares issued ................. 2,886,783 -- 2,805,011
Debt converted to common
stock ....................... 143,840 -- 145,000
Debt converted to
preferred stock ............. (86,863) -- 1,143,137
Collection of stock
subscription receivable ..... -- -- 109,000
Net loss ...................... -- (2,127,624) (2,127,624)
Dividends on
preferred stock ............. -- (60,125) (60,125)
----------- ----------- -----------

Balance, December 31, 1995 .... $ 8,703,883 $(8,962,239) $ 1,029,226
=========== =========== ===========
See accompanying notes to consolidated financial statements.

F-7

BALTIC INTERNATIONAL USA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>

YEAR ENDED DECEMBER 31,
-----------------------------------------------------
1995 1994 1993
------------- ------------ ----------
Cash flows from operating activities:
<S> <C> <C> <C>
Net loss ............................................................ $(2,127,624) $(6,343,195) $(430,697)
Noncash adjustments:
Net equity in (earnings) and losses of:
BIA ............................................................. 3,440,445 4,580,752 490,954
Other joint ventures ............................................ (369,223) (241,076) (53,475)
Depreciation and amortization ..................................... 19,678 6,353 2,087
Amortization of debt costs and discount ........................... 92,070 83,263 17,343
Notes payable issued for expenses ................................. -- -- 36,342
Equity issued for expenses ........................................ -- -- 6,206
Deferred compensation expense ..................................... 190,145 88,308 8,110
Write-off of deferred costs ....................................... -- 105,351 --
Fee income reflected as increase in
advance to joint venture ........................................ -- -- (356,983)
Extraordinary loss from early
extinguishment of debt .......................................... -- 64,587 --
Increase/decrease in current assets
and liabilities:
Accounts receivable ........................................... (108,540) (62,690) (5,000)
Accounts payable and accrued liabilities ...................... 337,253 331,193 (8,510)
Income taxes payable/receivable ............................... -- (23,720) 6,860
Prepaid and other ............................................. 45,438 -- --
Inventory ..................................................... (8,066) -- --
Commitments for guarantees .................................... 1,019,521 -- --
----------- ----------- ---------
Net cash provided by (used by)
operating activities ......................................... 2,531,097 (1,410,874) (286,763)
----------- ----------- ---------

Cash flows from investing activities:
Investment in and advances to joint ventures ........................ (6,070,445) (3,254,675) (613,044)
Distributions and repayments from joint ventures .................... 282,999 507,413 130,717
Acquisition of net assets of ADC, net
of $38,882 cash ................................................... (29,954) -- --
Disposal of property ................................................ 6,074 -- --
Acquisition of property and equipment ............................... (11,348) (5,555) (3,811)
----------- ----------- ---------
Net cash used by investing activities ........................ (5,828,748) (2,752,817) (486,138)
----------- ----------- ---------

</TABLE>
See accompanying notes to consolidated financial statements.

F-8

BALTIC INTERNATIONAL USA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(CONTINUED)
<TABLE>
<CAPTION>

Year Ended December 31,
---------------------------------------
1995 1994 1993
----------- ----------- ---------
Cash flows from financing activities:
<S> <C> <C> <C>
New borrowings ............................... $ 1,066,000 $ 1,625,006 $ 777,120
Increase in debt issuance costs .............. -- (58,669) (118,683)
Repayment of debt and long-term obligations .. (264,712) (1,756,092) (141,000)
Deferred lease credit ........................ (85,659) -- --
Issuance of stock, net of related costs ...... 2,652,005 4,481,759 228,660

Preferred dividends paid ..................... (29,500) (598) --
Redemption of preferred stock ................ -- (46,660) --
----------- ----------- ---------
Net cash provided by financing
activities ............................ 3,338,134 4,244,746 746,097
----------- ----------- ---------
Net increase (decrease) in cash and
cash equivalents ............................. 40,483 81,055 (26,804)
Cash and cash equivalents, beginning of period . 98,757 17,702 44,506
----------- ----------- ---------
Cash and cash equivalents, end of period ....... $ 139,240 $ 98,757 $ 17,702
=========== =========== =========

Supplemental disclosure of noncash transactions:
Services and expenses contributed to BIA ..... $ 563,815 $ 2,969,561 $ 356,983
Conversion of account payable to equity ...... -- -- 171,000
Conversion of notes payable to equity ........ 1,288,137 -- 81,700
Accrual of deferred stock offering costs ..... -- -- 100,000
Dividends declared and paid in
subsequent period .......................... 30,625 -- --

Supplemental disclosure of interest paid ....... $ 96,771 $ 42,552 $ 22,098
Supplemental disclosure of income
taxes paid ................................... $-- $ 16,860 $ 636
</TABLE>

See accompanying notes to consolidated financial statements.

F-9

BALTIC INTERNATIONAL USA, INC.
Notes to Consolidated Financial Statements

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Business operations

Baltic International USA, Inc. (the "Company" or "BIUSA"), a Texas
corporation, was organized on March 1, 1991 to identify, form and
participate in aviation-related and other business ventures in the
former Soviet Union.

The Company owns a 49% interest in and assists in the management of
Baltic International Airlines ("BIA"), a joint venture registered in
the Republic of Latvia. The routes and passenger service operations of
BIA were transferred to a new Latvian carrier, Air Baltic Corporation
("Air Baltic") effective October 1, 1995. The Company owns a 8.02%
interest in Air Baltic after the sale of 12% of Air Baltic stock in
January 1996 discussed in Note 12. The Company is also engaged in
providing services to BIA and other airlines through its 50% interest
in Baltic Catering Services ("BCS"), a Riga, Latvia-based aviation
catering and distribution company. The Company also serves as a
freight forwarder to BIA and Air Baltic through Baltic World Air
Freight ("BWAF"). American Distributing Company ("ADC"), a wholly
owned subsidiary, began operations on December 1, 1995 as a
distribution company. BIUSA's main assets are its ownership interests
in BIA, advances to Air Baltic Corporation, and its sales contracts
with BIA and Air Baltic (see Note 3).

Basis of accounting

Revenues are recognized when earned and expenses are recognized when
the goods and services are acquired or provided. Sales commissions are
earned when transportation on BIA is provided. In 1994 and 1995, the
Company deferred recognition of revenues earned from BIA due to the
uncertain collectibility of such revenues. The Company accounts for
its investment in BIA and BCS using the equity method. The Company's
investment in BIA has been written down to zero. The Company has
recorded additional liabilities for commitments for guarantees on BIA
liabilities. The Company is not committed to provide further financial
support to BIA other than the guaranteed amounts. Therefore, the
Company has discontinued applying the equity method for its equity in
the losses of BIA.

Principles of consolidation

The consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries (BWAF and ADC). All
significant intercompany accounts and transactions have been
eliminated.

Property, equipment and depreciation

Property and equipment are stated at cost. Depreciation is computed
over the estimated useful lives of the assets using the straight-line
method for financial reporting purposes and accelerated methods for
income tax purposes. Maintenance and repairs are charged to operations
as incurred.

Debt issuance costs

Debt issuance costs of $48,000 relating to the Company's bridge notes
payable were deferred at December 31, 1993. Such costs were amortized
using the interest method until the early retirement of such notes in
May 1994. Other debt issuance costs deferred at December 31, 1993 were
charged to expense during 1994 because the related financing was not
obtained.

Goodwill

Goodwill results from the acquisition of the remaining 50% interest in
BWAF and the acquisition of the Miller distribution rights in Riga,
Latvia by ADC (see Note 3). Goodwill is amortized over ten years.

F-10

Income taxes

Deferred income taxes result from temporary differences between the
financial statements and tax basis of assets and liabilities (see Note
5).

The Company has not recognized the tax effect of the losses and
undistributed earnings of its foreign joint venture investments. The
Company intends to indefinitely reinvest undistributed earnings of its
foreign joint ventures.

Statement of cash flows

For purposes of the statement of cash flows, the company considers all
highly liquid investments purchased with original maturities of three
months or less to be cash equivalents.

