KITTY HAWK INC, 10-K405, 1998-03-31

KITTY HAWK INC
10-K405, 1998-03-31
AIR TRANSPORTATION, NONSCHEDULED

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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

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

FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
---------------------
COMMISSION FILE NUMBER 0-25202

KITTY HAWK, INC.
(Exact name of registrant as specified in its charter)

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DELAWARE 75-2564006
(State or other jurisdiction of (I.R.S. employer identification no.)
Incorporation or organization)
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1515 WEST 20TH STREET
P.O. BOX 612787
DALLAS/FORT WORTH INTERNATIONAL AIRPORT, TEXAS 75261
(972) 456-2200
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)

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

Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $0.01 PAR VALUE

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [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-K or any amendment to this
Form 10-K. [X]

On March 24, 1998, the aggregate market price of the voting stock held by
non-affiliates of the registrant was approximately $120.9 million. (For purposes
of determination of the above stated amount, only directors, executive officers
and 10% or greater stockholders have been deemed affiliates).

On March 24, 1998, there were 16,766,881 outstanding shares of Common
Stock, par value $0.01 per share.

DOCUMENTS INCORPORATED BY REFERENCE:

Part III -- Portions of the registrant's definitive proxy statement to be
issued in conjunction with the registrant's 1998 Annual Meeting of Stockholders
to be held on May 29, 1998.

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KITTY HAWK, INC.

1997 ANNUAL REPORT ON FORM 10-K

TABLE OF CONTENTS

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PAGE
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PART I.

Item 1. Business.................................................... 3
Item 2. Properties.................................................. 14
Item 3. Legal Proceedings........................................... 15
Item 4. Submission of Matters to a Vote of Security Holders......... 15
Item 4A. Executive Officers of the Registrant........................ 16

PART II.

Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters......................................... 17
Item 6. Selected Financial Data..................................... 18
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 20
Item 8. Financial Statements and Supplementary Data................. 35
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 35

PART III.

Item 10. Directors and Executive Officers of the Registrant.......... 36
Item 11. Executive Compensation...................................... 36
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 36
Item 13. Certain Relationships and Related Transactions.............. 36

PART IV.

Item 14. Exhibits, Financial Statement Schedules and Reports on Form
8-K......................................................... 37
Signatures.................................................. 42
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FORWARD-LOOKING STATEMENTS

In addition to historical information, this Annual Report on Form 10-K
contains forward-looking statements, which can be identified by the use of
forward looking terminology, such as "may," "will," "expect," "could,"
"anticipate," "estimate" or "continue" or the negative thereof or other
variations thereon or comparable terminology. The forward-looking statements
contained herein are subject to certain risks and uncertainties that could cause
actual results to differ materially from those referred to in the
forward-looking statements. Factors that might cause such a difference include,
but are not limited to, those discussed in "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Factors That May
Affect Future Results and Market Price of Stock." Readers are cautioned not to
place undue reliance on these forward-looking statements, which reflect
management's analysis only as of the date hereof. Kitty Hawk undertakes no
obligation to publicly revise these forward-looking statements to reflect events
or circumstances that arise after the date hereof. Readers should carefully
review the risk factors described in other documents the Company files from time
to time with the Securities and Exchange Commission.

PART I

ITEM 1. BUSINESS

GENERAL

The Company is a leading U.S. and international air freight carrier and a
leading provider of air freight logistics services for the delivery of freight
on a highly-reliable, time sensitive basis. The Company also provides air
passenger charter services and aircraft maintenance services. The Company's
principal executive offices are located at 1515 West 20th Street, P.O. Box
612787, Dallas/Fort Worth International Airport, Texas 75261, its telephone
number is (972) 456-2200 and its Internet address is http://www.kha.com. Unless
the context otherwise requires, the "Company" or "Kitty Hawk" refers to Kitty
Hawk, Inc., its predecessor and its subsidiaries.

THE MERGER

On September 22, 1997, Kitty Hawk and certain of its subsidiaries, M. Tom
Christopher, Conrad A. Kalitta, American International Airways, Inc. ("AIA"),
American International Travel, Inc. ("AIT"), Flight One Logistics, Inc. ("FOL"),
Kalitta Flying Service, Inc. ("KFS") and O.K. Turbines, Inc. ("OKT" and with
AIA, AIT, FOL and KFS, collectively, the "Kalitta Companies") entered into an
Agreement and Plan of Merger, which was subsequently amended (as so amended, the
"Merger Agreement"). Pursuant to the Merger Agreement, on November 19, 1997,
separate subsidiaries of Kitty Hawk were merged with and into each of the
Kalitta Companies (the "Merger"), with each of the respective Kalitta Companies
surviving the Merger as a direct, wholly owned subsidiary of Kitty Hawk. In
connection with the Merger, the outstanding shares of capital stock of four of
the Kalitta Companies were converted, in the aggregate, into 4,099,150 shares of
the Company's Common Stock, par value $0.01 per share ("Common Stock"), and the
outstanding shares of the remaining Kalitta Company were converted into $20
million cash.

PURCHASE OF BOEING 727S FROM THE KALITTA COMPANIES

In September 1997, prior to the Merger, the Kalitta Companies sold to Kitty
Hawk for $51 million 16 Boeing 727 aircraft, comprising 15 aircraft in freighter
configuration and one aircraft in passenger configuration. As part of the
transaction, the Kalitta Companies assigned to Kitty Hawk all of their customer
contracts relating to the aircraft sold.

THE COMMON STOCK OFFERING, THE NOTE OFFERING, THE CREDIT FACILITY
AND THE TERM LOAN

Concurrently with the Merger, the Company consummated a 3,000,000 share
Common Stock offering (the "Common Stock Offering") at $19 per share and a $340
million 9.95% Senior Secured Note offering (the "Note Offering"). Of the
3,000,000 shares offered in the Common Stock Offering, 2,200,000 shares were
sold by the Company and 800,000 shares were sold by certain stockholders of the
Company.

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Concurrently with the Merger, the Company also entered into a new senior
secured revolving credit facility providing for borrowings of up to $100
million, subject to a current borrowing base limitation of approximately $59.3
million (the "Credit Facility"), and a new $45.9 million term loan (the "Term
Loan"). See "Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Liquidity and Capital Resources."

The net proceeds of the Common Stock Offering, the Note Offering and the
Term Loan, after deducting underwriting discounts, placement fees and offering
expenses, were approximately $413 million. Of the approximately $413 million of
net proceeds, the Company used approximately $249.8 million to pay off
substantially all of the Kalitta Companies' pre-Merger indebtedness, $78.9
million to refinance Kitty Hawk's pre-Merger indebtedness, $39.6 million to
acquire two Boeing 747s, $20 million to pay the cash portion of the
consideration for the Kalitta Companies, $16.4 million to fund a portion of the
costs to modify two recently acquired Boeing 747s from freighter to cargo
configuration, $6.0 million for working capital purposes and $2.3 million to pay
expenses incurred in connection with the Merger, the Credit Facility and the
Term Loan.

RECENT FINANCIAL PERFORMANCE OF THE KALITTA COMPANIES

The Kalitta Companies on a combined basis posted net losses of $17,000 in
1996 and of $40.8 million during the period from January 1, 1997 to November 18,
1997 (the day immediately preceding the consummation of the Merger). The Company
believes that the recent negative financial performance prior to the Merger can
be attributed to a number of factors, including (i) the incurrence of abnormally
high engine overhaul expenses due to Federal Aviation Administration ("FAA")
Airworthiness Directives ("Directives"), (ii) the loss of revenue resulting from
the effective grounding of two Boeing 747s in January 1996 due to a series of
Directives, (iii) the incurrence principally in 1997 of start-up costs
associated with establishing the Kalitta Companies' wide-body passenger charter
business, (iv) the incurrence of costs to add and maintain flight crews in
anticipation of increased air freight carrier business which has not yet
materialized in part due to delays in acquiring aircraft and (v) lower revenues
from the U.S. Military. Since January 1, 1998, AIA, which accounts for a
substantial proportion of the combined operating results of the Kalitta
Companies, has continued to suffer losses. The Company is striving to implement
changes to improve the operating performance of AIA and AIA's relationships with
its customers. The Company expended approximately $800,000 towards
Merger-related integration during the fourth quarter of 1997 and has budgeted
another $1.5 million for Merger-related costs for 1998. The Company believes
AIA's results of operations for the first quarter of 1998 will be better than
AIA's results of operations for the first quarter of 1997. Generally, the
Company believes that AIA's losses for the first quarter of 1998 are the result
of problems related to crew scheduling, maintenance scheduling and parts
logistics.

INDUSTRY OVERVIEW

Air Freight Carrier Services. The market for air freight carrier services
is served by an industry which is composed of (i) "door-to-door" express package
delivery companies such as Federal Express and United Parcel Service, (ii)
"freight-forwarders" that contract for air freight carrier service, (iii) air
freight carriers that provide scheduled air freight delivery service and (iv)
air freight carriers that provide on-demand charter service. The air freight
services industry provides same-day, next-day and/or two-day delivery services.
A number of air freight carriers, including the Company, provide a combination
of these services.

Air Freight Logistics Services. Demand for air freight charter logistics
services is driven by demand for same-day delivery of time sensitive freight. In
contrast to the market for next-day and two-day freight delivery services, the
Company believes that the market in North America for on-demand charters is
served by hundreds of air freight carriers, the vast majority of which are
privately held, operate from only one location and do not coordinate
"door-to-door" charter delivery services to the extent of the Company's air
logistics business.

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AIR FREIGHT CARRIER SERVICES

The Company uses a diversified fleet of four Boeing 747s, six Lockheed
L-1011s, 19 Douglas DC-8s, 29 Boeing 727s, five Douglas DC-9s and seven
turbo-prop Convairs to provide air freight services on (i) a regularly scheduled
basis between certain airports, (ii) a contract charter basis and (iii) an
on-demand charter basis.

Scheduled Freight Services

Domestic. The Company operates a scheduled airport-to-airport air freight
carrier service which provides overnight delivery to and from 47 cities in the
United States. Freight received each evening is delivered the next morning,
Tuesday through Friday, throughout the year. The majority of overnight
deliveries are routed through the Company's 90,000 square foot sorting center
located at the Hulman Regional Airport in Terre Haute, Indiana. The Company's
right to use its space at the Hulman Regional Airport expires in August 1998.
The Company is currently negotiating an extension of this lease through the
spring of 1999, at which time the Company anticipates relocating its sorting
operations from the Hulman Regional Airport to the Fort Wayne-Allen County
Airport in Fort Wayne, Indiana. This new facility is expected to permit the
Company to handle nearly twice the sorting capacity of the Terre Haute facility.
In addition, the facility is designed to improve productivity by reducing the
time to load and unload aircraft and decreasing sorting times. See "Item 2.
Properties."

The Company's overnight operation caters primarily to freight-forwarders
and other cargo airlines that either handle ground transport themselves or
contract with others to do so. The Company competes with certain of these
companies that ship large and odd-sized freight, including the United Parcel
Service, Emery Air Freight and Burlington Air Express, as well as commercial
passenger airlines that provide freight service on their scheduled flights.

The Company's scheduled air freight service currently transports air
freight to and from airports located in 23 cities. In addition, the Company
contracts with third parties to provide ground transportation between those 23
airports and 24 other airport locations at which the Company receives and
delivers freight at scheduled times.

International. The Company provides scheduled international service through
American International Cargo ("AIC"), a general partnership in which the Company
owns a 60% interest. AIC was formed in October 1992. The 40% interest in AIC
which is not owned by the Company is owned by Pacific Aviation Logistics, Inc.,
which also serves as the managing partner of AIC. AIC operates scheduled air
freight service between Los Angeles, Honolulu and various destinations in the
South Pacific.

Contract Charter Freight Services

The Company provides air freight charter services on a contractual basis
for a variety of customers, including the U.S. Postal Service, the U.S.
Military, freight forwarders and other airlines.

ACMI Domestic. The terms of the Company's contract charters vary, but they
typically require the Company to supply aircraft, crew, maintenance and
insurance ("ACMI"), while its customers are responsible for substantially all
other aircraft operating expenses, including fuel, fuel servicing, airport
freight handling, landing and parking fees, ground handling expenses and
aircraft push-back costs. These ACMI contracts also typically require the
Company to operate specific aircraft and/or provide minimum air freight capacity
and generally are terminable if the Company (i) fails to meet certain minimum
performance levels, (ii) otherwise breaches the contract or (iii) becomes
subject to other customary events of default. The Company is permitted under its
ACMI Contracts to utilize and, in fact often does utilize, its aircraft in
on-demand service in the periods between ACMI contract flights.

ACMI International. The Company operates ACMI contracts in foreign
countries as well as between the U.S. and foreign countries. The ACMI contracts
provide that the Company has exclusive operating control and direction of each
aircraft the Company operates and that certain foreign-based customers must
obtain any

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government authorizations and permits required to service the designated routes.
Therefore, the Company's route structure is limited to areas in which customers
gain authority from the relevant governments.

The Company currently supplies supplemental airlift capacity to the flag
carriers of six countries, including Aviateca (Guatemala), Iberia (Spain), Lacsa
(Costa Rica), Nica (Nicaragua), Taca International Airlines (El Salvador) and
Varig (Brazil). Because these airlines are the national airlines of their
respective countries, the Company receives operating authority for each of those
countries. The Company also has operating authority for Brazil, Columbia and
Ecuador. From its Miami location, the Company currently provides service to Cali
and Medellin, Columbia for AeroFloral for the shipment of fresh flowers.

U.S. Postal Service. The Company has historically performed a variety of
services for the U.S. Postal Service, ranging from regularly scheduled delivery
throughout the year to special contracts bid by the U.S. Postal Service to meet
increased demand during the Christmas holiday season. Similar to an ACMI
contract, the Company's contracts with the U.S. Postal Service generally allow
the Company to pass-through its fuel costs, landing charges and other variable
costs. Accordingly, the Company is not generally at risk of loss in the event
these variable costs increase during the term of these fixed-price arrangements.

Since 1993, the Company has been the prime contractor for the "Christmas
Network" established by the U.S. Postal Service to provide air transportation
and ground handling services primarily for second-day mail among a network of
domestic cities during the December holiday rush. The U.S. Postal Service awards
contracts periodically pursuant to a public bidding process that considers
quality of service and other factors, including, to a lesser extent, price.

U.S. Military. The Company has historically provided air freight charter
services for the U.S. Military. In January 1998, the Company became eligible to
operate passenger charters for the U.S. Military. The Company believes that its
ability to provide both air freight and air passenger charter service to the
U.S. Military will enhance its ability to obtain contract charters from the U.S.
Military.

On-Demand Charter Freight Services

The Company's aircraft are utilized to fly on-demand charters for customers
of the Company's air logistics business. Approximately 10.0% of the on-demand
charters managed by Kitty Hawk during 1997 were flown on Kitty Hawk's aircraft
(including aircraft of the Kalitta Companies after November 18, 1997). On-
demand contract charters flown on the Company's aircraft generate a higher gross
margin to the Company than charters subcontracted to third party carriers.

Air Passenger Charters

The Company operates a fleet of 31 passenger configured aircraft, including
two Boeing 747s, two Lockheed L1011s, 19 Lear jets and 8 other small aircraft.
The Company's principal customers for large aircraft air passenger charters are
independent tour operators, cruise lines, sponsors of incentive travel packages
and specialty charters and passenger airlines that "wet" lease aircraft. Sales
to tour operators represent the most significant portion of the Company's
passenger charter business. These leisure-market programs are generally
contracted for repetitive, round-trip patterns, operating during seasonal
periods. The tour operator pays a fixed price for use of the aircraft and
assumes responsibility and risk for the actual sale of the available aircraft
seats and fuel increases. The Company also operates on-demand passenger charter
flights using large and small aircraft.

AIR FREIGHT CHARTER LOGISTICS SERVICES

General. The Company is a leading provider of same-day air freight charter
logistics services in North America. The Company arranges the delivery of time
sensitive freight utilizing aircraft of third party air freight carriers as well
as its own fleet. On-demand air charters of freight generally are used when
"next-flight-out" delivery services of commercial airlines or the next-day
delivery services of air freight companies or other service providers cannot
meet the customer's delivery deadline. The Company's air freight logistics
services involve coordinating "door-to-door" transportation by arranging for
ground pick-up, loading, air

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transportation, unloading and ground delivery of the freight. The Company
provides logistics services 24 hours per day, 365 days per year.

The customers of the Company's on-demand air freight charter logistics
services include companies that are engaged in industries such as automotive,
chemical, computer, mail and bulk package delivery, retail merchandising and oil
field service and equipment. Typically, the premium costs incurred in utilizing
on-demand charters to achieve expedited same-day delivery are justified by the
Company's customers on the basis that greater costs would otherwise be incurred
as a result of a work stoppage or having to maintain greater inventory levels.

Database, Information Software and Tracking Systems. The Company believes
that its database is critical to its ability to arrange on-demand air charters
in a timely and reliable manner. The Company maintains in its database a
detailed carrier profile for over 500 air freight carriers that provide
on-demand charter service and information concerning ground transportation and
aircraft loading companies in North America. The Company has implemented an
Internet system to provide its account managers with real-time updates on
available third party on-demand charter aircraft across North America. The
Company believes that this system enables it to meet customer demands more
efficiently and quickly.

The Company's logistics system was developed in 1990 to automate access to
the Company's database and has been frequently revised and improved. This system
provides on-screen information regarding air carriers, aircraft type and
specifications, fuel suppliers, cargo handlers and surface carriers, along with
relevant cost information. In addition, the Company is an on-line subscriber to
Jeppesen's Flight Planning and Kavouras Meteorological services. The flight
planning services provided by Jeppesen integrate airport analyses (comprised of
runway lengths, altitudes, hours of operation and noise abatement procedures)
with current weather data and other information necessary to provide an
automated flight plan. This flight planning service then transmits
electronically the automated flight plan to the pilot and to the FAA
contemporaneously.

The Company's HawkEye software system allows account managers to track an
aircraft's progress from origin to destination on his or her computer screen and
on the control room's main projection board. Aircraft icons show each flight,
its direction and information about the flight including the type of aircraft,
the flight number, its current altitude, ground speed, distance to destination
and times of departure and estimated arrival. The data supporting HawkEye is a
direct data feed obtained from the FAA's Air Traffic Control computer system.
The Company believes that its computer systems are generally year 2000
compliant. The Company does not know whether the computer systems of its
customers, suppliers, vendors and air logistics services providers are generally
year 2000 compliant. See "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Year 2000."

AIRCRAFT MAINTENANCE SERVICES

General. The Company is one of the few dedicated air freight carriers in
the world capable of maintaining and repairing its own aircraft fleet (with the
exception of certain aircraft engine components), which range in size from its
Boeing 747s to its small prop aircraft. As a result, the Company has the
capacity to provide aircraft maintenance services to other aircraft operators.
The Company's maintenance services to third parties include primarily engine
overhauls and air frame repairs. The Company has extensive maintenance
facilities in Oscoda and Ypsilanti, Michigan and Dallas, Texas. Maintenance
services at these facilities operate twenty-four hours per day, seven days per
week. See "Item 2. Properties."

Engine and Airframe Maintenance. The Company provides FAA-certified
inspection, maintenance, overhaul and repair services for large and small jet
engines and auxiliary power units (with the exception of certain aircraft engine
components) at both the Ypsilanti and Oscoda facilities, including all levels of
maintenance checks on large and small jet engines and auxiliary power units. The
Company also performs all levels of aircraft maintenance checks, as well as
modifying certain aircraft from passenger to freighter configuration. In
addition, the Company performs avionics maintenance, component overhaul, strip
and paint operations, sheet metal fabrications and repair and other related
services.

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Aircraft Components, Instruments and Accessories. The Company is certified
by the FAA to service the aircraft and engine accessories used in its fleet.
These accessories include hydraulic, pneumatic, electrical, mechanical and
electronic aircraft components. The Company also maintains an FAA-approved
station for repair of a wide variety of cockpit instrumentation. This portion of
the Company's business, operated as the Aerodata Aircraft Instrument Division,
services instrumentation, not only for the Company, but also for outside
customers.

AIRCRAFT FLEET

The Company currently owns 124 aircraft and leases 4 aircraft from third
parties, not including one aircraft held for sale and the Company's undivided
one-third interest in four Falcon 20C jet aircraft. Of these aircraft, the
Company operates 116 aircraft in revenue service, including six Boeing 747s,
eight Lockheed L-1011s, 19 Douglas DC-8s, 29 Boeing 727s, 5 Douglas DC-9s, seven
Convairs, 19 Lear jets and 12 Beechcraft BE8Ts.

Boeing 747 Airworthiness Directives. In January 1996, the FAA issued a
series of Airworthiness Directives on certain Boeing 747 aircraft which were
modified for freight hauling by GATX-Airlog Company, a subsidiary of General
American Transportation Corp ("GATX"). The Directives, which became effective on
January 30, 1996, were issued because of concerns relating to the integrity of
the cargo door and surrounding floor area in the event the aircraft were
operated at their maximum cargo capacity of approximately 220,000 pounds. In
spite of the fact that the aircraft affected by the Directives have flown over
83,000 hours without incident, the Directives require certain modifications to
be made to the aircraft. Absent such modifications, the Directives limit the
cargo capacity of these aircraft to 120,000 lbs., a limit which significantly
restricts the Company's ability to profitably operate the aircraft.

One of each of the Company's Boeing 747-200 and Boeing 747-100 freighters
are affected by these Directives and have been out of service since January
1996. These Directives do not affect any of the Company's other Boeing 747s.
GATX has proposed a solution to the problem identified by one of the Directives
which has been approved by the FAA. An appropriate means to test the proposed
solution, however, has not yet been identified. Currently, the Company
anticipates modifying the Boeing 747-100 to be in compliance with a portion of
the Directive for which the FAA has approved a solution by the latter half of
1998, which will allow the Company to operate it with a reduced cargo capacity
of 160,000 lbs. The Company is awaiting engineering solutions to address the
remaining Directives. If the cost necessary to address the remaining Directives
and return both the Boeing 747-100 and 200 to maximum cargo capacity is
uneconomical, the Company may either operate one or both of the aircraft at
limited load capacity or use one or both of them for spare parts. The Company is
currently involved in litigation against GATX to recover the cost to the repair
these aircraft as well as revenues lost as a consequence of the aircraft
downtime. See "Item 3. Legal Proceedings."

Acquisition of Boeing 747s. In September 1997, the Company acquired one
Boeing 747, its associated engines and one spare engine for approximately $21
million. The Company is currently converting this Boeing 747 to freighter
configuration at its Oscoda, Michigan facility for an estimated cost of $9
million. In February 1998, the Company acquired for approximately $39.6 million
(i) two additional used Boeing 747s and associated engines, (ii) two additional
spare engines and (iii) certain other related spare parts and support equipment.
The Company has entered into an agreement to have a third party convert these
two recently acquired Boeing 747s from passenger to freighter configuration in
1998 and to have other work performed at an aggregate cost of approximately $26
million. None of these Boeing 747s are affected by the Directive related to
Boeing 747s modified by GATX.

Boeing 727 Cargo Door and Floor Modifications Regulations. The Company
currently operates a fleet of 29 Boeing 727s, all of which were previously
converted from passenger configuration to freighter configuration by the
installation of a large cargo door and numerous interior modifications for cargo
container handling systems. The aircraft conversions were approved by the FAA
upon the issuance of supplemental type certificates ("STCs") to four firms that
engineered and designed the conversion hardware and aircraft

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modification processes. Twenty-eight of the Company's aircraft have been
modified utilizing STCs held by three of these four firms.

The FAA has reevaluated the engineering analysis which supported the
issuance of the Boeing 727 cargo modification STCs and has preliminarily
determined that the STC design features do not meet FAA certification criteria
in several respects. The FAA has issued a proposed Directive to address the
first of the FAA's concerns -- the structural strength of the aircraft floor
structure. Other areas of concern relate to the strength of various
cargo-handling system components of the Boeing 727 aircraft and are expected to
be addressed by the FAA in subsequently issued Directives.

If the proposed Directive is adopted, each operator of Boeing 727 freighter
aircraft modified by any of the four firms will be required to limit the weight
of each container (or pallet) position and to adopt other aircraft operating
restrictions depending on the configuration of the aircraft, until the operator
can demonstrate that the floor strength meets the FAA's certification criteria.
Under the proposed Directive, the Company would be required to limit the weight
per container/pallet position to approximately 4,000 pounds from a current
maximum of 8,000 pounds. After a period of 120 days from the date the Directive
becomes effective, the maximum per position weight will be fixed at
approximately 3,000 pounds, until the Company can demonstrate that the floor
strength meets the FAA's certification criteria. The Company believes this
Directive will not have a material adverse effect on the Company.

The Company is urging the FAA to allow additional time before requiring
operators to modify the aircraft to bring them into compliance. In addition, the
Company is working with the STC holders which are performing engineering
analysis to seek a cost effective solution. There can be no assurance as to the
terms of the final Directive and whether a satisfactory solution can be
engineered. If no such solution is developed and approved by the FAA, the
capacity of the Company's Boeing 727 fleet will be reduced. The FAA's proposed
Directive is being opposed on its merits by a number of Boeing 727 operators.
One of the Company's Boeing 727 aircraft was converted to freighter
configuration by Boeing and is not subject to the foregoing proposed Directive.

TRAINING AND SAFETY

The Company's management believes that high quality personnel and intensive
training programs are key to the Company's success and the maintenance of a good
safety record. As a result, the Company hires experienced flight crews and
maintenance personnel and ensures that both receive ongoing training. The
Company maintains its own Douglas DC-8 simulator in Miami which it both uses to
train its own pilots and hires out for use by other airlines. The Company also
makes use of the training facilities of other major airlines.

The Company has an ongoing safety program that employs an industry standard
database to track safety performance. Open facsimile and phone lines are
available for crews to report safety problems which are entered into the
database and monitored for any re-occurrence. Direct communication between
flight crews and Company management is available at all times through the
Company's dispatch system.

In September 1996, pursuant to the FAA's National Aviation Safety
Inspection Program, the Kalitta Companies underwent a broad but routine
inspection of all of the Kalitta Companies' aircraft and maintenance operations.
As a consequence of the FAA's inspection, the FAA and the Kalitta Companies
entered into a Consent Order in January 1997 which required the Kalitta
Companies to revise certain internal policies and procedures to address certain
regulatory violations noted in an FAA inspection report as well as pending
enforcement actions. Without admitting any fault, the Kalitta Companies agreed
to pay a fine of $450,000, one third of which was suspended and subsequently
forgiven.

SALES AND MARKETING

The Company's marketing focus is on major users of air freight
transportation services and other logistics providers. In connection with the
Company's emphasis on developing and maintaining long-term relationships with
major customers, the Company employs 25 account managers who are dedicated to
major accounts. An

9
<PAGE> 10

account manager is responsible for educating the client about the Company's
service capabilities, ensuring quality service and determining how the Company
can best serve the customer. The marketing effort on behalf of the air freight
carrier business is primarily focused on selected freight forwarders and
integrators and existing customers. The Company also dedicates two individuals
to passenger air charter marketing. The Company does not engage in mass media
advertising. The Company, however, does promote its business through trade
specific publications and trade shows as well as through its sponsorship of drag
and short-track racing.

MAINTENANCE

The Company's aircraft require considerable maintenance in order to remain
in compliance with FAA regulations. Any equipment being placed on the Company's
operating certificate is inspected and repaired prior to being utilized by the
Company for either on-demand or contract charters. The Company has extensive
maintenance facilities in Oscoda and Ypsilanti, Michigan and Dallas, Texas. The
Company also has significant maintenance capability in Los Angeles, Miami and
Terre Haute, Indiana. Maintenance services at Ypsilanti, Oscoda, Dallas, Los
Angeles and Miami operate twenty-four hours per day, seven days per week. See
"-- Aircraft Maintenance Services."

EMPLOYEES

General. At March 1, 1998, the Company employed approximately 3,800
full-time personnel, of which approximately 300 were involved in sales and
administrative functions and approximately 3,500 in maintenance and flight
operations (including approximately 850 pilots). The Company considers its
relations with its employees to be satisfactory.

Collective Bargaining Agreement with Certain Employees of the
Company. Certain employee pilots and flight engineers of the Company (as
successor to the Kalitta Companies) are members of the Airline Division of the
International Brotherhood of Teamsters (the "Teamsters Union") and are employed
pursuant to a Collective Bargaining Agreement (the "Collective Bargaining
Agreement"). The Collective Bargaining Agreement became amendable on August 29,
1997, but remains in effect while the parties are in negotiations for a
successor collective bargaining agreement. Pilots and flight engineers subject
to the agreement are guaranteed pay based upon a minimum of 60 block hours per
month. The agreement requires that all flight crew personnel must meet minimum
qualifications and includes typical seniority, furlough, grievance, group health
insurance, sick leave and vacation provisions. The seniority provisions require
that the most senior flight crews have the opportunity to operate larger
aircraft or move to new crew positions as aircraft or crew positions become
available by reason of flight crew attrition or aircraft acquisitions. As a
consequence, the contract obligates the Company to incur costs to retrain crews
as they advance in seniority and progress to new aircraft or crew positions. In
addition, the Company may incur costs to train flight crews to fill positions
vacated by more senior flight crews. The Collective Bargaining Agreement
provides that so long as it is in effect, the Teamsters Union will not authorize
a strike and the Company (as successor to the Kalitta Companies) will not
lockout union employees. Although the Company and the Teamsters Union have
commenced "interest-based" bargaining, there can be no assurance that a new
collective bargaining agreement can be reached or that negotiations will not
result in work stoppages, substantial increases in salaries or wages, changes in
work rules or other changes adverse to the Company.

ENVIRONMENTAL

The Company's operations must comply with numerous environmental laws,
ordinances and regulations regarding air quality and other matters. Under
current federal, state and local environmental laws, ordinances and regulations,
a current or previous owner or operator of real property may be liable for the
costs of removal or remediation of hazardous or toxic substances on, under or in
such property. Such laws often impose liability whether or not the owner or
operator knew of, or was responsible for, the presence of such hazardous or
toxic substances. In addition, the presence of contamination from hazardous or
toxic substances, or the failure to remediate such contaminated property
properly, may adversely affect the ability of the owner of the property to use
such property as collateral for a loan or to sell such property. Environmental
laws also may impose
10
<PAGE> 11

restrictions on the manner in which a property may be used or transferred or in
which businesses may be operated and may impose remedial or compliance costs.
The costs of defending against claims of liability or remediating contaminated
property and the cost of complying with environmental laws could have a material
adverse effect on the Company.

The Company is subject to the regulations of the Environmental Protection
Agency and state and local governments regarding air quality and other matters.
The Company leases office space, hangar space, ramp space and unimproved areas
at various airport locations throughout the U.S. See "Item 2. Properties." Most
of these leases require the Company to indemnify the lessor for any
environmental contamination caused by the Company. In particular, the Company
leases an underground fuel storage facility from Wayne County, Michigan at
Willow Run Airport. If the soil or groundwater in the vicinity of this
underground facility is found to be contaminated, the Company will lose its
right to continue to use the facility. Moreover, the lease provides that the
Company will be solely responsible for the costs to remediate any such
contamination. If such contamination occurs or is otherwise discovered by
governmental authorities during the term of the lease with Wayne County, the
Company may incur significant expense to effect either or both of required
relocation of operations or the required clean-up.

The Company is aware of the presence of environmental contamination on
properties that the Company (as successor to the Kalitta Companies) leases or
owns. The Company does not believe that the costs of responding to the known
contamination should or will be borne solely by the Company, if at all. While
the Company does not believe that the costs of responding to the presence of
such contamination is likely to have a material adverse effect on the Company,
there can be no assurance in this regard. Pursuant to the Merger Agreement, Mr.
Kalitta has agreed, subject to certain limitations, to indemnify the Company
until May 19, 2001 against any losses arising with respect to environmental
liabilities related to contamination at any of the Kalitta Companies'
facilities.

In part because of the highly industrialized nature of many of the
locations at which the Company operates, there can be no assurance that the
Company has discovered all environmental contamination for which it may be
responsible.

GOVERNMENT REGULATION

General. The Company is subject to Title 49 of the United States Code
(formerly the Federal Aviation Act of 1958, as amended), under which the
Department of Transportation ("DOT") and the FAA exercise regulatory authority
over air carriers. The DOT is primarily responsible for regulating economic
issues affecting air service, including, among other things, air carrier
certification and fitness, insurance, consumer protection, unfair methods of
competition and transportation of hazardous materials. The FAA is primarily
responsible for regulating air safety and flight operations, including, among
other things, airworthiness requirements for each type of aircraft the Company
operates, pilot and crew certification, aircraft maintenance and operational
standards, noise abatement, airport slots and other safety-related factors.
Certain of the Company's aircraft are subject to Directives which require
modifications to the affected aircraft. See "-- Aircraft Fleet." In addition,
the Company is subject to regulation by various other federal, state, local and
foreign authorities, including the Department of Defense and the Environmental
Protection Agency.

The Company's international operations are governed by bilateral air
services agreements between the United States and foreign countries where the
Company operates. Under some of these bilateral air services agreements, traffic
rights in those countries are available to only a limited number of and in some
cases only one or two, U.S. carriers and are subject to approval by the
applicable foreign regulators, limiting growth opportunities in such countries.

The DOT and the FAA have the authority to modify, amend, suspend or revoke
the authority and licenses issued to the Company for failure to comply with the
provisions of law or applicable regulations. In addition, the DOT and the FAA
may impose civil or criminal penalties for violations of applicable rules and
regulations.

11
<PAGE> 12

The DOT views the Merger as a de facto transfer of the Kalitta Companies'
foreign operating authority, which requires prior DOT approval. Consequently,
Kitty Hawk and the Kalitta Companies filed an application with the DOT seeking
temporary and permanent approval to transfer the Kalitta Companies' foreign
operating authority to Kitty Hawk. On November 6, 1997, the DOT granted Kitty
Hawk and the Kalitta Companies a temporary exemption from the requirement to
receive DOT approval prior to the de facto transfer. While the Company believes
it will receive permanent approval of the de facto transfer from the DOT, there
can be no assurance in this regard. In the event the Company does not receive
permanent DOT approval, the Company would be required, at its option, either to
relinquish the Kalitta Companies' foreign operating authority or divest itself
of the Kalitta Companies.