Loss per common share

Net loss per common share is computed using the weighted average number
of common shares outstanding. Common equivalent shares from stock
options and warrants are included in the computation if dilutive.

Stock warrants and options are considered to be dilutive for earnings
per share purposes if the average market price during the period ending
on the balance sheet date exceeds the exercise price and the Company
had earnings for the period.

New accounting pronouncements

In March 1995, the Financial Accounting Standards Board ("FASB") issued
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, which establishes accounting standards for
the impairment of long-lived assets, certain identifiable intangibles,
and goodwill related to those assets to be held and used and for long-
lived assets and certain identifiable intangibles to be disposed of.
In November 1995, the FASB issued SFAS No. 123, Accounting for Stock-
Based Compensation, which addresses the financial accounting and
reporting standards for stock-based employee compensation plans and
transactions in which an entity issues its equity instruments to
acquire goods or services from nonemployees. These pronouncements are
effective for fiscal years beginning after December 15, 1995. The
Company will be required to implement these statements for the year
ended December 31, 1996. Implementation of these pronouncements should
have no material effect on the Company's financial statements.

Management's estimates and assumptions

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that effect 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. Actual results could differ
from those estimates.

Concentration of credit risk

Substantially all of the Company's assets and revenue sources are
heavily concentrated in Latvia and Lithuania and in its affiliation
with BIA. Failure of BIA to perform up to the terms of its obligations
due to economic or political circumstances would result in a material
credit risk to the Company.

At December 31, 1995, the Company's cash in financial institutions
exceeded the federally insured deposits limit by $1,286.

Reclassifications

Certain prior amounts have been reclassified to conform to 1995
consolidated financial statement presentation.

F-11

NOTE 2 - FINANCIAL CONDITION AND LIQUIDITY

The Company has made significant investments in and advances to BIA
which has incurred losses of $12,408,524 from inception through
December 31, 1995. The Company has loaned an additional $636,156 to
BIA through March 31, 1996. As further explained in Note 3, the
Company elected to forgive $4,042,255 of debt previously written off to
BIA as of September 30, 1995. The Company's future plans for BIA are
to continue operations as a charter and cargo service in the Baltic
region. However, BIA has not conducted any substantive business
operations since October 1995. Management believes that results of
operations have been and will continue to be affected by various
factors typically encountered by businesses in the start-up phase and
in the airline industry. The Company's success depends upon many
factors that are beyond the Company's immediate control, including
market acceptance of its business ventures, competition, economic and
political factors, seasonality and the need for additional capital.

The Company and BIA require substantial capital to pursue their
operating strategies. To date, the Company has relied upon net cash
provided by financing activities to fund its capital requirements.
There can be no assurance that the Company's business interests will
generate sufficient cash in future periods to satisfy its capital
requirements.

In the event that inflation or other factors were to increase the cost
of doing business in Latvia, or if a change in the political or
economic climate occurred, many perceived business opportunities based
on cost advantage may not be available. Political stability in Latvia
remains dependent, in part, on political events in neighboring
republics. Accordingly, unforeseeable and uncontrollable costs and
political factors could adversely affect BIA's operations and its
ability to implement its business strategy.

The above factors have adversely affected the Company's capital
resources and liquidity and raise substantial doubt about the Company's
ability to continue as a going concern. The accompanying financial
statements do not include any adjustments related to the recoverability
and classification of recorded assets or other adjustments should the
Company be unable to continue as a going concern.

On May 5, 1994, the Company received $5,040,000 in net proceeds from
its initial public offering of 800,000 units, each consisting of one
share of common stock, par value $0.01 per share, and a warrant to
purchase an additional one-half share of common stock at $6.00 per
share, subject to adjustment, exercisable under certain circumstances
through April 1996. The Company used approximately $1,773,000 of such
proceeds to redeem indebtedness and preferred stock outstanding and
approximately $605,000 to pay additional related offering expenses.
The Company also advanced approximately $2,000,000 to BIA to fund its
growth and capital needs which has since been written off.

The Company has supplemented cash flow through the issuance of stock
and borrowings. From January through March 1995, the Company issued
$800,000 in bridge financing notes payable, pursuant to which warrants
to purchase 80,000 shares of Common Stock of the Company at $1.00 per
share were issued. In the third quarter of 1995, the Company issued
additional warrants to purchase an aggregate of 160,000 shares to
consultants for services rendered. These warrants are exercisable for
$1.00 per share and expire in August 2000. Effective June 30, 1995, an
aggregate principal amount of $1,185,000 of bridge notes payable was
converted to 118,500 shares of Preferred Stock convertible into 592,500
shares of Common Stock, and $145,000 in short-term debt was converted
into 116,000 shares of Common Stock. In September 1995, an additional
$145,000 of bridge notes was converted to 14,500 shares of Preferred
Stock convertible into 72,500 shares of Common Stock. Also during
1995, the Company received proceeds of $2,914,011 relating to the
issuance of 2,722,841 shares of common stock pursuant to private sales
and the exercise of outstanding stock options. During the first
quarter of 1996, the Company received proceeds of approximately
$101,338 relating to the issuance of 147,351 shares of common stock
pursuant to private sales and the exercise of stock options. In
February and March 1996, the Company issued 50 shares of Series B
Convertible Redeemable Preferred Stock for net proceeds of $1,093,750.
The Company believes it has sufficient ability to obtain additional
financing from key officers, directors and certain investors.

The Company's operations have been insufficient as a source of funds to
meet the Company's capital requirements and other liquidity needs. The
Company believes it can raise sufficient amounts of equity and obtain
debt financing in order to meet its required liquidity requirements for
the remainder of the year ending December 31, 1996. However,
management has no specific plans or commitments with respect thereto
for the Company, and there can be no assurance the Company will be
successful in any effort. Historical earnings history of the Company
have been directly affected by the consistent advances to BIA. The
Company does not anticipate any further advances to BIA which would
adversely impact earnings. The other operating interest of the Company
do not require significant advances and are currently profitable.

F-12

NOTE 3 - INVESTMENTS IN AND ADVANCES TO JOINT VENTURES

Baltic International Airlines

The Company entered into a joint venture agreement with the Latvian
Civil Aviation Department, an agency of the Government of Latvia (the
"Latvian Partner"), on June 6, 1991 to create BIA as a limited
liability company in the Republic of Latvia. The Company currently
owns a 49% interest in BIA.

In September 1994, the Company contributed $2 million of its advances
to BIA in exchange for an increase in its percentage interest in BIA
from 40% to 49%. The Company incurred a loss on its investment in BIA
of $1,250,000 as a result of this transaction. The Latvian Partner has
indicated its intention to contribute real estate to BIA with a value
of at least $500,000. In December 1994, the Company contributed
$969,561 of its advances to BIA representing uncollected charges for
interest and fees.

At September 30, 1995, BIUSA elected to forgive $4,042,255 of debt from
BIA. The Company transferred its remaining investment in and advances
to BIA in the amount of $1,302,600 to advances to Air Baltic upon
completion of the Air Baltic Joint Venture Agreement. On October 1,
1995, the scheduled passenger service operation of BIA was transferred
to Air Baltic. BIA currently has no substantive operations.

From January 1, 1996 to March 31, 1996, the Company advanced an
additional $1,476,971 to BIA which includes $364,586 that had been
accrued at December 31, 1995 as commitments for guarantees on BIA liabilities.
Additionally, the Company reserved $612,385 of the advances made during
the quarter as uncollectible at March 31. Management believes that it is
in the best interest of both BIUSA and BIA for BIA to remain an operating
charter and cargo airline. As BIA will likely continue to operate as a
charter and cargo airline in the Baltic region, the Company believes
that maintaining BIA's airline certification and maintaining the
goodwill of BIA's debtors is beneficial to BIUSA.