Safety, Training and Maintenance Regulations. The Company's operations are
subject to routine, and periodically more intensive, inspections and oversight
by the FAA. Following a review of safety procedures at ValuJet, the FAA adopted
changes to procedures concerning oversight of contract maintenance and training.
The Company believes it is currently in compliance with such changes.

In January 1997, the Kalitta Companies entered into a Consent Order which
required the Kalitta Companies to revise certain internal policies and
procedures to address regulatory violations noted in an FAA inspection report as
well as pending enforcement actions. See "-- Training and Safety."

Aging Aircraft Regulations; Potential Compliance Costs. All of the
Company's aircraft are subject to Service Bulletins and Directives issued under
the FAA's "Aging Aircraft" program or issued on an ad hoc basis. These Service
Bulletins or Directives could cause certain of these aircraft to be subject to
extensive aircraft examinations and require certain of these aircraft to undergo
structural inspections and modifications to address problems of corrosion and
structural fatigue at specified times. It is possible that additional Service
Bulletins or Directives applicable to the types of aircraft included in the
Company's fleet could be issued in the future, which could have a material
adverse effect on the Company. The cost of compliance with such Directives and
Service Bulletins cannot currently be estimated, but could be substantial. See
"-- Aircraft Fleet" for a discussion of certain Directives which currently
affect or may affect certain of the Company's aircraft.

Noise Abatement Regulations. Airline operators must comply with FAA noise
standard regulations primarily promulgated under the Airport Noise and Capacity
Act of 1990 (the "Noise Regulations"). Currently, the Company is in compliance
with the Noise Regulations. The Company owns 73 aircraft and leases 4 aircraft
that are affected by the Noise Regulations, including 11 Boeing 747s (two of
which are effectively grounded due to a series of Directives unrelated to Noise
Regulations), eight Lockheed L-1011s, 20 Douglas DC-8s, 33 Boeing 727s (not
including one aircraft held for sale) and five Douglas DC-9-15Fs (collectively,
the "Jet Fleet"). Of the aircraft in the Jet Fleet, 41 are currently in
compliance with Stage III noise control standards or are currently being
modified to be in compliance with such standards, including all of the Company's
Boeing 747s and Lockheed L-1011s. The Company must bring the Jet Fleet into
Stage III compliance by January 1, 2000. Any aircraft in the Jet Fleet that is
not in compliance with the Stage III noise control standards on January 1, 2000
may not be operated in the U.S. until it complies with such standards. There can
be no assurance that the Company will have sufficient funds or be able to obtain
financing to cover the costs of modifying additional aircraft to meet these
deadlines. The failure to modify these aircraft could have a material adverse
effect on the Company. In addition, certain airport operators have adopted local
regulations which, among other things, impose curfews and other noise abatement
requirements. Finally, the Company's international operations are affected by
noise regulations in foreign countries that may be stricter than those in effect
in the U.S.

Only six of the Company's 20 Douglas DC-8 aircraft comply with the Stage
III noise control standards. The Company may elect not to modify the 14
remaining Douglas DC-8 aircraft to meet the Stage III noise control standards
because the anticipated cost of approximately $3.5 million per aircraft (not
including aircraft downtime) may exceed the economic benefits of such
modifications. If the Company cannot or does not modify these 14 Douglas DC-8
aircraft, the Company will have to remove these aircraft from service in the
United States before January 1, 2000 and may have to replace them with other
aircraft. In addition, 20 of the Company's Boeing 727 aircraft currently do not
comply with the Stage III noise control standards, not

12
<PAGE> 13

including one Boeing 727 currently being modified to be in compliance with such
standards and one Boeing 727 held for sale. The Company currently anticipates
modifying its Boeing 727 fleet (at an anticipated cost of approximately $36
million, not including aircraft downtime) to be in compliance with the Stage III
noise control standards by the applicable deadlines. However, there can be no
assurance regarding the actual cost or that the Company will have sufficient
funds or be able to obtain financing to cover the costs of these modifications
or to replace such aircraft.

Hazardous Materials Regulations. The DOT exercises regulatory jurisdiction
over the transportation of hazardous materials. The Company may from time to
time transport articles that are subject to these regulations. Shippers of
hazardous materials share responsibility for compliance with these regulations
and are responsible for proper packaging and labeling. Substantial civil
monetary penalties can be imposed on both shippers and air carriers for
infractions of these regulations.

Foreign Operations Regulated. Certain of the Company's operations are
conducted between the U.S. and foreign countries, as well as wholly between two
or more points that are all located outside of the United States. As with the
certificates and licenses obtained from U.S. authorities, the Company must
comply with all applicable rules and regulations imposed by these foreign
aeronautical authorities or be subject to the suspension, amendment or
modification of its operating licenses issued by those authorities.

Stock Ownership by Non-U.S. Citizens. Under current federal aviation law,
the Company's air freight carriers could cease to be eligible to operate as air
freight carriers if more than 25% of the voting stock of the Company were owned
or controlled by non-U.S. citizens. Moreover, in order to hold an air freight
carrier certificate, the president and two-thirds of the directors and officers
of an air freight carrier must be U.S. citizens. All of the Company's directors
and officers are U.S. citizens. Furthermore, (i) the Company's Certificate of
Incorporation limits the aggregate voting power of non-U.S. persons to 22 1/2%
of the votes voting on or consenting to any matter and (ii) the Company's Bylaws
do not permit non-U.S. citizens to serve as directors or officers of the
Company.

INSURANCE

The Company is vulnerable 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 potential claims involving injury to persons or
property. The Company is required by the DOT to carry liability insurance on
each of its aircraft and many of the Company's aircraft leases and contracts
also require the Company to carry such insurance. Any extended interruption of
the Company's operations due to the loss of an aircraft could have a material
adverse effect on the Company. The Company currently maintains public liability
and property damage insurance and aircraft liability insurance for each of the
aircraft in the revenue fleet in amounts consistent with industry standards.
All-risk aircraft hull insurance is maintained for all aircraft in the revenue
fleet other than the Company's seven Convairs and 12 Beechcraft BE8Ts. The
Company maintains baggage and cargo liability insurance if not provided by its
customers under contracts. Although the Company believes that its insurance
coverage is adequate, there can be no assurance that the amount of such coverage
will not be changed upon renewal or that the Company will not be forced to bear
substantial losses from accidents. Substantial claims resulting from an accident
could have a material adverse effect on the Company. The Company attempts to
monitor the amount of liability insurance maintained by the third party carriers
utilized in its air logistics business through, among other things, the
obtaining of certificates of insurance.

SEASONALITY

Certain customers of the Company engage in seasonal businesses, especially
the U.S. Postal Service and customers in the U.S. automotive industry. As a
result, the Company's air logistics business has historically experienced its
highest quarterly revenues and profitability during the fourth quarter of the
calendar year due to the peak Christmas season activity of the U.S. Postal
Service and during the period from June 1 to November 30 when production
schedules of the U.S. automotive industry typically increase. Consequently, the
Company experiences its lowest quarterly revenue and profitability during the
first quarter of the calendar year.

13
<PAGE> 14

ITEM 2. PROPERTIES

General. The Company's facilities consist of office space, hangars,
maintenance facilities and warehouse and storage space. Some of the Company's
hangar facilities are constructed on property ground leased from airport owners.
Accordingly, the hangar improvements revert to the owner when the ground lease
expires. These leases expire on various dates through December 2015. The Company
also has various agreements with municipalities and governmental authorities
that own and operate airports throughout the United States. These agreements
generally relate to the Company's use of general airport facilities, but may
also include leases or licenses to use hangar and maintenance space. In
addition, the Company owns a number of aircraft. See "Item 1.
Business -- Aircraft Fleet."

The following is a summary of the Company's major facilities:

<TABLE>
<CAPTION>
OWNED/
LEASED/
LOCATION USE OF SPACE LICENSED
-------- ------------ --------
<S> <C> <C>
1515 West 20th Street, Company headquarters Owned(1)
Dallas/Fort Worth International Airport, TX
1535 West 20th Street Offices and warehouse Leased
Dallas/Fort Worth International Airport, TX
1349 South Huron, Ypsilanti, MI Offices(2) Leased
Willow Run Airport, Ypsilanti, MI Office, hangar, maintenance, Leased
fuel farm and storage
N. I-94 Service Drive, Ypsilanti, MI Office, storage and maintenance Owned
Oscoda, MI Office, hangar, maintenance, Leased
housing, fuel farm and
storage
Hulman Regional Airport, Terre Haute, IN Office, hangar and sorting Licensed
space
Los Angeles International Airport Office, hangar and ramp Leased
Honolulu International Airport(3) Office and warehouse Leased
Miami International Airport Office, hangar, ramp and Leased
maintenance
</TABLE>

- ---------------

(1) The Company owns the building and improvements and leases the land from the
Dallas/Fort Worth International Airport.

(2) The Company leases this building from a limited liability company owned by
Mr. Kalitta, his son Scott Kalitta and his nephew Doug Kalitta.

(3) The Company has constructed a warehouse at the Honolulu International
Airport which it leases to AIC.

Proposed New Sorting Facility. The Company currently licenses its sorting
space at the Hulman Regional Airport in Terre Haute, Indiana from Roadway Global
Air for a term which will expire in August 1998. Because of the growth in the
volume of freight shipped in its domestic scheduled service, the lack of
available expansion space and the limited airport facilities in Terre Haute, the
Company plans to move this sorting center to Fort Wayne, Indiana in the spring
of 1999. The Company has entered into discussions with the Hulman Regional
Airport Authority to obtain an interim lease of its current space in Terre Haute
until it is able to move to Fort Wayne. There is no assurance that the Company
will be able to obtain an interim lease of its Terre Haute facility.

Oscoda Base. The Company subleases its maintenance facility at the former
Wurtsmith Air Force Base in Oscoda, Michigan from the Oscoda-Wurtsmith Airport
Authority pursuant to a prime lease from the U.S. Government. These subleases
vary in duration from month-to-month to long-term (the last of which expires in
December 2015) and are subject to earlier termination upon termination of the
prime lease between the U.S. Government and the Wurtsmith Authority. Under the
subleases, the Company has access to an 11,800 foot lighted runway equipped for
full instrument approach, as well as office, hangar, maintenance and storage
space. The hangar space includes seven hangars, two of which can completely
enclose a single

14
<PAGE> 15

wide-bodied aircraft or two narrow-bodied aircraft. Because the Oscoda facility
is a former U.S. Air Force base, it is also complete with living quarters and
support buildings, which the Company leases from Oscoda Township under leases of
varying duration from month-to-month to long-term, the last of which expires in
August 2005. Until 2011, the Oscoda facility is part of a "renaissance" zone
which means that the Company does not pay real or personal property taxes on its
facilities and equipment in Oscoda.

ITEM 3. LEGAL PROCEEDINGS

GATX Litigation. In January 1997, the Kalitta Companies filed suit against
GATX (the "GATX Litigation") to recover damages related to the January 1996
effective grounding of two of the Kalitta Companies' Boeing 747s pursuant to the
Directive affecting GATX-modified Boeing 747s. See "Item 1. Business -- Aircraft
Fleet -- Boeing 747 Airworthiness Directive." Other defendants include Pemco
Aeroplex Co. (the successor to Hayes International, Inc.) which developed the
design for the STC relating to the modifications and Central Texas Airborne
Systems, Inc. (successor to Chrysler Technologies Airborne Systems, Inc.) which
modified the Kalitta Companies' Boeing 747s as a subcontractor for GATX. The
suit is pending in the Federal District Court for the Northern District of
California and covers a variety of claims.

In connection with the Merger, the Company entered into an agreement with
Mr. Kalitta which provides that any amounts recovered by the Company through the
GATX Litigation are first to be applied to reimburse the Company for its legal
costs incurred in connection with the GATX Litigation and then to correct the
mechanical problems associated with the grounded Boeing 747s. Any additional
amounts will be allocated 10% to the Company and 90% to Mr. Kalitta. In the
event the amounts recovered by the Company, if any, are insufficient to
reimburse the Company for its legal costs incurred in connection with the GATX
Litigation, Mr. Kalitta will reimburse the Company for the unreimbursed portion
of its legal costs related to the GATX Litigation incurred after November 19,
1997.

U.S. Postal Service Contract. In September 1992, the U.S. Postal Service
awarded an air freight services contract to Kitty Hawk and one of the Kalitta
Companies, as co-bidders. Emery Worldwide Airlines, Inc. ("Emery") (the
incumbent) sued to enjoin the award. This litigation (the "ANET Litigation") was
settled in April 1993 by agreements under which the U.S. Postal Service
terminated the contract for convenience and awarded the contract to Emery. In
lieu of damages for the contract's termination, the U.S. Postal Service paid $10
million into an escrow account to be divided between Kitty Hawk and one of the
Kalitta Companies. Also under the settlement, Emery paid $2.7 million into the
escrow account and agreed to pay $162,500 into the escrow account each quarter
for up to 10 years, so long as the Emery contract remained in effect. Before
settling the ANET Litigation, Kitty Hawk, one of the Kalitta Companies and
Messrs. Christopher and Kalitta agreed, among other things, to hold the escrowed
funds in escrow until they had agreed upon an allocation and distribution, or
until the matter was resolved by binding arbitration. Subsequent disagreements
led to litigation and arbitration among Kitty Hawk, one of the Kalitta Companies
and Messrs. Christopher and Kalitta that were resolved pursuant to a
comprehensive settlement reached in August 1994. Under the comprehensive
settlement, Kitty Hawk received approximately $3.5 million in cash from the
escrowed funds and obtained a Boeing 727-200. Also under the comprehensive
settlement agreement, Mr. Christopher received rights to one-half of any future
contingent quarterly payments from Emery.

Routine Litigation. The Company is subject to various legal proceedings and
claims, either asserted or unasserted, which arise in the ordinary course of
business. While the outcome of these claims cannot be predicted with certainty,
management does not believe that the outcome of any of these legal matters will
have a material adverse effect on the Company.

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

None.

15
<PAGE> 16

ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT

The executive officers of the Company are:

<TABLE>
<CAPTION>
NAME OFFICE(S)
---- ---------
<S> <C>
M. Tom Christopher....................... Chairman of the Board of Directors and
Chief Executive Officer
Conrad A. Kalitta........................ Vice Chairman
Tilmon J. Reeves......................... President
Richard R. Wadsworth..................... Senior Vice President -- Finance, Chief
Financial Officer and Secretary
</TABLE>

M. Tom Christopher has served as Chairman of the Board of Directors and
Chief Executive Officer of the Company since Kitty Hawk's inception in 1985 and
serves in the class of directors whose terms expire at the 2000 Annual Meeting
of Stockholders. He has over 20 years of experience in the air freight industry.

Conrad A. Kalitta has served as Vice Chairman of the Company since November
1997 and serves in the class of directors whose terms expire at the 2000 Annual
Meeting of Stockholders. Mr. Kalitta founded American International Airways,
Inc., Flight One Logistics, Inc. and Kalitta Flying Service, Inc., each of which
were acquired by the Company in November 1997. Mr. Kalitta is also a
professional drag racer in the "top-fuel" class and has won three national
championships.

Tilmon J. Reeves has served as President of the Company since May 1993 and
has over 30 years of aviation experience. From May 1993 to November 1997, Mr.
Reeves also served as the Company's Chief Operating Officer. Mr. Reeves became a
director in October 1994 and serves in the class of directors whose terms expire
at the 1999 Annual Meeting of Stockholders.

Richard R. Wadsworth has served as Senior Vice President -- Finance since
October 1992, Chief Financial Officer since September 1994 and Secretary since
October 1994. From October 1994 to November 1997, Mr. Wadsworth served on the
Company's Board of Directors.

In addition, beginning on April 1, 1998, James R. Craig will become Vice
President and General Counsel of the Company. From October 1994 to November
1997, Mr. Craig served on the Company's Board of Directors. Prior to April 1998,
Mr. Craig was of counsel to Burke, Wright & Keiffer, P.C. Prior to his
affiliation with Burke, Wright & Keiffer, P.C., Mr. Craig was in private law
practice in Dallas since 1971 and in 1989 served as President of Whitehall
Development Company, a real estate development firm, of which he is now a
director.

Pursuant to the Merger Agreement, the Company has agreed to cause the
election of Mr. Kalitta as President of AIA until November 19, 1998 and Messrs.
Christopher and Kalitta have agreed to vote their Common Stock or other voting
securities in favor of Mr. Christopher as the Company's Chairman of the Board
and Chief Executive Officer and Mr. Kalitta as the Company's Vice Chairman until
November 19, 1998.

16
<PAGE> 17

PART II

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

The Company's Common Stock has traded on the Nasdaq National Market System
under the symbol "KTTY" since the Company's initial public offering on October
9, 1996. The following table sets forth the range of high and low sale prices of
the Common Stock for the periods shown below.

<TABLE>
<CAPTION>
PRICE RANGE
-----------
HIGH LOW
---- ---
<S> <C> <C>
October 9, 1996 through November 30, 1996................... $14 3/4 $10
One Month Ended December 31, 1996........................... 13 1/2 8
Three Months Ended March 31, 1997........................... 12 3/4 10
Three Months Ended June 30, 1997............................ 17 1/4 11 7/8
Three Months Ended September 30, 1997....................... 21 3/4 13 3/8
Three Months Ending December 31, 1997....................... 23 3/4 16 1/8
</TABLE>

At March 24, 1998, the Company had approximately 3,600 holders of record
and beneficial owners of the Company's Common Stock.

Kitty Hawk has never declared or paid any cash dividends on the Common
Stock. The Company presently intends to retain earnings, if any, for development
and growth of its business and does not anticipate paying cash dividends on the
Common Stock in the foreseeable future. The Credit Facility and the indenture
under which the Company's 9.95% Senior Secured Notes due 2004 (the "Notes") were
issued contain significant limitations on the Company's ability to pay
dividends. Payment of future dividends, if any, will be at the discretion of the
Company's Board of Directors, after taking into account various factors,
including the Company's earnings, capital requirements and surplus, financial
position, contractual restrictions and other relevant business considerations
and there can be no assurance that dividends will be paid. See "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."

On November 19, 1997, the Company issued 4,099,150 unregistered shares of
Common Stock to Mr. Kalitta in connection with the Merger. These shares were
issued as consideration for Mr. Kalitta's sole ownership of AIA, AIT, FOL and
OKT and were issued pursuant to Section 4(2) of the Securities Act of 1933, as
amended (the "Securities Act"), and Rule 506 promulgated pursuant thereto.
Immediately prior to the issuance of these shares, Mr. Kalitta represented to
the Company that he was an accredited investor, as defined in Regulation D
promulgated pursuant to the Securities Act.

17
<PAGE> 18

ITEM 6. SELECTED FINANCIAL DATA

The following table sets forth selected financial and operating data with
respect to the Company for each of the fiscal years indicated and for the four
months ended December 31, 1995 and 1996. This information should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the consolidated financial statements, including
the notes thereto, appearing elsewhere in this Form 10-K. The selected statement
of operations data for each of the fiscal years ended August 31, 1995 and 1996,
for the four months ended December 31, 1996 and for the year ended December 31,
1997 has been derived from audited consolidated financial statements of the
Company appearing elsewhere in this Form 10-K. The selected balance sheet data
as of August 31, 1995 and 1996 has been derived from audited consolidated
financial statements of the Company not appearing in this Form 10-K. The
selected balance sheet data as of December 31, 1996 and 1997 has been derived
from audited consolidated financial statements of the Company appearing
elsewhere in this Form 10-K. The selected statement of operations and balance
sheet data as of and for each of the fiscal years ended August 31, 1993 and 1994
has been derived from audited consolidated financial statements of the Company
not appearing in this Form 10-K. Operating results for the four months ended
December 31, 1995 and 1996 are not necessarily indicative of results that may be
expected for a calendar year. In the opinion of management of the Company, the
selected statement of operations data for the four months ended December 31,
1995, which are derived from the Company's unaudited consolidated financial
statements appearing elsewhere in this Form 10-K, reflect all adjustments
(consisting only of normal recurring adjustments) necessary for a fair
presentation of the financial position and results of operations for such
periods. On December 4, 1996, the Company changed its fiscal year end from
August 31 to December 31. In November 1997, the Company acquired the Kalitta
Companies. See "Item 1. Business -- The Merger." The results of operations for
the Kalitta Companies for the period November 19, 1997 through December 31, 1997
are included in the selected financial and operating data for the fiscal year
ended December 31, 1997.

<TABLE>
<CAPTION>
FOUR MONTHS
ENDED YEAR ENDED
FISCAL YEAR ENDED AUGUST 31, DECEMBER 31, DECEMBER 31,
---------------------------------------- ----------------- ---------------------
1993 1994 1995 1996 1995 1996 1996 1997
------- -------- -------- -------- ------- ------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Air freight carrier revenues........ $12,939 $ 28,285 $ 41,117 $ 52,922 $17,994 $20,577 $ 55,504 $137,286
Air logistics revenues.............. 52,840 79,415 62,593 89,493 51,734 39,408 77,168 112,557
------- -------- -------- -------- ------- ------- -------- --------
Total revenues...................... 65,779 107,700 103,710 142,415 69,728 59,985 132,672 249,843
Total costs of revenues............. 55,201 92,951 85,532 119,489 57,682 47,580 109,387 195,691
------- -------- -------- -------- ------- ------- -------- --------
Gross profit........................ 10,578 14,749 18,178 22,926 12,046 12,405 23,285 54,152
General and administrative
expenses.......................... 4,394 6,013 7,832 9,080 2,862 2,725 8,943 15,106
Non-qualified profit sharing
expense........................... 250 732 1,001 1,170 889 962 1,243 2,429
Stock option grants to executives... -- -- -- 4,231(1) -- -- 4,231(1) --
------- -------- -------- -------- ------- ------- -------- --------
Operating income.................... 5,934 8,004 9,345 8,445 8,295 8,718 8,868 36,617
Interest expense.................... (134) (343) (1,185) (1,859) (482) (684) (2,061) (6,924)
Contract settlement income,
net(2)............................ 725 1,178 -- -- -- -- -- --
Other income (expense).............. 193 (432) (601) 291 38 626 879 1,110
------- -------- -------- -------- ------- ------- -------- --------
Income before minority interest and
income taxes...................... 6,718 8,407 7,559 6,877 7,851 8,660 7,686 30,803
Minority interest................... -- -- -- -- -- -- -- (497)
------- -------- -------- -------- ------- ------- -------- --------
Income before income taxes.......... 6,718 8,407 7,559 6,877 7,851 8,660 7,686 30,306
Income taxes........................ 2,613 3,146 3,143 2,768 3,097 3,367 3,038 12,416
------- -------- -------- -------- ------- ------- -------- --------
Net income.......................... $ 4,105 $ 5,261 $ 4,416 $ 4,109(1) $ 4,754 $ 5,293 $ 4,648(1) $ 17,890
======= ======== ======== ======== ======= ======= ======== ========
Basic and diluted earnings per
share(3).......................... $ 0.52 $ 0.66 $ 0.55 $ 0.52(1) $ 0.60 $ 0.55 $ 0.55(1) $ 1.60
======= ======== ======== ======== ======= ======= ======== ========
Weighted average common shares
outstanding....................... 7,968 7,968 7,968 7,928 7,968 9,610 8,477 11,194
OTHER FINANCIAL DATA:
Capital expenditures................ $ 1,318 $ 13,876 $ 17,929 $ 33,538 $ 175 $13,796 $ 47,159 $113,460
Adjusted EBITDA(4).................. $ 7,104 $ 9,507 $ 12,839 $ 19,840 $10,014 $12,546 $ 22,372 $ 53,278
Ratio of adjusted EBITDA to total
interest expense.................. 53.0x 27.7x 10.8x 10.7x 20.8x 18.3x 10.9x 7.7x
Ratio of earnings to fixed
charges(5)........................ 33.6x 20.6x 6.9x 4.4x 15.9x 12.9x 4.5x 4.4x
</TABLE>

18
<PAGE> 19

<TABLE>
<CAPTION>
AUGUST 31, DECEMBER 31,
---------------------------------------- --------------------
1993 1994 1995 1996 1996 1997
------- ------- ------- ------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit)........................ $ 4,679 $ 4,223 $ 1,747 $(6,962)(8) $ 33,519 $110,971(8)
Total assets..................................... 18,598 37,911 47,954 79,828 123,027 836,746
Total debt....................................... 976 9,145 16,981 36,912 24,768 404,643
Stockholders' equity............................. $ 7,289 $12,550 $16,966 $23,639 $ 58,292 $174,873
</TABLE>

- ---------------

(1) Results for the fiscal year ended August 31, 1996 and the year ended
December 31, 1996 lack comparability to other periods because such periods
include nonrecurring grants to two executive officers of stock options that
resulted in a charge to earnings of approximately $4,231. Had these grants
of stock options not occurred, net income for the fiscal year ended August
31, 1996 and year ended December 31, 1996 would have been approximately
$6,648 and $7,187 and net income per share would have been $0.84 and $0.85,
respectively.

(2) Reflects sums received in settlement of litigation. See "Item. 3. Legal
Proceedings -- U.S. Postal Service Contract" and Note 7 of Notes to
Consolidated Financial Statements.

(3) The earnings per share amounts prior to 1997 have been restated as required
to comply with Statement of Financial Accounting Standards No. 128,
"Earnings Per Share." For further discussion of earnings per share and the
impact of Statement No. 128, see the Notes to the consolidated financial
statements.

(4) Adjusted EBITDA represents net income before minority interest, income tax
expense, interest expense, depreciation, amortization and certain items
described below. Adjusted EBITDA excludes approximately $4,231 from stock
options granted to executives in 1996 and approximately $725 and $1,178 in
contract settlements in fiscal 1993 and 1994, respectively. Adjusted EBITDA
is presented because it is a financial indicator of the Company's ability to
incur and service debt. However, adjusted EBITDA is not calculated under
GAAP, is not necessarily comparable to similarly titled measures of other
companies and should not be considered in isolation, as a substitute for
operating income, net income or cash flow data prepared in accordance with
GAAP or as a measure of the Company's profitability or liquidity.

(5) In calculating the ratio of earnings to fixed charges, earnings consist of
income before minority interest and income tax expense and fixed charges
(less capitalized interest). Fixed charges consist of capitalized interest,
interest expense, amortization of debt expense and one-third of rental
payments on operating leases (such factor having been deemed by the Company
to represent the interest portion of such payments).

(6) As reported by the Company to the Federal Aviation Administration. Flight
hours reported are less than block hours, which also include the time an
aircraft is operating under its own power whether or not airborne. The
Company generally bills its customers on a block hour basis.

(7) Includes on-demand charters flown by the Company's aircraft.

(8) Working capital includes a $10 million Revolving Credit Facility classified
as a current liability that was subsequently repaid.

19
<PAGE> 20

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

OVERVIEW

Acquisition of the Kalitta Companies. On November 19, 1997, the Company
acquired all of the outstanding stock of the Kalitta Companies. The results of
operations for fiscal year 1997 include the results of operations of the Kalitta
Companies for the period November 19, 1997 to December 31, 1997, which is
generally the highest volume and most profitable period of the year. See "Item
1. Business -- Recent Financial Performance of the Kalitta Companies" and
"-- Seasonality."

Revenues. The Company's revenues are derived from two related businesses
(i) air freight carrier and (ii) air logistics. Air freight carrier revenues are
derived substantially from ACMI contract and on-demand charters flown with the
Company's aircraft. In addition, revenues from the Company's scheduled overnight
freight service, passenger charter service and third party maintenance
operations are also included in air freight carrier revenues. Air logistics
revenues are derived substantially from on-demand air freight charters arranged
by the Company for its customers utilizing the flight services of third party
air freight carriers. With respect to on-demand charters that are arranged by
the Company and flown with its own aircraft, charges to the customer for air
transportation are accounted for as air freight carrier revenues and charges for
ground handling and transportation are accounted for as air logistics revenues.

The principal factors that have contributed to revenue growth over the past
several years have been increases in the size of the Company's fleet (from 10
aircraft at December 31, 1993 to 124 aircraft at December 31, 1997 (including 82
aircraft from the acquisition of the Kalitta Companies), the general U.S.
economic expansion since 1992 and increased global demand for time sensitive air
freight services.

Costs of Revenues. The principal components of the costs of revenues
attributable to the air freight carrier business consist of the costs for
maintenance and operation of aircraft, including the salaries of pilots and
maintenance personnel, charges for fuel, insurance and maintenance and
depreciation of engines and airframes. Generally, charges for fuel are only
applicable for the on-demand charters flown by the air freight carrier because
fuel for the ACMI contract charters is generally provided by the customer or
billed to the customer on a direct pass-through basis, although the Company
absorbs the cost of fuel in its scheduled freight operations. Cost of revenues
also includes cost of sales associated with third party maintenance revenues.
The principal components of the costs of revenues attributable to air logistics
consist of sub-charter costs paid to third party air freight carriers and costs
paid for ground handling and transportation. With respect to on-demand charters
that are flown on the Company's aircraft, all related air transportation
expenses are allocated to the air freight carrier business and all related cargo
ground handling and transportation are allocated to the air logistics business.

Under the Company's Amended and Restated Annual Incentive Compensation
Plan, the Company awards semiannual cash bonuses to its employees. The aggregate
amount of bonuses for fiscal years 1995 and 1996, the year ended December 31,
1997 and the four months ended December 31, 1996 have equaled 11.7%, 9.5%, 7.3%,
and 10%, respectively, of the Company's income before the deduction of income
taxes, stock option grants to executives and the bonuses that were expensed
under this plan.

The Company's gross margins have been substantially higher in its air
freight carrier business (which uses Company aircraft) than in its air logistics
business (which principally uses third party aircraft). In addition, the air
freight carrier business historically has provided a more predictable revenue
base. Accordingly, the Company is continuing to shift its aircraft from
on-demand service to ACMI contracts.

Significant Events Affecting Comparability of Results of Operations. Since
September 1, 1994, several events have affected the comparability of results of
operations for each of the last three fiscal years. In fiscal year 1995, the
Company expensed approximately $727,000 relating to its attempted initial public
offering. In fiscal year 1996, the Company granted Messrs. Reeves and Wadsworth
options to purchase 390,707 and 153,567 shares of Common Stock, respectively,
for an exercise price of $0.01 per share that resulted in a charge to earnings
of approximately $4,231,000. In 1997, the Company acquired the Kalitta Companies
and included their results of operations for the period November 19, 1997 to
December 31, 1997 in the Company's

20
<PAGE> 21

results of operations, which increased revenues by approximately $58.9 million,
costs of revenues by approximately $49.4 million and income before interest,
minority interest and income taxes by approximately $6.5 million.

Reduced Dependence of Significant Customers. Historically, the Company
derived a substantial amount of revenue from a limited number of customers.
Subsequent to November 19, 1997, as a result of the acquisition of the Kalitta
Companies, the Company is significantly less dependent on revenues from these
customers, although revenues from the U.S. Postal Service are expected to be a
significant portion of the Company's revenues.

Change in Fiscal Year. On December 4, 1996, the Company changed its fiscal
year end from August 31 to December 31. The following discussion is of the
Company's financial condition and results of operations (i) for the years ended
December 31, 1996 and 1997, (ii) for the four months ended December 31, 1995 and
1996 and (iii) for the fiscal years ended August 31, 1995 and 1996.

RESULTS OF OPERATIONS

The following table sets forth, on a comparative basis for the periods
indicated, the components of the Company's gross profit and the gross profit
margin by revenue type:

<TABLE>
<CAPTION>
FOUR MONTHS ENDED
FISCAL YEAR ENDED AUGUST 31, DECEMBER 31, YEAR ENDED DECEMBER 31,
--------------------------------- --------------------------------- ----------------------------------
1995 1996 1995 1996 1996 1997
--------------- --------------- --------------- --------------- --------------- ----------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
AIR FREIGHT CARRIER:
Revenues............. $41,117 100.0% $52,922 100.0% $17,994 100.0% $20,577 100.0% $55,504 100.0% $137,286 100.0%
Costs of revenues.... 28,104 68.4 38,760 73.2 11,685 64.9 13,784 67.0 41,448 74.7 100,598 73.3
------- ----- ------- ----- ------- ----- ------- ----- ------- ----- -------- -----
Gross profit......... $13,013 31.6% $14,162 26.8% $ 6,309 35.1% $ 6,793 33.0% $14,056 25.3% $ 36,688 26.7%
======= ===== ======= ===== ======= ===== ======= ===== ======= ===== ======== =====
AIR LOGISTICS:
Revenues............. $62,593 100.0% $89,493 100.0% $51,734 100.0% $39,408 100.0% $77,168 100.0% $112,557 100.0%
Costs of revenues.... 57,428 91.7 80,140 89.5 45,997 88.9 33,796 85.8 67,938 88.0 95,093 84.5
------- ----- ------- ----- ------- ----- ------- ----- ------- ----- -------- -----
Gross profit......... $ 5,165 8.3% $ 9,353 10.5% $ 5,737 11.1% $ 5,612 14.2% $ 9,230 12.0% $ 17,464 15.5%
======= ===== ======= ===== ======= ===== ======= ===== ======= ===== ======== =====
</TABLE>

21
<PAGE> 22

The following table presents, for the periods indicated, consolidated
income statement data expressed as a percentage of total revenues:

<TABLE>
<CAPTION>
FISCAL YEAR FOUR MONTHS
ENDED ENDED YEAR ENDED
AUGUST 31, DECEMBER 31, DECEMBER 31,
-------------- -------------- --------------
1995 1996 1995 1996 1996 1997
----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
REVENUES:
Air freight carrier...................... 39.6% 37.2% 25.8% 34.3% 41.8% 54.9%
Air logistics............................ 60.4 62.8 74.2 65.7 58.2 45.1
----- ----- ----- ----- ----- -----
Total revenues............................. 100.0 100.0 100.0 100.0 100.0 100.0
Total costs of revenues.................... 82.5 83.9 82.7 79.3 82.4 78.3
----- ----- ----- ----- ----- -----
Gross profit............................... 17.5 16.1 17.3 20.7 17.6 21.7
General and administrative expenses........ 7.6 6.4 4.1 4.5 6.8 6.0
Non-qualified profit sharing expense....... 0.9 0.8 1.3 1.6 0.9 0.9
Stock option grants to executives.......... -- 3.0 -- -- 3.2 --
----- ----- ----- ----- ----- -----
Operating income........................... 9.0 5.9 11.9 14.6 6.7 14.8
Interest expense........................... (1.1) (1.3) (0.7) (1.2) (1.6) (2.8)
Other income (expense)..................... (0.6) 0.2 0.1 1.0 0.7 0.4
----- ----- ----- ----- ----- -----
Income before minority interest and income
taxes.................................... 7.3 4.8 11.3 14.4 5.8 12.4
Minority interest.......................... -- -- -- -- -- (0.2)
----- ----- ----- ----- ----- -----
Income before income taxes................. 7.3 4.8 11.3 14.4 5.8 12.2
Income taxes............................... 3.0 1.9 4.4 5.6 2.3 5.0
----- ----- ----- ----- ----- -----
Net income................................. 4.3% 2.9% 6.9% 8.8% 3.5% 7.2%
===== ===== ===== ===== ===== =====
</TABLE>

YEAR ENDED DECEMBER 31, 1997 COMPARED TO THE UNAUDITED YEAR ENDED DECEMBER 31,
1996

The results of operations data for the year ended December 31, 1996
referred to below, are taken from the Company's unaudited financial statements,
which are not separately presented herein, and are presented for comparative
purposes only. In the opinion of management, the 1996 results of operations
include all adjustments management believes are necessary for a fair
presentation.