Summarized financial data for BIA is as follows:
December 31,
-------------------------------
1995 1994
----------- ------------
Current assets ........................... $ 338,691 $ 688,397
Noncurrent assets ........................ 388,012 2,124,897
----------- -----------
Total assets ............................. $ 726,703 $ 2,813,294
=========== ===========
Current liabilities ...................... $ 4,085,872 $ 1,635,322
Noncurrent liabilities ................... 2,783,006 2,008,272
Partners' deficit ........................ (6,142,175) (830,300)
----------- -----------
Total liabilities and partners'
deficit ................................ $ 726,703 $ 2,813,294
=========== ===========

Year Ended December 31,
--------------------------------------------
1995 1994 1993
------------ ------------ ------------
Revenues ....................... $ 8,760,990 $ 7,510,362 $ 3,608,575
Loss from operations ........... (8,205,708) (4,895,797) (1,264,915)
Net loss ....................... (5,875,690) (5,112,664) (1,311,955)

Total debt forgiven was $4,042,255 which was recorded as extraordinary income by
BIA. The Company did not recognize its equity share of this extraordinary
income.

Losses relating to BIA as reflected in the accompanying statement of operations
comprised:
Year Ended December 31,
----------------------------------
1995 1994 1993
---------- ---------- --------
Equity in losses of BIA ................... $3,440,445 $2,258,070 $490,954
Provision for losses on investment in
and advances to BIA resulting from
losses attributable to the Latvian
Partner funded by the Company ........... -- 721,257 --
Allowance for collectibility of advances
to and accounts receivable from BIA ..... -- 1,601,425 --
---------- ---------- --------
Total ..................................... $3,440,445 $4,580,752 $490,954
========== ========== ========

F-13

The Company's investment in BIA is summarized as follows:
December 31,
---------------------
1995 1994
---- ------------
Proportionate investment in equity (deficit)
of BIA .............................................. $-- $ (406,847)
Advances to and accounts receivable from BIA .......... -- 2,008,272
Allowance for collectibility of advances to
and accounts receivable from BIA .................... -- (1,601,425)
--- -----------
Total investment in and advances to BIA ......... $-- $ --
=== ===========

Baltic World Air Freight

On September 5, 1992, the Board of Directors of the Company approved
the formation of a joint venture to market and operate the air cargo
services of BIA and serve as the cargo sales agent for BIA. On
September 11, 1992, BWAF was formed as a California partnership, in
which the Company owned a 50 percent partnership interest. In October
1994, the Company purchased the remaining 50% interest in BWAF for
approximately $165,000. The acquisition was accounted for using the
purchase method of accounting. In connection with the acquisition, the
Company was obligated to either issue unregistered shares of common
stock of the Company with a value of $145,000, or pay such amount in
cash. In 1995, the Company issued 145,000 shares of common stock in
satisfaction of the purchase. The results of operations of BWAF have
been combined with those of the Company effective October 1, 1994.

Baltic Catering Services

On July 1, 1993, the Board of Directors of the Company authorized the
Company to enter into the BCS joint venture, a Riga, Latvia, limited
liability company, to supply the catering needs of BIA and other
airlines with operations in Riga. BCS was formed initially on March
26, 1993 as a joint venture between ARVO, Ltd., a Latvian limited
liability company, and Baltic World Holdings, Ltd., a U.S. Virgin
Islands company owned by certain of the Company's stockholders. On
September 30, 1993, Baltic World Holdings, Ltd. assigned and
transferred all of its rights and privileges of its 50 percent
ownership of BCS to the Company retroactively to March 26, 1993.

In February 1996, the Company entered into a joint venture agreement
with TOPflight AB, a Swedish company to create a joint venture, Airo
Catering Services ("ACS"), that will set up airline catering facilities
across Eastern Europe. The Company owns 51% of ACS and TOPflight AB
owns 49%. ACS is developing a detailed business plan targeting six
airports for in-flight catering development. On April 2, 1996, the
catering operations of BCS were acquired by Riga Catering Services
("RCS"), previously owned by TOPflight AB, in exchange for shares in
RCS. RCS is currently owned 35% by ACS, 23.5% by the Company and 41.5%
by the principals of the Company's partner in BCS. The business of BCS
after the transfer of the catering business to RCS is the operation of
the restaurant in the Riga Airport. The total assets remaining after
the transfer of the catering business is about $230,000. The Company
will account for the acquisition of its interest in RCS using the
purchase method of accounting..

Summarized combined financial information for BWAF through September
30, 1994 and BCS is as follows:
December 31,
1995 1994
-------- ---------
Current assets $ 291,967 $ 135,362
Noncurrent assets 270,218 319,174
-------- --------
Total assets $ 562,185 $ 454,536
======== ========
Current liabilities $ 3,686 $ 57,316
Equity 558,499 397,220
------- --------
Total liabilities and equity $ 562,185 $ 454,536
======== ========

Year Ended December 31,
1995 1994 1993
--------- --------- --------
Operating revenue $2,341,881 $1,520,004 $270,213
Income from operations 714,734 482,153 106,949
Net income 727,278 482,153 106,949

F-14

Air Baltic Corporation

On August 29, 1995, a Joint Venture Agreement was signed between the
Company, the Republic of Latvia ("Latvia"), Scandinavian Airlines
Systems Denmark-Norway-Sweden ("SAS"), Investeringsfonden for
Ostlandene (the Investment Fund for Central and Eastern Europe - "IO")
and Swedfund International AB ("Swedfund") (collectively, the
"Parties"), for the establishment of a Latvian national airline, Air
Baltic Corporation.

Upon completion of the Joint Venture Agreement, as amended on November
27, 1995, Air Baltic will have a share capital of $11.7 million
consisting of $3.4 million cash and $8.3 million other assets including
real estate, with the following ownership percentages: Latvia -
51.07%, the Company - 20.02%, SAS - 16.51%, IO - 6.2% and Swedfund -
6.2%. The Company obtained its 20.02% interest based on its cumulative-
to-date investments in and advances to BIA. The Joint Venture
Agreement provides that supplemental funding in the amount of $4.0
million for working capital as necessary, will be provided by the
Nordic Investment Bank, or a similar financial institution.

Furthermore, the Parties agreed to provide subordinated debt loans as
necessary to Air Baltic, totaling approximately $10.1 million, of which
the Company's portion was $290,000. In January 1996, SAS assumed the
Company's $290,000 portion of the subordinated debt. The obligation to
provide such financing will expire on December 31, 1997. The Company
has agreed to pay all aviation-related payables of BIA as of November
27, 1995.

Through December 31, 1995, all of the cash capital had been contributed
to Air Baltic and the title to the real estate being contributed to Air
Baltic was in the process of being transferred. See Note 12 for
discussion of the agreement entered into in January 1996 between the
Company and SAS to sell 12% of Air Baltic stock owned by the Company to
SAS.

The Company has accounted for its investment in Air Baltic using the
cost basis of accounting given the 12% interest in Air Baltic that
was sold to SAS in January 1996 was considered temporarily owned as of
December 31, 1995. Additionally, the Company gave up its board seat in
connection with the sale of Air Baltic stock to SAS, and the Company
cannot influence any of the corporate decisions of Air Baltic and acts
similar to a passive minority investor. The Company's influence over
and participation in the management of Air Baltic is nominal.

American Distributing Company

The Company has been granted exclusive rights to distribute selected
Kraft products throughout the Baltic States which will be managed
through its wholly owned subsidiary, ADC. Additionally, ADC will
manage the Company's rights to distribute Miller Beer products in St.
Petersburg, Russia and Riga, Latvia. ADC is a Latvian limited
liability company which began operations on December 1, 1995. ADC will
operate the Kraft operation independently, but will work with a local
St. Petersburg based company to commence activities related to
distribution of Miller products in St. Petersburg.

Latavio

On September 6, 1995, the Company invested $468,950 for a 25% share of
a non-profit state joint-stock company, the Latvian Airlines
("Latavio"). The Company is to provide management expertise by
submitting a business plan to restructure Latavio, developing a
turnaround strategy, and evaluating other business possibilities in the
Baltic area. Subsequent to the investment, the Latvian Economic Court
temporarily halted the privatization process and has appointed a thirty
party administrator to determine whether Latavio should be restructured
outside of the privatization process or, whether privatization should
continue. Management has not fully determined the level of the risk of
loss of the investment of Latavio; however, the Company has fully
reserved the investment as of September 30, 1995.