Revenues -- Air Freight Carrier. Air freight carrier revenues increased to
$137.3 million, or 147.3%, for 1997 from $55.5 million for 1996, principally due
to an increase in fleet size and the acquisition of the Kalitta Companies.
Approximately $58.9 million of the increase was due to revenues generated by the
Kalitta Companies from November 19, 1997 to December 31, 1997, which is the
highest volume and most profitable portion of the year. See "-- Seasonality."
The remaining increase of approximately $22.9 million is primarily attributable
to the growth in the Company's aircraft fleet from 25 aircraft at December 31,
1996 to 42 aircraft immediately prior to the acquisition of the Kalitta
Companies. Air freight carrier on-demand and ACMI contract charter revenues were
$31.4 million and $108.7 million, or 21.3% and 73.5%, respectively, of total air
freight carrier revenues for 1997, as compared to $15.9 million and $37.8
million, or 28.7% and 68.1%, respectively, of total air freight carrier revenues
for 1996. Passenger charter and third party maintenance services represent
approximately 3.8% of 1997 air freight carrier revenues. Revenues from on-demand
charters flown by Company aircraft for 1997 decreased 25.8% as a percent of air
freight carrier revenues from the prior year due to aircraft being shifted from
on-demand to ACMI contract charter service, consistent with the Company's
strategy of using more of its fleet in ACMI business which produces relatively
stable revenues. Prices for the Company's on-demand and ACMI contract charters
remained relatively constant during this period.

Revenues -- Air Logistics. Air logistics revenues increased $35.4 million,
or 45.9%, to $112.6 million in 1997 from $77.2 million in 1996. The increase was
primarily due to increased demand for on-demand charters generally and
specifically for charters that require larger aircraft, which generate greater
revenues. Prices for

22
<PAGE> 23

the Company's air logistics services remained relatively constant during this
period. The number of on-demand charters managed increased by 995 charters, or
6.9% to 15,402 charters for 1997 from 14,407 charters for 1996. Additionally,
revenues from the Company's Christmas contract with the U.S. Postal Service
increased by $18.5 million, or 79.6%, for 1997 from $23.3 million for 1996.

Costs of Revenues -- Air Freight Carrier. Air freight carrier costs of
revenues increased $59.1 million, or 142.7%, to $100.6 million in 1997, from
$41.4 million in 1996, reflecting increased costs associated with increased
fleet size. Maintenance expenses increased $17.2 million, or 150%, to $28.7
million in 1997 from $11.5 million in 1996. Maintenance expenses increased as a
percentage of revenues to 11.5% from 8.7%. The increase was primarily
attributable to adding the aircraft fleet of the Kalitta Companies which
generally have greater maintenance costs as a percentage of revenue. During
1997, the Kalitta Companies accounted for $15.5 million of these maintenance
expenses. The gross profit margin from the air freight carrier business
increased from 25.3% for 1996 to 26.7% for 1997. The Kalitta Companies and their
fleet of aircraft contributed $9.4 million, or 25.7%, of gross profit for 1997
with the remainder of the fleet of the Company contributing $27.2 million, or
74.3%, of gross profit. The increase in margins related to the remainder of the
fleet was primarily the result of lower maintenance costs resulting from
operational efficiencies associated with increased fleet size, higher
utilization of aircraft during 1997 and lower average fuel prices in 1997 as
compared to 1996. Fuel prices may increase during 1998 due to reduced oil
exports by certain countries.

Costs of Revenues -- Air Logistics. Air logistics costs of revenues
increased $27.2 million, or 40%, to $95.1 million for 1997, from $67.9 million
for 1996. The gross profit margin from air logistics increased from 12% for 1996
to 15.5% for 1997. The increase in gross profit margin is mainly attributable to
the Company's 1997 Christmas contract with the U.S. Postal Service.

General and Administrative Expenses. General and administrative expenses
increased $6.2 million, or 68.9%, to $15.1 million for 1997 from $8.9 million
for 1996. Not including costs associated with the Merger, the Common Stock
Offering, the Note Offering, the Term Loan and Credit Facility, the acquisition
of the Kalitta Companies contributed approximately $3 million to the increase in
general and administrative expenses for 1997, representing costs for
administrative support after the Merger. Excluding the effect of the acquisition
of the Kalitta Companies, the Company experienced an increase in general and
administrative expenses from $8.9 million for 1996 to $12.2 million for 1997
primarily as a result of an increase in support functions and administrative
costs associated with the growth in the aircraft fleet (from 25 aircraft at
December 31, 1996 to 42 aircraft at November 18, 1997) and the increased volume
of business of the air freight carrier. As a percentage of revenues, general and
administrative expenses decreased to 6% in 1997 from 6.7% for 1996.

Non-qualified Employee Profit Sharing Expense. Employee profit sharing
expense increased $1.2 million, or 95.9%, to $2.4 million for 1997 from $1.2
million for 1996, reflecting the increase of net income before taxes for 1997.

Operating Income. As a result of the above, operating income increased
$27.7 million, or 312.8%, to $36.6 million for 1997 from $8.9 million for 1996.
Operating margin increased to 14.7% for 1997 from 6.7% for 1996.

Interest Expense. Interest expense increased to $6.9 million for 1997, as
compared to $2.1 million for 1996, an increase of $4.9 million, or 235.8%. The
increase is primarily a result of incurring $45.9 million of debt under the Term
Loan for the acquisition of 16 Boeing 727 aircraft in September 1997 and issuing
the Notes in November 1997 in connection with the acquisition of the Kalitta
Companies. Because these borrowings are expected to remain outstanding, interest
expense for 1998 will be substantially higher.

Other Income. Other income increased to $1.1 million for 1997 from $0.9
million for 1996. The increase was primarily due to increased interest income
during 1997 from the investment of net proceeds from the Company's initial
public offering and of approximately $56 million of net proceeds from the Note
Offering.

Minority Interest. Minority interest represents the earnings attributable
to the 40% of AIC owned by a third party, which was approximately $497,000. The
results are for the period November 19, 1997 to December 31, 1997, which is
generally the highest volume and most profitable portion of the year. See
"-- Seasonality."

23
<PAGE> 24

Income Taxes. The Company's effective tax rate increased to 41% for 1997 as
compared to 39.4% for 1996. The increase is primarily due to increased state
income taxes.

Net Income. As a result of the above, net income increased to $17.9 million
for 1997, compared to $4.7 million for 1996. Net income as a percentage of total
revenues increased to 7.2% for 1997 from 3.5% in 1996.

FOUR MONTHS ENDED DECEMBER 31, 1996 COMPARED TO FOUR MONTHS ENDED DECEMBER 31,
1995

Revenues -- Air Freight Carrier. Air freight carrier revenues increased to
$20.6 million, or 14.4%, from $18 million for the four months ended December 31,
1996 compared to the four months ended December 31, 1995, principally from an
increase in fleet size from 21 aircraft to 26 aircraft during the comparable
periods. Air freight carrier on-demand and ACMI contract charter revenues were
$3 million and $16.9 million, or 14.5% and 82.3%, respectively, of total air
freight carrier revenues for the four months ended December 31, 1996, as
compared to $7.8 million and $9.2 million, or 43.2% and 51.3%, respectively, for
the four months ended December 31, 1995. Revenues from on-demand charters flown
by Kitty Hawk aircraft for the four months ended December 31, 1996 decreased
61.6% from the comparable prior year period primarily as the result of Kitty
Hawk's strategy to use as many aircraft as possible under ACMI contracts, which
provide more stable, predictable revenues. Prices for Kitty Hawk's on-demand and
ACMI contract charters remained relatively constant.

Revenues -- Air Logistics. Air logistics revenues decreased $12.3 million,
or 23.8%, to $39.4 million in the four months ended December 31, 1996, from
$51.7 million in the four months ended December 31, 1995. This decrease was
primarily due to decreased demand for on demand charters from the automobile
industry in the fourth quarter of calendar year 1996 and is partially offset by
an increase in the number of managed charters for the U.S. Postal Service during
December 1996. Prices for Kitty Hawk's air logistics services remained
relatively constant.

Costs of Revenues -- Air Freight Carrier. Air freight carrier costs of
revenues increased $2.1 million, or 18%, to $13.8 million in the four months
ended December 31, 1996, from $11.7 million in the four months ended December
31, 1995, reflecting the increased volume of business from Boeing 727-200 ACMI
contract charters. Gross profit margin from the air freight carrier decreased to
33% in the four months ended December 31, 1996, from 35.1% in the comparable
prior year period. This decrease reflects the increase in ACMI contract
charters, which produce lower gross margins than on-demand charters.

As reported to the FAA, overall aircraft utilization increased to 7,670
flight hours for the four months ended December 31, 1996, from 6,320 in the four
months ended December 31, 1995, a 21.4% increase. This increase was primarily
due to the increased hours flown for ACMI contract charters.

Costs of Revenues -- Air Logistics. Air logistics costs of revenues
decreased $12.2 million, or 26.5%, to $33.8 million in the four months ended
December 31, 1996, from $46 million in the four months ended December 31, 1995,
reflecting the decreased volume of business. The gross profit margin from air
logistics increased to 14.2% in the four months ended December 31, 1996, from
11.1% in the comparable prior year period, an increase of 27.9%. This increase
was primarily due to Kitty Hawk's additional revenues and increased gross profit
margin from the U.S. Postal Service Christmas contract in December 1996 and
Kitty Hawk's success in reducing its costs paid to third party air freight
carriers and ground service providers.

General and Administrative Expenses. General and administrative expenses
decreased $137,000, or 4.8%, to $2.7 million in the four months ended December
31, 1996, from $2.9 million in the four months ended December 31, 1995. This
decrease was primarily due to a reduction of professional fees and bank charges
in the four months ended December 31, 1996. As a percentage of total revenues,
general and administrative expenses increased to 4.5% in the four months ended
December 31, 1996, from 4.1% in the four months ended December 31, 1995.

Non-qualified Employee Profit Sharing Expense. Employee profit sharing
expense increased $73,000, or 8.2%, to $962,000 in the four months ended
December 31, 1996, from $889,000 in the four months ended

24
<PAGE> 25

December 31, 1995, reflecting the increased profitability from operating
activities of Kitty Hawk in the four months ended December 31, 1996.

Operating Income. Operating income increased $423,000, or 5.1%, to $8.7
million in the four months ended December 31, 1996, from $8.3 million in the
four months ended December 31, 1995. Operating income margin increased to 14.6%
from 11.9%, for the four months ended December 31, 1996 and 1995, respectively.

Interest Expense. Interest expense increased to $684,000 for the four
months ended December 31, 1996 from $482,000 in the four months ended December
31, 1995, a 42% increase. The increase was primarily the result of the
incurrence of additional long-term debt to finance the acquisition of Boeing
727-200 aircraft subsequent to December 31, 1995.

Other Income (Expense). Other income increased to $626,000 in the four
months ended December 31, 1996, from $38,000 in the comparable prior year
period. The increase was primarily due to the temporary investment of the net
proceeds of Kitty Hawk's initial public offering.

Income Taxes. Income taxes as a percentage of income before income taxes
decreased to 38.9% for the four months ended December 31, 1996, from 39.4% for
the comparable prior year period. The decrease was primarily due to decreased
state income taxes.

Net Income. As a result of the above, net income increased to $5.3 million
in the four months ended December 31, 1996, from $4.8 million in the four months
ended December 31, 1995, a 11.3% increase. Net income as a percentage of total
revenues increased to 8.8% in the four months ended December 31, 1996, from 6.9%
in the comparable prior year period.

FISCAL YEAR ENDED AUGUST 31, 1996 COMPARED TO FISCAL YEAR ENDED AUGUST 31, 1995

Revenues -- Air Freight Carrier. Air freight carrier revenues increased
$11.8 million or 28.7% from $41.1 million for fiscal year 1995 to $52.9 million
for fiscal year 1996. Air freight carrier on-demand and ACMI contract charter
revenues were $20.7 million and $30.1 million, or 39.2% and 56.8%, respectively,
of total air freight carrier revenues for fiscal year 1996, as compared to $18.1
million and $20.9 million, or 44.2% and 50.8%, respectively, for fiscal year
1995. Revenues from on-demand charters flown by Kitty Hawk aircraft for fiscal
year 1996 increased 14% from the prior year. The increase in ACMI revenues of
$9.2 million from 1995 to 1996 was principally due to Kitty Hawk's strategy to
increase its Boeing 727 fleet and dedicate more aircraft to ACMI contract
service. Prices for Kitty Hawk's on-demand and ACMI contract charters remained
relatively constant.

Revenues -- Air Logistics. Air logistics revenues increased $26.9 million,
or 43%, to $89.5 million in fiscal year 1996, from $62.6 million in fiscal year
1995. This increase was primarily due to increased demand for on demand charters
from the automobile industry in the fourth quarter of calendar year 1995 and a
substantial increase in the number of managed charters for the U.S. Postal
Service during December 1995. Prices for Kitty Hawk's air logistics services
remained relatively constant.

Costs of Revenues -- Air Freight Carrier. Air freight carrier costs of
revenues increased $10.7 million, or 37.9%, to $38.8 million in fiscal year
1996, from $28.1 million in fiscal year 1995, reflecting the increased volume of
business from Boeing 727-200 ACMI contract charters. Gross profit margin from
the air freight carrier decreased to 26.8% in fiscal year 1996, from 31.6% in
the comparable prior year period. This decrease reflects the increase in ACMI
contract charters, which produce lower gross margins than on-demand charters.

As reported to the FAA, overall aircraft utilization increased to 20,237
flight hours for fiscal year 1996, from 15,183 in fiscal year 1995, a 33.3%
increase. This increase was primarily due to the increased hours flown for ACMI
contract charters.

Costs of Revenues -- Air Logistics. Air logistics costs of revenues
increased $22.7 million, or 39.5%, to $80.1 million in fiscal year 1996, from
$57.4 million in fiscal year 1995, reflecting the increased volume of business.
The gross profit margin from air logistics increased to 10.5% in fiscal year
1996, from 8.3% in the comparable prior year period, a 26.5% increase. This
increase was primarily due to Kitty Hawk's success in

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<PAGE> 26

reducing its costs paid to third party air freight carriers and ground service
providers and increased gross profit margin from the U.S. Postal Service
Christmas contract in December 1995.

General and Administrative Expenses. General and administrative expenses
increased $1.2 million, or 15.9%, to $9.1 million in fiscal year 1996, from $7.8
million in fiscal year 1995. This increase was primarily due to an increase in
support functions and administrative costs associated with the growth in the
aircraft fleet and the increased revenue volume for the air freight carrier in
fiscal year 1996. As a percentage of total revenues, general and administrative
expenses decreased to 6.4% in fiscal year 1996, from 7.6% in fiscal year 1995.

Non-qualified Employee Profit Sharing Expense. Employee profit sharing
expense increased $169,000, or 16.9%, to $1.2 million in fiscal year 1996, from
$1 million in fiscal year 1995, reflecting the increased profitability from
operating activities of Kitty Hawk in fiscal year 1996.

Stock Option Grants to Executives. During fiscal year 1996, Kitty Hawk
granted two executive officers options to purchase 544,274 shares of Common
Stock that resulted in a charge to earnings of approximately $4,231,000.

Operating Income. Operating income decreased $311,000, or 3.3%, to $9
million in fiscal year 1996, from $9.3 million in fiscal year 1995. Operating
income margin decreased to 6.3% from 9%, for fiscal year 1996 and 1995,
respectively.

Interest Expense. Interest expense increased to $1.9 million for fiscal
year 1996 from $1.2 million in fiscal year 1995, a 56.9% increase. The increase
was primarily the result of the incurrence of additional long-term debt to
finance the acquisition of two Boeing 727-200 aircraft in the second half of
fiscal year 1995 and two additional Boeing 727-200 aircraft in fiscal year 1996.

Loss on Asset Disposal. Loss on asset disposal for fiscal year 1996 was
$589,000, which resulted from write-downs associated with equipment
dispositions. There were no losses on asset disposal in fiscal year 1995.