Lithuanian Aircraft Maintenance Corporation

On September 28, 1995, the Company entered into a joint venture with a
joint stock company, Siauliai Aviacija, presently 100% owned by the
Ministry of Transportation of the Republic of Lithuania and the
Municipality of Siauliai City for the establishment of an aircraft
maintenance facility. The venture will be a Lithuanian closed stock
company which will operate under the name Lithuanian Aircraft
Maintenance Corporation ("LAMCO"). The Company has the right to own up
to 50% of LAMCO. The Company's initial investment will total only
2.8% of LAMCO. Further purchases of shares are anticipated during 1996
as the business plans for the operating entities of LAMCO are
concluded. Siauliai Aviacija owns 96.7% of LAMCO and .25% is owned by
the Municipality of Siauliai City. The Company will have the right to
recommend the general manager, chief financial officer and department
heads for approval by LAMCO's board for a

F-15

period of 10 years. The
Company will also have the authority to negotiate a line of credit for
LAMCO. The Company does not expect LAMCO to be fully operational until
late 1996 or early 1997, if at all.

LAMCO has an authorized charter capital of $1.845 million. The LAMCO
Articles will not be registered until the parties have contributed at
least 25% of their respective capital obligations. The Lithuanian
partners have made their cash capital contributions and the Company has
contributed 25% of its capital ($40,000) on March 26, 1996, with the
remainder of the Company's capital contribution due by May 1, 1996.

NOTE 4 - PROPERTY AND EQUIPMENT

Property and equipment consist of the following:

LIFE DECEMBER 31
(IN YEARS) 1995 1994
------- --------- ---------

Machinery and equipment ................ 3-5 $ 20,053 8,238
Furniture and fixtures ................. 3-5 12,187 6,026
--------- --------
32,240 14,264
Less accumulated depreciation .......... (12,205) (6,629)
--------- --------
Total property and equipment, net ...... $ 20,035 $ 7,635
========= ========

F-16

NOTE 5 - SHORT-TERM AND LONG-TERM OBLIGATIONS

Short-term and long-term debt and notes payable to stockholders consist of the
following:

<TABLE>
<CAPTION>
DECEMBER 31,
1995 1994
--------- ---------
<S> <C> <C>
Note payable to bank, unsecured, interest rate of prime plus 2% (11% at December
31, 1995), due upon maturity, principal payable July 1996, guaranteed by an
officer of the Company ......................................................... $ 75,000 $ --

Subordinated bridge loan financing, interest payable quarterly at 10% per annum,
secured by warrants to purchase 175,000
common shares of the Company, due March 31, 1996 ............................... 175,000 --

Subordinated bridge loan financing payable to officers and directors, interest
rate of 10% per annum, secured by warrants to purchase 8,000 common
shares of the Company, repaid in March 1996 .................................... 80,000 --

Note payable to bank, unsecured, interest payable monthly at 10.5%, principal
payable March 1995, guaranteed by an officer
of the Company ................................................................. -- 50,000

Subordinated bridge loan financing, interest payable quarterly at 10% per annum,
secured by warrants to purchase 52,000 common shares of the Company, due March
31 1996 or upon completion of an offering with gross proceeds of at least $2
million, whichever is earlier, including $275,000 payable
to certain stockholders of the Company ......................................... -- 570,000

Notes payable to stockholders or their affiliates, noninterest-
bearing and unsecured, payable on March 31, 1996 ............................... -- 135,000

Commitment to former joint venture partner in connection with the acquisition of
50% interest in BWAF, noninterest-bearing payable either in cash or in
unregistered shares of common stock
of the Company ................................................................. -- 145,000
330,000 900,000
Less:

Discount on bridge loan financing ............................................ (5,937) (81,270)
Short-term obligations, net .................................................. (324,063) (195,000)
Notes payable to stockholders ................................................ -- (346,739)
--------- ---------

Long-term debt, net ............................................................ $ -- $ 276,991
========= =========
</TABLE>
F-17

NOTE 6 - INCOME TAXES

The components of deferred tax assets consisted of the following:

December 31,
------------------------
1995 1994
----------- ---------
Deferred tax assets:
Net operating loss carryforward .................. $ 1,824,170 $ 574,634
Allowance for doubtful accounts .................. 159,433
Deferred compensation ............................ 67,416 30,024
Investment in BIA ................................ 1,071,755 --
----------- ---------
Total deferred tax assets .......................... 3,122,784 604,658
----------- ---------
Deferred tax liabilities:
Unremitted earnings of BCS ....................... 69,629 --
Other ............................................ 17,327 --
----------- ---------
Total deferred tax liabilities ..................... 86,956 --
----------- ---------
Net deferred tax asset before valuation allowance .. 3,035,828 604,658
Valuation allowance ................................ (3,035,828) (604,658)
----------- ---------
Net deferred tax asset ............................. $ -- $ --
=========== =========

Provisions for income taxes in the statements of operations were as follows:

Year Ended December 31,
----------------------------------
1995 1994 1993
---- ------- ------
Current expense (benefit) ............ $-- $(6,860) $6,860
Deferred expense ..................... -- -- --
---- ------- ------
Total expense (benefit) .............. $-- $(6,860) $6,860
==== ======= ======

Differences between the effective income tax rate and the statutory
federal income tax rate were primarily the result of expenses
deductible for financial reporting purposes that are not deductible for
tax purposes.

As of December 31, 1995, the Company had net operating loss
carryforwards of approximately $5,365,207 available to offset future
taxable income. These carryforwards will expire at various dates
beginning in 2009.

NOTE 7 - COMMON STOCK

The original Articles of Incorporation authorized the Company to issue
up to 5,000,000 shares of its $0.01 par value common stock. On October
30, 1993, the Board of Directors of the Company approved a Plan of
Recapitalization, thereby increasing the total number of $0.01 par
value common shares authorized for issuance to 20,000,000. Each holder
of record of common stock became entitled to receive certificates
representing one additional share of common stock for each share of
common stock subscribed. The accompanying financial statements and
footnotes have been presented as if the recapitalization had been in
effect for all years.

In 1993, common stock shares of 102,400 were subscribed in exchange for
cash and services. In October 1993, the Company issued 2,044,600
shares of $.01 par value common stock in satisfaction of all common
stock subscriptions outstanding since 1991. In November 1993, an
additional 74,800 shares were sold for $187,000 cash.

In May 1994, the Company completed its initial public offering of
800,000 units consisting of one share of common stock and one warrant
to purchase one-half share of common stock. Also, in connection with
the offering, the Company issued warrants to the underwriters'
representatives to purchase 120,000 shares of common stock. The
Company received net proceeds from its initial public offering of
$4,351,765.

F-18

The Company adopted an Equity Incentive Plan (the "Plan"). An
aggregate of 800,000 shares of common stock may be issued under the
Plan. In December 1995, the board of directors adopted a resolution
subject to shareholder approval to increase the number of shares that
may be issued under the Plan to 1,500,000 shares. The Plan provides
for the grant of options or rights, including incentive stock options
and nonqualified stock options to officers, directors, employees and
consultants to the Company for the purpose of providing incentive to
those persons to work for the Company. In October 1992, options to
purchase 52,000 shares were granted to consultants of the Company at an
exercise price of $0.50 per share. Each option vests immediately. As
of September 30, 1995, 18,000 of these options have been exercised.
The difference between the fair market value of the common stock and
the exercise price was recorded as consulting expense on the date of
grant. In December 1993, the Board of Directors granted an additional
116,800 options to employees of the Company at an exercise price of
$0.50 per share. Such options are exercisable annually through 1996.

In October 1993 through April 1994, in connection with a bridge
financing arrangement, the Company issued detachable stock purchase
warrants to purchase an aggregate of 163,995 shares of the Company's
common stock at $1.00 per share, subject to adjustment. Each warrant
is exercisable at any time on or after September 1, 1993 and prior to
August 31, 1998. In October through December 1994, in connection with
similar bridge financing arrangements the Company issued detachable
stock purchase warrants to purchase 57,000 shares of the Company's
common stock at $1.00 per share subject to adjustment. Each warrant is
exercisable at any time on or after August 31, 1995 and prior to
October 31, 1999. In October 1994, the Company granted options to
purchase 225,000 shares of the Company's common stock at $2.875 per
share to certain employees of the Company. On June 13, 1995, the Board
of Directors voted to reduce the exercise price of those options to
$1.125 per share to reflect the value of common stock at that date.
During the year ended December 31, 1995, common stock shares of
2,722,841 were issued resulting in proceeds of $2,914,011.

In December 1995, the Company issued options to purchase 213,000 shares
of common stock at $1.375 per share and detachable stock purchase
warrants to purchase 240,000 shares of common stock at $1.375 per share
to certain employees and directors of the Company and detachable stock
purchase warrants to purchase 10,000 shares of common stock at $1.00
per share in connection with a bridge financing agreement. Also in
December 1995, the Company issued options to purchase 381,680 shares of
common stock at $0.735 per share to a consultant for services rendered
and these options were exercised in December 1995 and January 1996.

The compensation expense recorded by the Company for options issued at
an exercise price lower than the market price at the date of grant was
$190,145 and $97,668 for the years ended December 31, 1995 and 1994,
respectively.

At December 31, 1995, common stock shares of 1,921,586 were reserved
for issuance upon exercise of options and warrants. A summary of
changes in outstanding options and warrants is as follows:
<TABLE>
<CAPTION>

Year Ended December 31,
------------------------------------------------
1995 1994 1993
-------------- ------------ ------------
<S> <C> <C> <C>
Shares under option, beginning of period 408,800 168,800 52,000
Changes during the period:
Granted 894,680 250,000 116,800
Canceled (5,333) (10,000) -
Exercised (644,531) - -
-------------- ------------- ------------
Shares under option, end of period 653,616 408,800 168,800
============== ============= ============

Average option price $ 1.10 $ 0.88 $ 0.50
============== ============= ============

Shares under warrant, beginning of period 751,995 103,996 -
Changes during the period:
Granted 516,000 647,999 103,996
Canceled - - -
Exercised (25) - -
-------------- ------------ ------------
Shares under warrant, end of period 1,267,970 751,995 103,996
============== ============ ============
Average warrant price $ 3.38 $ 4.86 $ 1.00
============== ============ ============
</TABLE>
F-19

NOTE 8 - PREFERRED STOCK

On October 30, 1993, the Board of Directors, in connection with the
recapitalization of the Company, authorized the issuance of up to
500,000 shares of preferred stock. Pursuant to the bridge loan
financing, the Company issued 4,666 shares of 4% Series A Cumulative
Preferred Stock, $10 par value in 1993 and 1994.

The Series A Cumulative Preferred Stock was redeemed by the Company
upon the closing of the Company's initial public offering.

Effective June 30, 1995, the Company created its Convertible Redeemable
Series A Preferred Stock ("Series A Preferred Stock"), 500,000 shares
authorized $10 par value, and issued 123,000 shares thereof upon
conversion of $1,230,000 in aggregate principal amount of long-term
indebtedness. The Series A Preferred Stock: (i) is redeemable only at
the option of the Company and only during the thirty day period
beginning on December 31 and June 30 of each year that the Series A
Preferred Stock is outstanding; (ii) is convertible at any time by the
holders thereof at the initial conversion price of $2 per share; (iii)
carries a liquidation preference of $10 per share; (iv) is non-voting;
and (v) accrues cumulative cash dividends per share at an annual rate
equal to 10% of the stated value per share, payable in equal quarterly
installments. The voting rights of the holders of the Company's common
stock will be diluted upon conversion to the Series A Preferred Stock
and the holders of the Series A Preferred Stock will have preferential
dividend and liquidation rights over the holders of common stock.
Furthermore, when and if the Company becomes profitable, the issuance
of the shares of Series A Preferred Stock will have a dilutive effect
on the per share value of the common stock.

Effective February 22, 1996, the Company created its Series B
Convertible Preferred Stock ("Series B Preferred Stock"), 70 shares
authorized $25,000 stated value per share and $10 par value, and issued
50 shares thereof for net proceeds of $1,090,200 in February and March
1996. The Series B Preferred Stock: (I) is not entitled to receive
dividends; (ii) is convertible at any time by the holders thereof on or
after the 55th day after the date that the shares were issued at the
conversion price of the lesser of $2 per share or 82% of the 5-day
average closing bid price of the Company's common stock; (iii) is non-
voting; (iv) carried a liquidation preference of $25,000 per share and
an amount equal to 10% per annum since the issuance date after payment
in full of the Series A Preferred Stock; and (v) is redeemable only at
the option of the Company if the conversion price is $0.75 or less per
share.

NOTE 9 - RELATED PARTY TRANSACTIONS

The following is a summary of material related party transactions which
have occurred during 1995, 1994 and 1993, other than those disclosed
elsewhere in the notes to the accompanying financial statements.

Baltic International Airlines

The Company is entitled to earn management fees, aircraft rental
income, and commission income from BIA. Commissions are based upon a
percentage of passenger ticket and cargo revenue earned on sales
originating outside of Riga. The Company earned $78,845, $655,000 and
$327,560 in such commissions and fees for the years ended December 31,
1995, 1994, and 1993, respectively. The Company subleases two Boeing
727 aircraft to BIA for an aggregate of $80,000 per month. For the
year ended December 31, 1995, the Company received $480,000 related to
the subleases. For the years ended December 31, 1995 and 1994, the
Company charged BIA $611,792 and $749,450, respectively, in costs
incurred on behalf of BIA, including pilots' salaries, officers'
salaries and consulting costs. The Company forgave $759,150 of fees
and commissions earned in 1994 by contributing it to the equity of BIA.

The Company has significant investments in and advances to its joint
ventures, including unsecured net advances of $2,008,272 at December
31, 1994. During 1993, the Company recorded interest income on such
note of $29,423. During 1994, the Company forgave interest income of
$210,411 by contributing it to the equity of BIA. The net advances
include the excess of amounts invested in BIA over the amount
contributed to the equity in BIA (see Note 3).

F-20

Air Baltic Corporation

The Company managed the interim flight operations of Air Baltic and
subleased two western aircraft previously operated by BIA under a wet
lease agreement for $1.5 million through December 31, 1995. In
addition, Air Baltic paid a $1.5 million fee to the Company for
services rendered in connection with the training of Latvian cockpit,
cabin and ground personnel.

Other

During 1992 and 1993, officers, directors, employees and certain
consultants contributed certain overhead, services, capital and
equipment to the Company in exchange for shares and/or stock options.
Certain officers provided similar benefits in excess of the amount
contributed to the Company, and in exchange received Promissory Notes
from the Company aggregating $332,523. Such notes were repaid in May
1994.

BWAF is dependent upon Air Baltic for cargo transportation.

During 1995, 1994 and 1993, consulting fees in the amount of $0,
$20,000 and $10,000 were paid to Capricorn Travel, which is controlled
by a director of the Company.

NOTE 10 - COMMITMENTS AND CONTINGENCIES

The Company, along with the Ministry of Transportation of the Republic
of Latvia, has agreed that it may provide additional future financial
support to BIA in the form of loans or capital contributions. The
Company is obligated on leases for two Boeing 727 aircraft. The
Company obtained deferred lease credits in the form of cash and rent
deferrals in 1994 from the lessor, principally to defray the cost of
heavy maintenance on the aircraft incurred by BIA. Aggregate rental
payments and supplemental payments are $61,378 per month. The leases
expire in June 1996.

The Company leases certain equipment and office space under operating
leases that expire over the next three years. Rental expense under
operating leases was $572,826 and $394,978 for 1995 and 1994,
respectively. Future minimum lease payments under noncancelable
operating leases are as follows:

1996 $ 36,148
1997 37,657
1998 30,629
Total $104,434

In December 1995, the Company guaranteed certain liabilities of BIA and
the Company accrued $1,019,521 as a commitment to pay these liabilities
as the Company has signed an agreement to pay these liabilities on
behalf of BIA. The expense for these liabilities is included in the
Company's net equity in losses of BIA on the 1995 consolidated
statement of operations.