Other Income (Expense). Other income increased to $291,000 in fiscal year
1996, from an expense of $601,000 in the comparable prior year period. The
increase was primarily due to the write-off of costs associated with Kitty
Hawk's attempted initial public offering in fiscal year 1995 and increased
interest income in fiscal year 1996.

Income Taxes. Income taxes as a percentage of income before income taxes
decreased to 40.3% for fiscal year 1996, from 41.6% for the comparable prior
year period. The decrease was primarily due to decreased state income taxes.

Net Income. As a result of the above, net income decreased to $4.1 million
in fiscal year 1996, from $4.4 million in fiscal year 1995, a 7% decrease. Net
income as a percentage of total revenues decreased to 2.9% in fiscal year 1996,
from 4.3% in the comparable prior year period.

LIQUIDITY AND CAPITAL RESOURCES

The Company's capital requirements are primarily for the acquisition and
modification of aircraft, working capital and the expansion and improvement of
maintenance and support facilities. In addition, the Company has, and will
continue to have, capital requirements for the requisite periodic and major
overhaul maintenance checks for its fleet and for debt service. The Company also
has seasonal working capital needs, because it generates higher revenue and cash
flow in the fourth calendar quarter and lower revenue and cash flow in the first
calendar quarter. The Company's cash requirements for maintenance and working
capital (particularly its seasonal requirements) have increased substantially
due to the acquisition of the Kalitta Companies. Funding requirements have
historically been met through internally generated funds, bank borrowings and
aircraft sales and from public and private offerings of equity and debt
securities. From time to time, the Company has entered into sale/leaseback
transactions to acquire aircraft and may do so in the future.

In connection with the acquisition of the Kalitta Companies, the Company
sold 2,200,000 shares of Common Stock resulting in net proceeds to the Company
of approximately $38.3 million. In addition, the

26
<PAGE> 27

Company issued $340 million of 9.95% Senior Secured Notes, resulting in net
proceeds to the Company of approximately $329.1 million. See "Item 1.
Business -- The Common Stock Offering, the Note Offering, the Credit Facility
and the Term Loan." The Notes provide for semi-annual interest payments of
approximately $16.9 million on each May 15 and November 15 and mature in
November 2004. The Notes are secured by a fleet of 30 aircraft, including nine
Boeing 747s (two of which were purchased in February 1998), eight Lockheed
L-1011s and 13 Boeing 727s. The Notes are guaranteed by all of the Company's
subsidiaries, other than AIC.

The Company has a $45.9 million outstanding Term Loan. The Term Loan is due
in quarterly installments of $2.25 million commencing in March 1999, with the
balance of $12.15 million due upon maturity in September 2002. Interest on the
Term Loan accrues at LIBOR plus 3% or a Base Rate plus 1.5%, subject to
reduction. The Base Rate is the Prime Rate of Wells Fargo Bank, N.A. ("WFB") or
the Federal Funds Rate plus 5%. The Term Loan is secured by accounts receivable,
all spare parts (including rotables), inventory, intangibles and contract
rights, cash, 16 Boeing 727s and related engines, the stock of each of the
Company's subsidiaries and the Company's 60% interest in AIC. The Term Loan is
guaranteed by all of the Company's subsidiaries, other than AIC.

In addition, to fund ongoing capital requirements, including possible
acquisitions, the Company has entered into a Credit Facility with WFB,
individually and as agent for various lenders. The Credit Facility provides the
Company with up to $100 million in revolving loans (subject to a current
borrowing base limitation of approximately $59.3 million) and is secured by the
same collateral as the Term Loan. The Credit Facility initially bears interest
at LIBOR plus 2.75% or a Base Rate 1.25%, subject to adjustment. The Base Rate
is WFB's Prime Rate or the Federal Funds Rate plus 5%. Borrowings under the
Credit Facility are subject to borrowing base limitations based on eligible
inventory and accounts receivable. The Credit Facility matures in November 2002.
As of March 31, 1998, the Company had a balance of approximately $15 million
outstanding under the Credit Facility and available borrowings under the Credit
Facility of approximately $44.3 million. Borrowings under the Credit Facility
and Term Loan are subject to certain financial covenants. As of December 31,
1997, the Company was not in compliance with the funded debt to Adjusted EBITDA
ratio. The Company has obtained a waiver as of December 31, 1997 with respect to
this ratio.

Capital expenditures were $113.5 million and $28.7 million for 1997 and
1996, respectively. Capital expenditures for 1997 were primarily for the
purchase of (i) 20 Boeing 727 aircraft (including 16 Boeing 727s acquired from
the Kalitta Companies) (ii) cargo and noise abatement modifications for three
Boeing 727 aircraft and one Boeing 747 aircraft, (iii) noise abatement equipment
with respect to two Douglas DC-9 aircraft, (iv) leasehold improvements to three
Boeing 727 aircraft, including a cargo conversion, (v) the Company's 40,000
square foot headquarters facility and related ground sublease at Dallas/Fort
Worth International Airport, (vi) five major maintenance checks on Boeing 727s,
(vii) overhauls on seven engines and acquisition of 11 JT8D engines and (viii)
ground service equipment for use in the Company's 1997 Christmas contract with
the U.S. Postal Service. Capital expenditures for 1996 were primarily for the
purchase of (i) three Boeing 727 aircraft and (ii) cargo and noise abatement
modifications for two Boeing 727 aircraft.

During 1998, the Company estimates that capital expenditures will aggregate
approximately $155.5 million (approximately $39.6 million of which has already
been incurred) and that it will make substantial capital expenditures
thereafter. As of March 24, 1998, the Company has acquired two Boeing 747s for
approximately $39.6 million and anticipates modifying these aircraft to cargo
configuration and having other work performed at an aggregate cost of
approximately $26 million. The acquisition of the Boeing 747s was funded with
approximately $39.6 million of the net proceeds from the Note Offering. The
cargo conversion will be funded with approximately $16.4 million of the net
proceeds from the Note Offering and approximately $9.6 million of internally
generated funds or borrowings under the Credit Facility. Additionally, the
Company anticipates converting one Boeing 727 aircraft from passenger to
freighter configuration during 1998 at a cost of approximately $5 million.

During 1998, the Company anticipates capital expenditures ranging from $27
million to $32 million for noise abatement modifications to Douglas DC-9 and
Boeing 727 aircraft currently owned. The Company's

27
<PAGE> 28

total capital expenditures for noise abatement modifications for its existing
fleet of owned and leased aircraft is expected to be between $80 million and $90
million. The entire fleet must be Stage III compliant by the year 2000. In the
event more aircraft are acquired, anticipated capital expenditures for noise
abatement modifications could materially increase. See "Item 1.
Business -- Government Regulation -- Noise Abatement Regulations."

Service Bulletins and Directives issued under the FAA's "Aging Aircraft"
program or issued on an ad hoc basis cause certain of the Company's aircraft to
be subject to extensive aircraft examinations and require certain of the
Company's aircraft to undergo structural inspections and modifications to
address problems of corrosion and structural fatigue among other things, at
specified times. It is possible that additional Service Bulletins or Directives
applicable to the Company's fleet could be issued in the future. The cost of
compliance with such Directives and Service Bulletins cannot currently be
estimated, but could be substantial. See "Item 1. Business -- Government
Regulation -- Aging Aircraft Regulations; Potential Compliance Costs."

The Company operates a fleet of 29 Boeing 727s, all of which were
previously converted from passenger configuration to cargo configuration by the
installation of a large cargo door and numerous interior modifications related
to the installation of cargo container handling systems. The FAA has issued a
proposed Directive, which if adopted, would limit the cargo capacity of 28 of
these Boeing 727s until certain modifications are made. The costs to make such
modifications and the amount of revenue that could be lost cannot currently be
estimated. However, the Company believes this Directive will not have a material
adverse effect of the Company. See "Item 1. Business -- Aircraft Fleet."

The Company believes that available funds, bank borrowings and cash flows
expected to be generated by operations will be sufficient to meet its
anticipated cash needs for working capital, debt service and capital
expenditures for at least the next 12 months. Thereafter, if cash generated by
operations is insufficient to satisfy the Company's liquidity requirements, the
Company may sell additional equity or debt securities or obtain additional
credit facilities. However, there can be no assurance that the Company will be
able to sell any additional equity or debt securities or obtain additional
credit facilities. Notwithstanding the foregoing, the Company may sell
additional equity or debt securities or obtain additional credit facilities at
any time.

YEAR 2000

The Company believes that its computer systems are generally year 2000
compliant. The Company does not yet know whether the computer systems of the FAA
or its customers, suppliers, vendors and air logistics service providers are
generally year 2000 compliant. The Company has begun discussions with its
significant suppliers, customers and financial institutions to ensure that those
parties have appropriate plans to remediate year 2000 issues where their systems
interface with the Company's systems or otherwise impact its operations and
assess the extent to which its operations are vulnerable should those
organizations fail to remediate properly their computer systems.

The Company's comprehensive year 2000 initiative is being managed by a team
of internal staff and outside consultants reporting directly to the Company's
Audit Committee. The team's activities are designed to ensure that there is no
adverse effect on the Company's core business operations and that transactions
with customers, suppliers and financial institutions are fully supported. While
the Company believes its planning efforts will be adequate to address its year
2000 concerns, there can be no guarantee that the systems of other companies
will be converted on a timely basis and will not have a material adverse effect
on the Company. The cost of the Company's year 2000 initiatives is not expected
to have a material adverse effect on the Company.

OTHER MATTERS

that public business enterprises report information about operating segments in
annual financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports. The Company
will adopt the new requirements retroactively in 1998. Management has not
completed its review of SFAS 131 and, therefore, has not yet determined the
impact, if any, this statement will have on the Company's financial reporting.

SEASONALITY

Certain customers of the Company engage in seasonal businesses, especially
the U.S. Postal Service and customers in the U.S. automotive industry. As a
result, the Company's air logistics business has historically experienced its
highest quarterly revenues and profitability during the fourth quarter of the
calendar year due to the peak Christmas season activity of the U.S. Postal
Service and during the period from June 1 to November 30 when production
schedules of the U.S. automotive industry typically increase. Consequently, the
Company experiences its lowest quarterly revenue and profitability during the
first quarter of the calendar year.

QUARTERLY RESULTS OF OPERATIONS

The following tables reflect certain selected quarterly operating results,
which have not been audited or reviewed. The information has been prepared on
the same basis as the Consolidated Financial Statements appearing elsewhere
herein and includes all adjustments, consisting of only normal recurring
adjustments, necessary for a fair presentation of the information shown. The
Company's results vary significantly from quarter to quarter and the operating
results for any quarter are not necessarily indicative of the results that may
be expected for any future period.
<TABLE>
<CAPTION>
QUARTER ENDED ONE MONTH
----------------------------------------------------------------- ENDED
NOVEMBER 30, FEBRUARY 29, MAY 31, AUGUST 31, NOVEMBER 30, DECEMBER 31,
1995 1996 1996 1996 1996 1996
------------ ------------ ------- ---------- ------------ ------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
Total revenues....... $36,045 $48,577 $22,504 $35,289 $25,414 $34,572
Gross profit......... 5,936 8,190 3,265 6,124 5,118 7,288
Operating income..... 3,564 2,447 897 2,126 2,851 5,868
Net income........... 1,956 1,273 182 698 1,632 3,661
Basic and diluted
earnings per
share(1)............ $ 0.25 $ 0.16 $ 0.02 $ 0.09 $ 0.18 $ 0.37

<CAPTION>
QUARTER ENDED
---------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1997 1997 1997 1997
--------- -------- ------------- ------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Total revenues....... $28,102 $32,366 $41,199 $148,176
Gross profit......... 5,355 7,451 8,748 32,598
Operating income..... 2,571 4,679 5,593 23,774
Net income........... 1,414 2,561 2,993 10,922
Basic and diluted
earnings per
share(1)............ $ 0.14 $ 0.25 $ 0.29 $ 0.82
</TABLE>

- ---------------
(1) Except for the quarter ended December 31, 1997, earnings per share
information for each of the quarters has been restated to comply with
Statement of Financial Accounting Standards No. 128, "Earnings per Share."

FACTORS THAT MAY AFFECT FUTURE RESULTS

The Company operates in a rapidly changing environment that involves
numerous risks, some of which are beyond the Company's control. The following
discussion highlights some of these risks.

Substantial Leverage and Debt Service. The Company incurred substantial
indebtedness through the issuance of the Notes and contemporaneously with the
issuance thereof entered into the Credit Facility, which allows for revolving
borrowings of up to $100 million, subject to a current borrowing base limitation
of approximately $59.3 million. In addition, the Company entered into the Term
Loan to refinance a $45.9 million loan which was incurred in September 1997 in
connection with the acquisition of 16 Boeing 727s from the Kalitta Companies. At
December 31, 1997, the Company's total indebtedness was approximately $404.6
million and its stockholders' equity was $174.9 million. At March 31, 1998,
there was a balance of $15 million under the Credit Facility and a balance of
approximately $45.9 million under the Term Loan. The Indenture pursuant to which
the Notes were issued permits the Company to incur substantial amounts of
additional indebtedness for certain specified purposes, including an unlimited
amount to acquire aircraft and aircraft-related assets.

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<PAGE> 30

The degree to which the Company is leveraged could have important
consequences, including (i) the Company's ability to obtain additional financing
for working capital, capital expenditures, acquisitions, general corporate
purposes or other purposes may be impaired in the future; (ii) a substantial
portion of the Company's cash flow from operations will be dedicated to the
payment of principal and interest on its indebtedness, thereby reducing funds
available to the Company for other purposes; and (iii) the Company's substantial
leverage may place the Company at a competitive disadvantage, hinder its ability
to adjust rapidly to changing market conditions and make it more vulnerable in
the event of a downturn in general economic conditions or its business or in the
event of a strike or other labor problems at one of its significant customers.

The Company's ability to make scheduled principal and interest payments or
to refinance its indebtedness will depend on its future financial performance,
which to a certain extent will be subject to economic, financial, competitive
and other factors beyond its control. There can be no assurance that the
Company's business will generate sufficient cash flow from operations to service
its indebtedness and make necessary capital expenditures. If unable to do so,
the Company may be required to refinance all or a portion of its indebtedness,
to sell assets or to obtain additional financing. There can be no assurance that
any such refinancing would be possible, that any assets could be sold (or, if
sold, of the timing of such sales and the amount of proceeds realized therefrom)
or that additional financing could be obtained, any of which could have a
material adverse effect on the Company.

Recent Financial Performance of the Kalitta Companies. The Kalitta
Companies on a combined basis posted net losses of $17,000 in 1996 and of $40.8
million during the period from January 1, 1997 to November 18, 1997 (the day
immediately preceding the consummation of the Merger). The Company believes that
the recent negative financial performance prior to the Merger can be attributed
to a number of factors, including (i) the incurrence of abnormally high engine
overhaul expenses due to FAA Directives, (ii) the loss of revenue resulting from
the effective grounding of two Boeing 747s in January 1996 due to a series of
Directives, (iii) the incurrence principally in 1997 of start-up costs
associated with establishing the Kalitta Companies' wide-body passenger charter
business, (iv) the incurrence of costs to add and maintain flight crews in
anticipation of increased air freight carrier business which has not yet
materialized in part due to delays in acquiring aircraft and (v) lower revenues
from the U.S. Military. Since January 1, 1998, AIA, which accounts for a
substantial proportion of the combined operating results of the Kalitta
Companies, has continued to suffer losses. The Company is striving to implement
changes to improve the operating performance of AIA and AIA's relationships with
its customers. The Company expended approximately $800,000 towards
Merger-related integration during the fourth quarter of 1997 and has budgeted
another $1.5 million for Merger-related costs for 1998. The Company believes
AIA's results of operations for the first quarter of 1998 will be better than
AIA's results of operations for the first quarter of 1997. Generally, the
Company believes that AIA's losses for the first quarter of 1998 are the result
of problems related to crew scheduling, maintenance scheduling and parts
logistics.

Risks of Business Integration. There can be no assurance that the Company
will be able to successfully integrate the operations of Kitty Hawk and the
Kalitta Companies or achieve the aims of the Merger. The benefits of the Merger
require (i) the integration of administrative, finance, purchasing, dispatching,
maintenance, sales and marketing organizations, (ii) the coordination of
aircraft operations and (iii) the implementation of appropriate operational,
financial and management systems and controls. This will require substantial
ongoing attention from the Company's management. The failure to successfully
integrate Kitty Hawk and the Kalitta Companies would have a material adverse
effect on the Company.

Control by Messrs. Christopher and Kalitta. As of the date hereof, Mr.
Christopher, the Company's Chairman and Chief Executive Officer, beneficially
owns 5,948,436 shares, or approximately 35.5% of the outstanding Common Stock,
and Mr. Kalitta, the Company's Vice Chairman, beneficially owns 4,099,150
shares, or approximately 24.4% of the outstanding Common Stock, of which 650,000
shares are held in escrow to secure Mr. Kalitta's indemnification obligations
under the Merger Agreement. As a consequence, the success of the Company
depends, in some part, upon the ability of Messrs. Christopher and Kalitta to
work together. Prior to the Merger, Messrs. Christopher and Kalitta were
competitors and had disagreements, one of which resulted in litigation between
Kitty Hawk and the Kalitta Companies. See "Item 3. Legal Proceedings -- U.S.
Postal Service Contract." Disagreements between Messrs. Christopher and Kalitta
in the
30
<PAGE> 31

future could delay or disrupt the Company's operations and have a material
adverse effect on the Company. Messrs. Christopher and Kalitta have entered into
a voting agreement that, among other things, provides that until November 2000,
Messrs. Christopher and Kalitta will vote their shares of Common Stock in favor
of director nominees selected by a Nominating Committee or in certain cases, the
Board of Directors.