NOTE 11 - EXTRAORDINARY LOSS

On May 6, 1994, the Company repaid all of its bridge financing notes
payable using proceeds from its initial public offering. As a result
of early extinguishment of $893,340 of such notes, the Company
recognized an extraordinary loss of $78,586 in 1994.

NOTE 12 - SUBSEQUENT EVENT

On January 10, 1996, the Company entered into an agreement to sell 12%
of Air Baltic stock to SAS for $1.7 million in cash and the assumption
by SAS of the remaining subordinated debt obligation of the Company to
ABC of $2,175,000. The Company will retain a 8.02% interest in Air
Baltic. A gain of approximately $300,000 will be recognized on the
sale of the Air Baltic stock.

F-21

INDEPENDENT AUDITORS' REPORT

To the Board of Directors and Joint Venture Partners of
Baltic International Airlines

We have audited the balance sheet of Baltic International Airlines as
of December 31, 1995, and the related statements of operations, joint
venture partners' equity (deficit) and cash flows for the year then
ended. 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 audit.

We conducted our audit 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 audit provides a reasonable basis for our opinion.

Baltic International Airlines is a joint venture and, as disclosed in
the financial statements, has extensive transactions and relationships
with Baltic International USA, Inc. and its joint venture partner.
Because of these relationships, it is possible that the terms of these
transactions are not the same as those that would result from
transactions among wholly unrelated parties.

In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Baltic
International Airlines at December 31, 1995, and the results of its
operations and its cash flows for the year then ended 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 incurred significant
losses and has a joint venture partners' deficit that raise substantial
doubt about the Company's 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 that
might result from the outcome of this uncertainty.

/s/ BDO Seidman, LLP
BDO Seidman, LLP

Houston, Texas
April 2, 1996

F-22

REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Joint Venture Partners of
Baltic International Airlines

In our opinion, the accompanying balance sheet and the related
statements of operations, joint venture partners' equity (deficit) and
cash flows present fairly, in all material respects, the financial
position of Baltic International Airlines, Riga, Latvia, at December
31, 1994, and the results of its operations and its cash flows for each
of the two years in the period ended December 31, 1994, in conformity
with accounting principles generally accepted in the United States of
America. 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 of these statements in accordance with generally accepted
auditing standards which 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, assessing the accounting principles used and significant
estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.

The accompanying financial statements have been prepared assuming that
the Company will continue as a going concern. The Company has incurred
losses from operations that raise substantial doubt about the Company's
ability to continue as a going concern. Management's plans in regard
to these matters are described in Note 2. The financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.

/s/ Price Waterhouse LLP
PRICE WATERHOUSE LLP

Houston, Texas
March 30, 1995

F-23

BALTIC INTERNATIONAL AIRLINES
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
---------------------------
1995 1994
----------- ------------
ASSETS
CURRENT ASSETS
<S> <C> <C>
Cash ..................................................... $ 155,175 $ 111,900
Accounts receivable ...................................... 183,516 476,623
Inventory ................................................ -- 32,976
Prepaid expenses ......................................... -- 66,898
----------- ------------
Total current assets ..................................... 338,691 688,397
PROPERTY AND EQUIPMENT, net ................................ 288,012 1,579,168
DEVELOPMENT AND PREOPERATING COSTS, net .................... -- 217,755
EQUIPMENT DEPOSITS AND PREPAID RENT ........................ 100,000 327,974
------------ -----------
Total assets ............................................. $ 726,703 $ 2,813,294
============ ===========

LIABILITIES AND JOINT VENTURE PARTNERS'
DEFICIT
CURRENT LIABILITIES
Accounts payable and accrued liabilities ................. $ 4,050,872 $ 1,352,863
Unearned revenue ......................................... -- 282,459
Note payable to bank ..................................... 35,000 --
------------ -----------
Total current liabilities .............................. 4,085,872 1,635,322
LONG-TERM LIABILITIES
Advances from BIUSA ...................................... 2,783,006 2,008,272
------------ -----------
Total liabilities ...................................... 6,868,878 3,643,594
------------ -----------
COMMITMENTS AND CONTINGENCIES
JOINT VENTURE PARTNERS' DEFICIT
Capital .................................................. 6,266,349 5,702,534
Accumulated deficit ...................................... (12,408,524) (6,532,834)
------------ -----------
Total joint venture partners' deficit .................. (6,142,175) (830,300)
------------ -----------
Total liabilities and joint venture partners'
deficit .............................................. $ 726,703 $ 2,813,294
============ ===========
</TABLE>
See accompanying notes to financial statements.

F-24

BALTIC INTERNATIONAL AIRLINES
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------
1995 1994 1993
------------ ------------ -----------
REVENUES:
<S> <C> <C> <C>
Passenger ............................ $ 8,552,438 $ 7,262,335 $ 3,445,963
Charter and other .................... 208,552 248,027 162,612
------------ ------------ -----------
Total revenues ..................... 8,760,990 7,510,362 3,608,575
------------ ------------ -----------
OPERATING EXPENSES:
Traffic and handling costs ........... 7,081,284 5,003,261 2,059,104
Fuel ................................. 2,060,950 1,701,436 875,897
Commissions .......................... 397,035 345,553 295,120
Aircraft rental ...................... 856,482 648,823 --
Other costs of services .............. 3,759,095 1,613,633 527,997
General and administrative expenses .. 1,694,578 1,146,834 599,998
Depreciation and amortization:
Property and equipment ............. 439,323 185,644 98,667
Developmental and preoperating costs 217,755 330,999 302,921
Right to use aircraft .............. -- -- 32,918
Development and preoperating costs ... -- 553,299 --
Loss on relinquishment of right to use
aircraft ........................... -- -- 80,868
Loss on sale of assets ............... 11,755 876,677
------------ ------------ -----------

Total operating expenses ........... 16,518,257 12,406,159 4,873,490
------------ ------------ -----------
LOSS FROM OPERATIONS ................... (7,757,267) (4,895,797) (1,264,915)
NONOPERATING INCOME AND (EXPENSES):
Interest income ...................... 886 4,077 277
Exchange loss ........................ (15,714) (10,533)
(17,844)
Interest expense ..................... (433,613) (210,411) (29,423)
------------ ------------ -----------
TOTAL LOSS FROM OPERATIONS
(NOTE 1) ............................ (8,205,708) (5,112,664) (1,311,955)
LOSS ON DISPOSAL OF SCHEDULED
PASSENGER CARRIER SERVICE,
including provisions
of $550,000 for operating losses
during phase-out period .............. (1,712,237) -- --
------------ ------------ -----------
NET LOSS BEFORE EXTRAORDINARY
INCOME ............................... (9,917,945) (5,112,664) (1,311,955)
EXTRAORDINARY INCOME-
FORGIVENESS OF DEBT .................. 4,042,255 -- --
------------ ------------ -----------
NET LOSS ............................... $ (5,875,690) $ 5,112,664) $(1,311,955)
============ ============ ===========
</TABLE>
See accompanying notes to financial statements.

F-25

BALTIC INTERNATIONAL AIRLINES
STATEMENTS OF JOINT VENTURE PARTNERS' EQUITY (DEFICIT)

Accumulated
Capital Deficit Total
----------- ------------ -----------
Balance at January 1, 1993 ....... $ 1,800,000 $ (108,215) $ 1,691,785

Capital contributions ............ 932,973 -- 932,973

Net loss ......................... -- (1,311,955) (1,311,955)
----------- ------------ -----------

Balance at December 31, 1993 ..... 2,732,973 (1,420,170) 1,312,803

Capital contributions ............ 2,969,561 -- 2,969,561

Net loss ......................... -- (5,112,664) (5,112,664)
----------- ------------ -----------

Balance at December 31, 1994 ..... 5,702,534 (6,532,834) (830,300)

Capital contributions ............ 563,815 -- 563,815

Net loss ......................... -- (5,875,690) (5,875,690)
----------- ------------ -----------

Balance at December 31, 1995 ..... $ 6,266,349 $(12,408,524) $(6,142,175)
=========== ============ ===========

See accompanying notes to financial statements.

F-26

BALTIC INTERNATIONAL AIRLINES
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------
1995 1994 1993
----------- ----------- -----------
Cash flows from operating activities:
<S> <C> <C> <C>
Net loss ........................................ $(5,875,690) $(5,112,664) $(1,311,955)
Noncash adjustments:
Depreciation and amortization ................. 657,078 516,643 434,506
Loss on relinquishment of right to use aircraft -- -- 80,868
Loss on sale of assets ........................ 11,755 876,677 --
Forgiveness of debt ........................... (4,042,255) -- --
Loss on disposal of segment ................... 1,712,237 -- --
Change in accounts receivable ................. 293,107 (476,623) --
Change in inventory ........................... 32,976 (32,976) --
Change in prepaid expenses .................... 66,898 46,434 (99,151)
Change in unearned revenue .................... (282,459) 184,839 97,620
Change in accounts payable .................... 2,148,009 1,054,677 150,611
----------- ----------- -----------
Net cash used by operating
activities ................................ (5,278,344) (2,942,993) (647,501)
----------- ----------- -----------

Cash flows from investing activities:
Acquisition of property and equipment ........... (279,242) (625,243) (222,039)
Equipment deposits and prepaid rent ............. 185,057 (327,974) --
Developmental and preoperating costs ............ -- -- (73,500)
Net cash used by investing activities ....... (94,185) (953,217) (295,539)
----------- ----------- -----------
Cash flows from financing activities:
Proceeds from note payable ...................... 35,000 -- --
Operating expenses paid by BIUSA ................ -- 1,719,724 379,827
Advances from BIUSA ............................. 5,380,804 2,478,136 692,700
Repayments of advances from BIUSA ............... -- (350,790) (116,694)
----------- ----------- -----------
Net cash provided by financing activities ... 5,415,804 3,847,070 955,833
----------- ----------- -----------
Net increase (decrease) in cash ................... 43,275 (49,140) 12,793
Cash, beginning of period ......................... 111,900 161,040 148,247
----------- ----------- -----------

Cash, end of period ............................... $ 155,175 $ 111,900 $ 161,040
=========== =========== ===========

Supplemental disclosure of noncash transactions:
Acquisition of property and equipment ........... $ -- $ -- $ 1,989,784
Right to use aircraft ........................... -- -- (1,263,569)
Liabilities to joint venture partners ........... -- (350,000) 350,000
Conversion of advances to equity ................ 563,815 2,969,561 --
</TABLE>
See accompanying notes to financial statements.

F-27

BALTIC INTERNATIONAL AIRLINES
Notes to Financial Statements

NOTE 1 - OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES

Business operations

Baltic International Airlines (the "Company") is a scheduled passenger
carrier with operations principally from Riga, Latvia, to England,
Germany and other European destinations. The routes and passenger
service operations of the Company were transferred to a new Latvian
carrier effective October 1, 1995.

The Company is the result of a joint venture agreement between the
Latvian Aviation Department, an agency of the Government of Latvia (the
"Latvian Partner"), and Baltic International USA, Inc. ("BIUSA"). The
Company was founded on June 6, 1991 as a limited liability company in
the Republic of Latvia.

On June 22, 1992, the Company began regularly scheduled service to
various German markets operating three refurbished Russian aircraft
provided by the Latvian partner. The Latvian partner facilitated the
Company's usage of and access to the aircraft, aviation-related
equipment and facilities, and provided full maintenance and service
thereto. The Latvian partner's 66 2/3% contribution, in the form of the
right to use aircraft and other assets, was made and valued at
$1,200,000 pursuant to the amended joint venture agreement.

On July 2, 1993, the Company's joint venture agreement was amended via a
Settlement Agreement, wherein BIUSA's percentage was increased to 40%
from 33 1/3% at that time. The Company transferred one refurbished
aircraft back to Latvian Airlines at no charge. Upon the relinquishment
of the aircraft, the Company recognized a loss of $80,868 due to the
refurbishment costs incurred. Effective July 31, 1993, Latvian Airlines
transferred ownership and control of the two remaining aircraft to the
Company and relinquished responsibility for further service or
maintenance.

During 1994, BIUSA converted $2,969,561 in advances to equity of BIA and
increased its percentage ownership to 49% from 40%.

For a period of time in 1993 and 1994, the Company operated one DC9-30
aircraft. Commencing in May 1994, the Company leases two Boeing 727-100
aircraft from an affiliate. The Boeing aircraft were not operating
until October 1994 and February 1995 due to scheduled maintenance and
repairs.

On August 29, 1995, the joint venture partners entered into another
joint venture agreement in which they contributed the scheduled
passenger carrier service of the Company to the new joint venture. This
portion of the business was transferred on October 1, 1995. The net
operations of the Company related to this discontinued operations and
the continuing operations, with expenses pro rated in proportion to
revenues, are as follows:
Year Ended December 31,
-----------------------------------------
1995 1994 1993
----------- ----------- -----------
Continuing operations ............. $ (195,334) $ (168,844) $ (59,120)
Discontinued scheduled passenger
carrier service ................. (8,010,374) (4,943,820) (1,252,835)
----------- ----------- -----------
Total loss from operations ........ $(8,205,708) $(5,112,664) $(1,311,955)
=========== =========== ===========

The Company recorded a loss on the disposal of this operation of
$1,712,237 (composed of a $550,000 provision for operating losses during
the phase-out period and a $1,162,237 loss on disposal) included in the
statement of operations for the year ended December 31, 1995.

Basis of accounting

Revenues are recognized when the transportation is provided rather than
when the ticket is sold. Passenger traffic commissions are recognized
when the transportation is provided and the related revenues are
recognized. Revenues not yet recognized as income are reflected in the
financial statements as unearned revenue. Expenses are recognized when
the goods and services are acquired or provided.

These financial statements have been prepared using accounting
principles generally accepted in the United States of America.

Inventory

Inventory of spare parts and supplies is stated at cost using the first-
in, first-out method.

F-28

Property and equipment

The costs of property and equipment, including renewals and
improvements which extend the life of existing property and equipment,
are capitalized and depreciated using the straight-line method over the
estimated useful lives of the various classes of assets. The salvage
value of aircraft and improvements has been assumed to be zero. The
Company uses the deferral method of accounting for overhaul costs on
its owned aircraft, whereby overhaul costs will be capitalized when
incurred and amortized over the period until the next expected
overhaul. The Company uses the accrual method of accounting for
overhaul costs on its leased aircraft.

Developmental and preoperating costs

Developmental and preoperating costs include the costs associated with
inaugurating service over the Company's routes, developing such routes,
pilot training and the costs of acquiring aircraft and access to
airports, reservations systems and other operating assets. Such costs
were amortized over a three-year period. Developmental and
preoperating costs incurred after December 31, 1993 are expensed as
incurred.

Income taxes

In November 1991, the Republic of Latvia enacted the Law on Foreign
Investments, which provides certain exemptions from income taxes on
foreign-owned joint ventures beginning with the first year in which the
first profit is made. There are no income tax benefits associated with
losses incurred.

Foreign currency translation

The functional currency of the Company is the Latvian Lat. A portion
of the Company's operations are conducted in convertible foreign
currencies and are translated into U.S. dollars at average current
rates during each period reported. Foreign currency transaction gains
and losses are included in net income. Net exchange gains or losses
resulting from the translation of assets and liabilities are
accumulated as a separate component of joint venture partners' equity.
There were no such gains or losses as of December 31, 1995 or December
31, 1994.