Cyclicality and Seasonality. The Company's services are provided to
numerous industries and customers that experience significant fluctuations in
demand based on economic conditions and other factors beyond the control of the
Company. The demand for the Company's services could be materially adversely
affected by downturns in the businesses of the Company's customers. The Company
believes a significant percentage of its revenues will continue to be generated
from services provided to the U.S. automotive industry, which has historically
been a cyclical industry. A contraction in the U.S. automotive industry, a
prolonged work stoppage or other significant labor dispute involving that
industry, or a reduction in the use of air freight charters by that industry,
could have a material adverse effect on the Company.

Certain customers of the Company engage in seasonal businesses, especially
the U.S. Postal Service and customers in the U.S. automotive industry. As a
result, the Company's air carrier business and air freight charter logistics
business have historically experienced their highest quarterly revenues and
profitability during the fourth quarter of the calendar year due to the peak
Christmas season activity of the U.S. Postal Service and during the period from
June 1 to November 30 when production schedules of the U.S. automotive industry
typically increase. Consequently, the Company generally experiences its lowest
quarterly revenue and profitability during the first quarter of the calendar
year. In addition, the Company has provided charter carrier services to the U.S.
Military during periods of heightened military activity, such as the Persian
Gulf conflict, which has caused its results of operations to fluctuate.

Availability of Facilities. The Company leases the majority of its
facilities from third parties. If the Company continues to grow, it must be able
to expand its current facilities or relocate to new ones.

The Company's scheduled air freight operations utilize a sorting space at
the Hulman Regional Airport in Terre Haute, Indiana. This sorting space is
licensed from Roadway Global Air for a term which expires in August 1998.
Because of the growth in the amount of freight sorted at this facility, the lack
of available expansion space and the limited airport facilities in Terre Haute,
the Company plans to move this sorting operation to Fort Wayne, Indiana in the
spring of 1999. The Company is currently negotiating a lease with the airport
authority in Fort Wayne and an interim lease for its current space in Terre
Haute. There can be no assurance that the Company will be able to complete
either of these negotiations or do so on favorable terms. Moreover, the move to
Fort Wayne is dependent on the issuance of bonds by the Fort-Wayne-Allen County
Airport Authority (the "Fort Wayne Authority"). There can be no assurance that
the Fort Wayne Authority will complete the bond issuance in a timely manner or
at all. The failure of the Company to successfully obtain sufficient space to
operate would have a material adverse effect on the Company.

The Company also leases its Oscoda, Michigan maintenance facilities under
various subleases from the Oscoda-Wurtsmith Airport Authority (the "Wurtsmith
Authority"). These subleases vary in duration from month-to-month to long-term
(the last of which expires in December 2015) and are subject to earlier
termination upon termination of the prime lease between the U.S. Government and
the Wurtsmith Authority. The Company is highly dependent on its facilities in
Oscoda. There can be no assurance that the Company will be successful in
extending these subleases or do so on favorable terms or that the prime lease
will not terminate prior to its stated expiration. Failure to extend one or more
of the subleases or early termination of the prime lease would force the Company
either to reduce substantially its maintenance capabilities or relocate the
Oscoda maintenance operations, either of which could increase costs and reduce
revenues. If the Company were forced to relocate these maintenance operations,
there can be no assurance that the Company would be able to find alternative
space on acceptable terms. In addition, the cost to move to another site would
be significant. The occurrence of any of these events, or the failure in general
of the Company to obtain facilities to conduct efficiently any of its
operations, would have a material adverse effect on the Company.

Dependence on Aircraft Availability. The Company's revenues are dependent
on the availability of its aircraft. In the event that one or more of the
Company's aircraft are lost or out of service for an extended period of time,
the Company may be forced to lease or purchase replacement aircraft or, if
necessary, convert
31
<PAGE> 32

an aircraft from passenger to freighter configuration. There can be no assurance
that suitable replacement aircraft could be located on acceptable terms. The
Company does not maintain business interruption insurance to cover this risk.
Loss of revenue resulting from any such business interruption or costs to
replace aircraft could have a material adverse effect on the Company.

Dependence on Key Personnel. The Company believes that its continued
success depends and will continue to depend, on the services of Mr. Christopher,
the founder of Kitty Hawk and Chairman of the Board of Directors and Chief
Executive Officer of the Company, Tilmon J. Reeves, the President of the Company
and Richard R. Wadsworth, the Senior Vice President -- Finance, Chief Financial
Officer and Secretary of the Company. The loss of the services of any of Messrs.
Christopher, Reeves or Wadsworth, particularly Mr. Christopher, could have a
material adverse effect on the Company. Each of Messrs. Christopher, Reeves and
Wadsworth have entered into employment agreements with the Company.

Employee Relations. The Company believes that it has good relations with
its employees. Certain employee pilots and flight engineers of the Company (as
successor to the Kalitta Companies) are members of the Teamsters Union and are
employed pursuant to a Collective Bargaining Agreement. The Collective
Bargaining Agreement became amendable on August 29, 1997, and the parties have
commenced "interest-based" bargaining for a successor agreement. Although the
parties have commenced "interest-based" bargaining, there can be no assurance
that a new collective bargaining agreement can be reached or that negotiations
will not result in work stoppages, a substantial increase in salaries or wages,
changes in work rules or other changes adverse to the Company. The cockpit crews
of the Company's other subsidiaries are not unionized. There can be no assurance
that the Company's non-union cockpit crews will remain non-unionized.
Unionization of the Company's non-union cockpit crews, work stoppages, increased
wages or other labor related matters could have a material adverse effect on the
Company. See "Item 1. Business -- Employees."

Dependence on Computer Systems. The Company utilizes a number of computer
systems to schedule flights and personnel, track aircraft and freight, bill
customers, pay expenses and monitor a variety of its activities, ranging from
safety compliance to financial performance. The failure of the hardware or
software that support these computer systems, or the loss of data contained in
any of them, could significantly disrupt the Company's operations, which could
have a material adverse effect on the Company. See "Item 1. Business -- Air
Freight Charter Logistics Services -- Database, Information Software and
Tracking Systems."

While the Company believes its computer systems are generally year 2000
compliant, the computer systems of the FAA and the Company's customers,
suppliers, vendors and air logistics service providers may not be year 2000
compliant. Failure of the computer systems of the FAA or one or more of the
Company's significant customers, suppliers, vendors or air logistics service
providers to correctly record, manipulate or retrieve dates from the year 2000
and beyond could have a material adverse effect on the Company.

Restrictive Covenants. The Indenture restricts, among other things, the
Company's ability to pay dividends or make certain other restricted payments, to
incur additional indebtedness (except for amounts incurred for certain specified
purposes), to encumber or sell assets, to enter into transactions with
stockholders and affiliates, to guarantee indebtedness, to merge or consolidate
with any other entity and to transfer or lease all or substantially all of its
assets.

The Company's Credit Facility and Term Loan also contain restrictive
financial and operating covenants with respect to liens, indebtedness, capital
expenditures, investments, prepayments of debt, dividends and certain
requirements to maintain financial ratios.

As of the date hereof, the Company is in compliance with the financial and
other covenants in the Credit Facility and Term Loan. As of December 31, 1997,
the Company was not in compliance with the funded debt to Adjusted EBITDA ratio.
The Company has obtained a waiver as of December 31, 1997 with respect to this
ratio. The ability of the Company to comply with such covenants, including
financial maintenance covenants, in the future will depend on the Company's
future financial performance. The Company's failure to comply with such
covenants would constitute an event of default under the Credit Facility and
Term Loan, which could result in (i) the acceleration of debt maturities,
including under the Notes, the Credit Facility and the Term Loan, (ii) the loss
of the Company's borrowing capacity and (iii) the foreclosure upon the Company's
pledged assets securing such indebtedness. The declaration of an event of
default under the Credit Facility and

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<PAGE> 33

Term Loan could result in a default by the Company under other loan agreements
or leases that contain cross-default or cross-acceleration provisions. Under
these circumstances, there can be no assurance that the Company would have
sufficient funds or other resources to satisfy all of its obligations on a
timely basis.

Government Regulation. The Company is subject to Title 49 of the United
States Code (formerly the Federal Aviation Act of 1958, as amended), under which
the DOT and the FAA exercise regulatory authority over air carriers. The DOT and
the FAA have the authority to modify, amend, suspend or revoke the authority and
licenses issued to the Company for failure to comply with the provisions of law
or applicable regulations. In addition, the DOT and the FAA may impose civil or
criminal penalties for violations of applicable rules and regulations. Such
actions by the FAA or the DOT, if taken, could have a material adverse effect on
the Company. The adoption of new laws, policies or regulations or changes in the
interpretation or application of existing laws, policies or regulations, whether
by the FAA, the DOT, the U.S. government or any foreign, state or local
government, could have a material adverse effect on the Company.

Modification of Aircraft. The Company owns 34 aircraft and leases two
aircraft (not including aircraft held for sale and aircraft currently being
brought into compliance with Stage III noise control standards) that do not meet
FAA Stage III noise abatement standards. All of these aircraft must be brought
into compliance with these standards by January 1, 2000. The Company may retire
or terminate the leases related to some of these aircraft instead of modifying
them. If all 36 aircraft are brought into compliance, the Company estimates that
the cost would be approximately $88 million, not including aircraft downtime.
There can be no assurance regarding the actual cost or that the Company will
have or be able to raise the necessary funds. See "Item 1.
Business -- Government Regulation."

Aging Aircraft Regulations; Potential Compliance Costs. All of the
Company's aircraft are subject to Service Bulletins and Directives issued under
the FAA's "Aging Aircraft" program or issued on an ad hoc basis. These Service
Bulletins or Directives could cause certain of these aircraft to be subject to
extensive aircraft examinations and require certain of these aircraft to undergo
structural inspections and modifications to address problems of corrosion and
structural fatigue at specified times. It is possible that additional Service
Bulletins or Directives applicable to the types of aircraft included in the
Company's fleet could be issued in the future. The cost of compliance with such
Directives and Service Bulletins cannot currently be estimated, but could be
substantial. See "Item 1. Business -- Aircraft Fleet" for a discussion of
certain Directives which currently affect or which may affect certain of the
Company's aircraft. It is possible that additional Directives may be issued,
which could have a material adverse effect on the Company.

Competition. The market for air freight services is highly competitive. The
Company's air freight carrier services are also subject to competition from
other modes of transportation, including, but not limited to, railroads and
trucking. Additional demand for air freight carrier services over the last few
years has resulted in numerous new entrants in this business. The Company
believes there are limited barriers to entry into this business and that
increased demand may stimulate additional competition.

The market for air logistics also has been and is expected to remain highly
competitive. The Company's principal competitors for on-demand air logistics
services are other air logistics companies, air freight carriers which seek to
book charters directly with customers and air freight companies that offer
expedited service.

The Company's ability to attract and retain business also is affected by
whether and to what extent its customers decide to coordinate their own
transportation needs. With respect to the Company's ACMI contract charter
business, the Company could be adversely affected by the decision of certain of
its certificated customers to acquire additional aircraft or by its
uncertificated customers to acquire and operate their own aircraft. In this
regard, many of the Company's competitors and customers have substantially
greater financial resources than the Company.

Environmental Matters. The Company's operations must comply with numerous
environmental laws ordinances and regulations. Under current federal, state and
local environmental laws ordinances and regulations, a current or previous owner
or operator of real property may be liable for the costs of removal or
remediation of hazardous or toxic substances on, under or in such property. Such
laws often impose liability whether or not the owner or operator knew of, or was
responsible for, the presence of such hazardous or toxic substances. In
addition, the presence of contamination from hazardous or toxic substances, or
the failure to
33
<PAGE> 34

remediate such contaminated property properly, may adversely affect the ability
of the owner of the property to use such property as collateral for a loan or to
sell such property. Environmental laws also may impose restrictions on the
manner in which a property may be used or transferred or in which businesses may
be operated and may impose remedial or compliance costs. The costs of defending
against claims of liability or remediating contaminated property and the cost of
complying with environmental laws could have a material adverse effect on the
Company. See "Item 1. Business -- Environmental."

Capital Intensive Nature of Aircraft Ownership. The Company's air carrier
business is highly capital intensive. In order to further expand the Company's
air carrier business, the Company intends to purchase used jet aircraft that
typically require certain modifications, including reconfiguring the aircraft
from passenger to cargo use and installing equipment to comply with noise
abatement regulations. The market for used jet aircraft is volatile and can be
negatively affected by limited supply, increased demand and other market factors
and recently has experienced significant price increases. Therefore, there can
be no assurance that the Company will be able to purchase and modify additional
aircraft at favorable prices or that the Company will have or be able to obtain
sufficient resources with which to make such purchases and modifications. The
capital intensive nature of the Company's business could adversely impact the
value of the Common Stock.

Operating Costs. The operation of the Company's air freight and passenger
carrier business incurs considerable operational, maintenance, fuel and
personnel costs. The Company's financial results can be adversely affected by
unexpected engine or airframe repairs, compliance with maintenance Directives
and regulations of the FAA and associated aircraft downtime. In addition, spare
or replacement parts and components may not be readily available in the
marketplace. Failure to obtain necessary parts or components in a timely manner
or at favorable prices could have a material adverse effect on the Company.

Fuel is a significant cost of operating the Company's aircraft for
on-demand services and the aircraft of third party providers of charter
services. Both the cost and availability of fuel are subject to many economic
and political factors and events occurring throughout the world and recently the
cost of fuel has fluctuated markedly. The Company has no agreement with any fuel
supplier assuring the availability or price stability of fuel and such
agreements are generally not available in the industry. The Company generally
passes on fuel cost increases to its customers under ACMI charter contracts, but
under certain contracts and the Company's scheduled operations, the Company's
ability to pass on increased fuel costs is limited. Accordingly, the future cost
and availability of fuel to the Company cannot be predicted and substantial
price increases in, or the unavailability of adequate supplies of, fuel may have
a material adverse effect on the Company.

Volatility of Air Freight Services Market. The demand for air freight
services is highly dependent on the strength of both the domestic and global
economy. Although the air freight services industry has experienced strong
growth over the last several years, general economic downturns could have a
material adverse effect on the Company.

Utilization of Aircraft. The Company's operating results are highly
dependent on its ability to effectively utilize its diverse fleet of aircraft.
There can be no assurance, however, that operation of any of the various types
of aircraft in the Company's fleet will prove to be profitable. The failure of
the Company to keep its aircraft in revenue service or achieve an acceptable
level of aircraft utilization could have a material adverse effect on the
Company.

Risk of Accident; Insurance Coverage and Expenses. The Company's operations
involve risks of potential liability against the Company in the event of
aircraft accidents and, in the case of the Company's air
34
<PAGE> 35

ambulance services, for medical malpractice. The Company is required by the DOT
to carry liability insurance on each of its aircraft. The Company also carries
medical liability insurance for its air ambulance business. Although the Company
believes its current insurance coverage is adequate and consistent with current
industry practice, there can be no assurance that the amount of such coverage
will not be changed or that the Company will not bear substantial losses and
lost revenues from accidents. Substantial claims resulting from an accident in
excess of related insurance coverage could have a material adverse effect on the
Company. In addition, any significant increase in the Company's current
insurance expense could have a material adverse effect on the Company. Moreover,
any aircraft accident, even if fully insured, could cause a public perception
that some of the Company's aircraft are less safe or reliable than other
aircraft, which could have a material adverse effect on the Company.

International Business Risk. The Company expects to continue to derive a
substantial portion of its revenues from providing air freight carrier services
to customers in South and Central America and the Pacific Rim. The risks of
doing business in foreign countries include potential adverse changes in the
diplomatic relations between foreign countries and the U.S., hostility from
local populations directed at a U.S. flag carrier, government policies against
foreign-owned businesses, adverse effects of currency exchange controls,
restrictions on the withdrawal of foreign investment and earnings and the risk
of insurrections that could result in losses against which the Company is not
insured. The Company's international operations also are subject to economic
uncertainties, including risks of renegotiation or modification of existing
agreements or arrangements with exchange restrictions and changes in taxation.
Any of these events could have a material adverse effect on the Company.

Nearly all of the Company's revenue is denominated in U.S. dollars.
However, a meaningful portion of the Company's revenue is derived from customers
whose revenue is denominated in foreign currencies. Therefore, any significant
devaluation in such currencies relative to the U.S. dollar could have an adverse
effect on such customer's ability to pay the Company or to continue to use its
services, which could have a material adverse effect on the Company.