New accounting pronouncements

Management's estimates and assumptions

NOTE 2 - FINANCIAL CONDITION AND LIQUIDITY

On October 1, 1995, the scheduled passenger service operation of the
Company was transferred to another company by the Latvian Partner and
BIUSA. The Company has incurred losses of $12,408,524 from inception
through December 31, 1995. The Company's future viability is dependent
on its ability to achieve profitable operations and obtain additional
financing. Management believes that its results of operations have
been and will continue to be affected by various factors typically
encountered by businesses in the start-up phase and in the airline
industry. The Company's eventual success depends upon many factors
that are beyond the Company's immediate control, including market
acceptance, competition, economic and political factors, seasonality
and the need for additional capital.

F-29

The Company requires substantial capital to pursue its operating
strategy. To date, the Company has relied upon net cash provided by
financing activities to fund its capital requirements. There can be no
assurance that the Company's business interests will generate
sufficient cash in future periods to satisfy its capital requirements.
The Latvian Partner has indicated its intention to contribute real
estate to the Company with a value of at least $500,000.

In the event that inflation or other factors were to increase the cost
of doing business in Latvia, or if a change in the political or
economic climate occurred, many perceived business opportunities based
on cost advantage may not be available. Political stability in Latvia
remains dependent, in part, on political events in neighboring
republics. Accordingly, unforeseeable and uncontrollable costs and
political factors could adversely affect the Company's operations and
its ability to implement its business strategy.

The Company has continued to be supported primarily through advances
from BIUSA. These factors have adversely affected the Company's
liquidity and raise substantial doubts about the Company's ability to
continue as a going concern. The accompanying financial statements do
not include any adjustments related to the recoverability and
classification of recorded assets or other adjustments should the
Company be unable to continue as a going concern.

NOTE 3 - PROPERTY AND EQUIPMENT

Property and equipment consists of the following:
December 31,
Life -------------------------
(In Years) 1995 1994
---------- ----------- -----------
Aircraft and improvements ........... 20 $ 382,701 $1,071,554
Furniture and fixtures .............. 3-7 122,661 121,419
Leasehold improvements .............. 2-20 837,304 567,304
Ground transportation equipment ..... 7 8,125 20,625
----------- ----------
1,350,791 1,780,902

Less - accumulated depreciation ..... (1,062,779) (201,734)
----------- ----------

Total property and equipment, net ... $ 288,012 $1,579,168
=========== ==========

In December 1994, BIA sold one of its TU134 aircraft for $350,000.
Proceeds were used to repay the $350,000 liability to BIA's former
joint venture partner. BIA recorded a loss on sale of the aircraft of
approximately $877,000.

In February 1996, the Company and BIUSA entered into an agreement to
return the two leased aircraft to the owner. As a result, the Company
accelerated the depreciation on leasehold improvements which have a net
book value of $0 at December 31, 1995.

NOTE 4 - DEVELOPMENTAL AND PREOPERATING COSTS

December 31,
-----------------------
1995 1994
--------- ---------
Developmental and preoperating costs, at cost ...... $ 992,998 $ 992,998

Accumulated amortization ........................... (992,998) (775,243)
--------- ---------

Total developmental and preoperating costs, net .... $ -- $ 217,755
========= =========

Development and preoperating costs include those costs associated with
development of routes, markets and pilot training. Amortization was
calculated using an estimated economic life of three years.

NOTE 5 - RELATED PARTY TRANSACTIONS

The following is a summary of material related party transactions other
than those disclosed elsewhere in the notes.

During 1993, the Company issued notes payable to BIUSA for an aggregate
of $665,200, which bear interest at 12%. The Company recorded interest
expense of $29,423 on such notes in 1993. The Company also issued a
$350,000 noninterest-bearing note to Latvian Airlines in connection
with the Settlement Agreement (see Note 1). During 1994, the Company
borrowed an additional $4,197,860 from BIUSA, bearing interest at 12%.
BIUSA converted $2,969,561 of such advances

F-30

to equity during 1994. The
Company accrued interest on advances from BIUSA of $210,411 during
1994. During the year ended December 31, 1995, the Company borrowed an
additional $3,520,708 from BIUSA. At September 30, 1995 BIUSA elected
to forgive $4,042,255 of debt due from the Company and this forgiveness
has been recorded as an extraordinary item on the statement of
operations.

The Company accrues commission payable to BIUSA for its services as
international promotional sales agent, based upon a percentage of
ticket revenue for tickets sold by BIUSA. For the years ended December
31, 1995, 1994 and 1993, the Company recorded $78,845, $166,157 and
$147,560, respectively, for such commissions.

The Company accrued administration and management charges to BIUSA at a
flat rate of $15,000 per month in 1993, and recorded $180,000 for such
charges. Commencing January 1, 1994, the Company accrued
administrative charges payable to BIUSA based upon actual costs
incurred and billed by BIUSA. Such charges include primarily pilot
salaries and an allocation of officers' salaries. Administrative
charges from BIUSA during 1995 and 1994 totaled $611,792 and $749,450,
respectively. Effective in May 1994, the Company subleases from BIUSA
two Boeing 727-100 aircraft for an aggregate monthly rental of $80,000.
The Company recorded $856,482 and $648,823 in aircraft rental expense
on the Boeing 727 aircraft in 1995 and 1994, respectively. At December
31, 1995, the Company had a $2,783,006 payable to BIUSA. BIUSA has
committed that it will not demand repayment of the advances for at
least one year.

A portion of the revenues earned by other corporate joint ventures of
BIUSA are derived from catering sales to the Company and cargo sales
using transportation provided by the Company. These amounts are not
material to the Company.

NOTE 6 - COMMITMENTS AND CONTINGENCIES

The Company leases two 727-100 aircraft for $80,000 per month pursuant
to subleases to BIUSA, which expire in 1996.

The Company does not maintain property insurance on its owned aircraft
nor does it maintain property or liability insurance on its ground
equipment, because it would be uneconomical.

The Company has received a notice of deficiency and penalties from
governmental authorities in Riga, Latvia, claiming approximately
$300,000 in unpaid VAT taxes and penalties. The Company believes the
claims are without merit and is vigorously contesting such claims. The
Company is undergoing VAT tax, income tax and payroll tax audits by
Latvian agencies for 1991 through 1994 and there can be no assurances
that additional taxes may not be levied. The Company contends that it
has properly remitted all taxes collected or otherwise owed. No
provision for such claims has been made in the accompanying financial
statements.

NOTE 7 - NOTE PAYABLE

During 1995, the Company borrowed $187,450 pursuant to a line of credit
obtained from a bank in Riga, Latvia. The borrowings are secured by a
TU134 aircraft owned by the Company This line of credit was paid off
in January 1996.

F-31

SIGNATURES

In accordance with the requirements of Section 13 or 15(d) of
the Exchange Act, the registrant has caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized, on the 22
day of May, 1996.

BALTIC INTERNATIONAL USA, INC.

//s// ROBERT L. KNAUSS
-------------------------
ROBERT L. KNAUSS, Chairman of the Board and
Chief Executive Officer

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

Signature Title Date
- --------- ----- ----

//s// ROBERT L. KNAUSS Chairman of the Board and May 22, 1996
- ------------------------ Chief Executive Officer
ROBERT L. KNAUSS (Principal Executive Officer)

//s// JAMES W. GOODCHILD Chief Operating and May 22, 1996
- ------------------------ Financial Officer (Principal
JAMES W. GOODCHILD Financial and Accounting Officer)

//s// HOMI M. DAVIER Director May 22, 1996
- ------------------------
HOMI M. DAVIER

//s// PAUL R. GREGORY Director May 22, 1996
- ------------------------
PAUL R. GREGORY

//s// JURIS PADEGS Director May 22, 1996
- ------------------------
JURIS PADEGS

//s// TED REYNOLDS Director May 22,1996
- ------------------------
TED REYNOLDS

Director ________, 1996
- ------------------------
MORRIS SANDLER

Exhibits

INDEX TO EXHIBITS

Exhibit No. Description Sequentially Numbered Pages

10.42(10)-- Airo Catering Services Joint Venture Agreement
10.43(10)-- Riga Catering Services Shareholders' Agreement

16.1(6)-- Letter on Change in Certifying Accountant
_________________________________

(1) Filed herewith.