Contraband Risk. Although required to do so, customers may fail to inform
the Company about hazardous or illegal cargo. If the Company fails to discover
any undisclosed weapons, explosives, illegal drugs or other hazardous or illegal
cargo or mislabels or otherwise ships hazardous materials, it may suffer
possible aircraft damage or liability, as well as fines, penalties or flight
bans, imposed by both the country of origin and of destination. Any of these
events could have a material adverse effect on the Company.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The response to Item 8 is submitted as a separate section of this Form
10-K. See "Item 14. Exhibits, Financial Statement Schedules and Reports on Form
8-K."

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

None.

35
<PAGE> 36

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information regarding directors required by Item 10 is incorporated by
reference from the Company's definitive proxy statement for its 1998 Annual
Meeting of Stockholders to be held on May 29, 1998. The information regarding
executive officers required by Item 10 is submitted as a separate section of
this Form 10-K. See "Item 4A. Executive Officers of the Registrant."

ITEM 11. EXECUTIVE COMPENSATION

The information required by Item 11 is incorporated by reference from the
Company's definitive proxy statement for its 1998 Annual Meeting of Stockholders
to be held on May 29, 1998.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information required by Item 12 is incorporated by reference from the
Company's definitive proxy statement for its 1998 Annual Meeting of Stockholders
to be held on May 29, 1998.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required by Item 13 is incorporated by reference from the
Company's definitive proxy statement for its 1998 Annual Meeting of Stockholders
to be held on May 29, 1998.

36
<PAGE> 37

PART IV

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

(A)1. FINANCIAL STATEMENTS

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

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Auditors.............................. F-2
Consolidated Balance Sheets as of December 31, 1996 and
1997...................................................... F-3
Consolidated Statements of Income for the years ended August
31, 1995 and 1996, and December 31, 1997 and for the four
months ended December 31, 1995 (unaudited) and 1996....... F-4
Consolidated Statements of Stockholders' Equity for the
years ended August 31, 1995 and 1996, and December 31,
1997 and for the four months ended December 31, 1996...... F-5
Consolidated Statements of Cash Flows for the years ended
August 31, 1995 and 1996, and December 31, 1997 and for
the four months ended December 31, 1995 (unaudited) and
1996...................................................... F-6
Notes to Consolidated Financial Statements.................. F-7
</TABLE>

(A)2. FINANCIAL STATEMENT SCHEDULES

No financial statement schedules are filed as part of this Annual Report on
Form 10-K because the required information is included in the financial
statements, including the notes thereto, or circumstances requiring the
inclusion of such schedules are not present.

(A)3. EXHIBITS

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

<TABLE>
<C> <S>
2.1 -- Agreement and Plan of Merger, dated September 22, 1997
(the "Merger Agreement"), by and among Kitty Hawk and
certain of its subsidiaries, M. Tom Christopher, AIA,
AIT, FOL, KFS, OK and Conrad A. Kalitta, filed as an
exhibit to the Registrant's Registration Statement on
Form S-1 (Reg. No. 333-36125), which exhibit is herein
incorporated by reference.
2.2 -- Amendment No. 1 to the Merger Agreement, dated October
23, 1997, by and among Kitty Hawk and certain of its
subsidiaries, M. Tom Christopher, AIA, AIT, FOL, KFS, OK
and Conrad A. Kalitta, filed as an exhibit to the
Registrant's Registration Statement on Form S-1 (Reg. No.
333-36125), which exhibit is herein incorporated by
reference.
2.3 -- Amendment No. 2 to the Merger Agreement, dated October
29, 1997, by and among Kitty Hawk and certain of its
subsidiaries, M. Tom Christopher, AIA, AIT, FOL, KFS, OK
and Conrad A. Kalitta, filed as an exhibit to the
Registrant's Registration Statement on Form S-1 (Reg. No.
333-36125), which exhibit is herein incorporated by
reference.
2.4 -- Amendment No. 3 to the Merger Agreement, dated November
14, 1997 by and among Kitty Hawk and certain of its
subsidiaries, M. Tom Christopher, AIA, AIT, FOL, KFS, OK
and Conrad A. Kalitta, filed as an exhibit to the
Registrant's Registration Statement on Form S-4 (Reg. No.
333-43645), which exhibit is herein incorporated by
reference.
</TABLE>

37
<PAGE> 38
<TABLE>
<C> <S>
3.1 -- Certificate of Incorporation of Kitty Hawk, Inc. (the
"Company"), filed as an exhibit to the Registrant's
Registration Statement on Form S-1 (Reg. No. 33-85698)
dated as of December 1994, which exhibit is incorporated
herein by reference.
3.2 -- Amendment No. 1 to the Certificate of Incorporation of
the Company, filed as an exhibit to the Registrant's
Registration Statement on Form S-1 (Reg. No. 33-85698)
dated as of December 1994, which exhibit is incorporated
herein by reference.
3.3 -- Amended and Restated Bylaws of Kitty Hawk, filed as an
exhibit to the Registrant's Registration Statement on
Form S-4 (Reg. No. 333-43645), which exhibit is herein
incorporated by reference.
4.1 -- Specimen Common Stock Certificate, filed as an exhibit to
the Registrant's Registration Statement on Form S-1 (Reg.
No. 333-8307) dated as of October 1996, which exhibit is
incorporated herein by reference.
4.2** -- Stockholders' Agreement dated November 1997 among the
Company, M. Tom Christopher and Conrad A. Kalitta, filed
as an exhibit to the Registrant's Registration Statement
on Form S-4 (Reg. No. 333-43645), which exhibit is herein
incorporated by reference.
4.3 -- Specimen Global Note in respect of 9.95% Senior Secured
Notes due 2004 (Old Notes), filed as an exhibit to the
Registrant's Registration Statement on Form S-4 (Reg. No.
333-43645), which exhibit is herein incorporated by
reference.
4.4 -- Indenture, dated November 15, 1997, in regard to 9.95%
Senior Secured Notes due 2004 by and among the Company
and certain of its subsidiaries and Bank One, N.A. as
Trustee and Collateral Trustee, filed as an exhibit to
the Registrant's Registration Statement on Form S-4 (Reg.
No. 333-43645), which exhibit is herein incorporated by
reference.
4.5 -- First Supplemental Indenture, dated February 5, 1998, in
regard to 9.95% Senior Secured Notes due 2004 by and
among the Company and certain of its subsidiaries and
Bank One, N.A. as Trustee and Collateral Trustee, filed
as an exhibit to the Registrant's Registration Statement
on Form S-4 (Reg. No. 333-43645), which exhibit is herein
incorporated by reference.
10.1** -- Settlement Agreement dated as of August 22, 1994 by and
between the Company, Kitty Hawk Aircargo, Inc., Aircraft
Leasing, Inc., M. Tom Christopher, American International
Airways, Inc. and Conrad Kalitta, filed as an exhibit to
the Registrant's Registration Statement on Form S-1 (Reg.
No. 33-85698) dated as of December 1994, which exhibit is
incorporated herein by reference.
10.2** -- Salary Continuation Agreement dated as of June 15, 1993
by and between the Company and M. Tom Christopher, filed
as an exhibit to the Registrant's Registration Statement
on Form S-1 (Reg. No. 33-85698) dated as of December
1994, which exhibit is incorporated herein by reference.
10.3** -- Split Dollar Insurance Agreement dated as of June 15,
1993 by and between the Company and James R. Craig, filed
as an exhibit to the Registrant's Registration Statement
on Form S-1 (Reg. No. 33-85698) dated as of December
1994, which exhibit is incorporated herein by reference.
10.4** -- Split Dollar Insurance Agreement dated as of June 15,
1993 by and between the Company and James R. Craig, filed
as an exhibit to the Registrant's Registration Statement
on Form S-1 (Reg. No. 33-85698) dated as of December
1994, which exhibit is incorporated herein by reference.
</TABLE>

38
<PAGE> 39
<TABLE>
<C> <S>
10.5** -- Kitty Hawk, Inc. Amended and Restated Omnibus Securities
Plan, dated as of September 3, 1996, filed as an exhibit
to the Registrant's Registration Statement on Form S-1
(Reg. No. 333-8307) dated as of October 1996, which
exhibit is incorporated herein by reference.
10.6** -- Kitty Hawk, Inc. Amended and Restated Employee Stock
Purchase Plan, dated as of September 3, 1996, filed as an
exhibit to the Registrant's Registration Statement on
Form S-1 (Reg. No. 333-8307) dated as of October 1996,
which exhibit is incorporated herein by reference.
10.7** -- Kitty Hawk, Inc. Amended and Restated Annual Incentive
Compensation Plan, dated as of September 3, 1996, filed
as an exhibit to the Registrant's Registration Statement
on Form S-1 (Reg. No. 333-8307) dated as of October 1996,
which exhibit is incorporated herein by reference.
10.8** -- Kitty Hawk, Inc. 401(k) Savings Plan, filed as an exhibit
to the Registrant's Registration Statement on Form S-1
(Reg. No. 33-85698) dated as of December 1994, which
exhibit is incorporated herein by reference.
10.9** -- Employment Agreement dated as of October 27, 1994 by and
between the Company and M. Tom Christopher, filed as an
exhibit to the Registrant's Registration Statement on
Form S-1 (Reg. No. 33-85698) dated as of December 1994,
which exhibit is incorporated herein by reference.
10.10** -- Amended and Restated Employment Agreement dated as of
June 12, 1996 by and between the Company and Richard R.
Wadsworth, filed as an exhibit to the Registrant's
Registration Statement on Form S-1 (Reg. No. 333-8307)
dated as of October 1996, which exhibit is incorporated
herein by reference.
10.11** -- Amended and Restated Employment Agreement dated as of
December 31, 1995 by and between the Company and Tilmon
J. Reeves, filed as an exhibit to the Registrant's
Registration Statement on Form S-1 (Reg. No. 333-8307)
dated as of October 1996, which exhibit is incorporated
herein by reference.
10.12 -- Purchase Agreement between Federal Express Corporation
and Postal Air, Inc. (predecessor to the Company) dated
as of October 22, 1992 (the "FEASI Agreement"), filed as
an exhibit to the Registrant's Registration Statement on
Form S-1 (Reg. No. 333-8307) dated as of October 1996,
which exhibit is incorporated herein by reference.
10.13 -- Amendment No. 1 dated November 17, 1992 to the FEASI
Agreement, filed as an exhibit to the Registrant's
Registration Statement on Form S-1 (Reg. No. 333-8307)
dated as of October 1996, which exhibit is incorporated
herein by reference.
10.14 -- Amendment No. 2 dated February 1993 to the FEASI
Agreement, filed as an exhibit to the Registrant's
Registration Statement on Form S-1 (Reg. No. 333-8307)
dated as of October 1996, which exhibit is incorporated
herein by reference.
10.15 -- Amendment No. 3 dated June 11, 1993 to the FEASI
Agreement, filed as an exhibit to the Registrant's
Registration Statement on Form S-1 (Reg. No. 333-8307)
dated as of October 1996, which exhibit is incorporated
herein by reference.
10.16 -- Amendment No. 4 dated May 10, 1994 to the FEASI
Agreement, filed as an exhibit to the Registrant's
Registration Statement on Form S-1 (Reg. No. 333-8307)
dated as of October 1996, which exhibit is incorporated
herein by reference.
</TABLE>

39
<PAGE> 40
<TABLE>
<C> <S>
10.17 -- Amendment No. 5 dated September 29, 1995 to the FEASI
Agreement, filed as an exhibit to the Registrant's
Registration Statement on Form S-1 (Reg. No. 333-8307)
dated as of October 1996, which exhibit is incorporated
herein by reference.
10.18 -- Amendment No. 6 dated December 6, 1996 to the FEASI
Agreement, filed as an exhibit to the Company's Form 10-Q
for the quarter ended November 30, 1996, which exhibit is
incorporated herein by reference.
10.19 -- Second Amended and Restated Credit Agreement, dated as of
November 19, 1997, by and among the Company (as borrower)
and Wells Fargo Bank (Texas), National Association (as
agent), filed as an exhibit to the Registrant's
Registration Statement on Form S-4 (Reg. No. 333-43645),
which exhibit is herein incorporated by reference.
10.20 -- Agreement, dated July 20, 1995, between American
International Airways, Inc. and the Pilots, Co-Pilots and
Flight Engineers in the service of American International
Airways, Inc., as represented by The International
Brotherhood of Teamsters -- Airline Division, filed as an
exhibit to the Registrant's Registration Statement on
Form S-1 (Reg. No. 333-36125), which exhibit is herein
incorporated by reference.
10.21** -- Employment Agreement by and between Conrad A. Kalitta and
AIA, filed as an exhibit to the Registrant's Registration
Statement on Form S-1 (Reg. No. 333-36125), which exhibit
is herein incorporated by reference.
10.22** -- Amended and Restated Consulting Agreement by and between
Conrad A. Kalitta and AIA, filed as an exhibit to the
Registrant's Registration Statement on Form S-1 (Reg. No.
333-36125), which exhibit is herein incorporated by
reference.
10.23 -- License Agreement (the "License Agreement"), dated May
15, 1995, by and between Roadway Global Air, Inc. ("RGA")
and American International Freight ("AIF"), a division of
AIA, filed as an exhibit to the Registrant's Registration
Statement on Form S-1 (Reg. No. 333-36125), which exhibit
is herein incorporated by reference.
10.24 -- Amendment to License Agreement, dated August 14, 1997, by
and between RGA and AIF, filed as an exhibit to the
Registrant's Registration Statement on Form S-1 (Reg. No.
333-36125), which exhibit is herein incorporated by
reference.
10.25 -- Escrow and Security Agreement, dated November 19, 1997,
between the Company and Bank One, N.A. as Trustee and
Collateral Trustee placing the Pledged Securities into
escrow, filed as an exhibit to the Registrant's
Registration Statement on Form S-4 (Reg. No. 333-43645),
which exhibit is herein incorporated by reference.
12.1* -- Statement of computation of ratio of earnings to fixed
charges.
21.1 -- Subsidiaries of the Registrant, filed as an exhibit to
the Registrant's Registration Statement on Form S-4 (Reg.
No. 333-43645), which exhibit is herein incorporated by
reference.
23.1* -- Consent of Ernst & Young LLP.
25.1 -- Statement of Eligibility and Qualification (Form T-1)
under the Trust Indenture Act of 1939 of Bank One, N.A.,
filed as an exhibit to the Registrant's Registration
Statement on Form S-4 (Reg. No. 333-43645), which exhibit
is herein incorporated by reference.
27.1* -- Financial Data Schedule.
</TABLE>

- ---------------

* Filed herewith.

** This exhibit is a management contract or compensatory plan or arrangement.

40
<PAGE> 41

(b) REPORTS ON FORM 8-K

On October 2, 1997, the Company filed a Current Report on Form 8-K to
report its acquisition of 16 Boeing 727s from the Kalitta Companies (Item 2). No
financial statements were filed with this Form 8-K. On November 7, 1997, the
Company filed Amendment No. 1 to this Form 8-K to file the historical and pro
forma financial statements required by Item 7(a) and (b) of Form 8-K.

On December 4, 1997, the Company filed a Current Report on Form 8-K to
report its acquisition of the Kalitta Companies from Mr. Kalitta (Item 2). This
Form 8-K included the historical and pro forma financial statements required by
Item 7(a) and (b) of Form 8-K.

41
<PAGE> 42

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on the 27th day of
March, 1998.

KITTY HAWK, INC.

By: /s/ RICHARD R. WADSWORTH
----------------------------------
Richard R. Wadsworth
Senior Vice President -- Finance,
Chief Financial Officer and
Secretary

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated on the 27th day of March, 1998.

<TABLE>
<CAPTION>
NAME CAPACITIES
---- ----------
<C> <S>

/s/ M. TOM CHRISTOPHER Chairman of the Board of Directors and
- ----------------------------------------------------- Chief Executive Officer
M. Tom Christopher

/s/ TILMON J. REEVES President and Director
- -----------------------------------------------------
Tilmon J. Reeves

/s/ CONRAD A. KALITTA Vice Chairman and Director
- -----------------------------------------------------
Conrad A. Kalitta

/s/ RICHARD R. WADSWORTH Senior Vice President -- Finance, Chief
- ----------------------------------------------------- Financial Officer, Secretary and
Richard R. Wadsworth Principal Financial and Accounting
Officer

/s/ PHILIP J. SAUDER Director
- -----------------------------------------------------
Philip J. Sauder

/s/ TED J. COONFIELD Director
- -----------------------------------------------------
Ted J. Coonfield

/s/ GEORGE W. KELSEY Director
- -----------------------------------------------------
George W. Kelsey

/s/ LEWIS S. WHITE Director
- -----------------------------------------------------
Lewis S. White
</TABLE>

42
<PAGE> 43

KITTY HAWK, INC. AND SUBSIDIARIES

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Report of Independent Auditors.............................. F-2
Consolidated Balance Sheets as of December 31, 1996 and
1997...................................................... F-3
Consolidated Statements of Income for the years ended August
31, 1995 and 1996, and December 31, 1997 and for the four
months ended December 31, 1995 (unaudited) and 1996....... F-4
Consolidated Statements of Stockholders' Equity for the
years ended August 31, 1995 and 1996, and December 31,
1997 and for the four months ended December 31, 1996...... F-5
Consolidated Statements of Cash Flows for the years ended
August 31, 1995 and 1996, and December 31, 1997 and for
the four months ended December 31, 1995 (unaudited) and
1996...................................................... F-6
Notes to Consolidated Financial Statements.................. F-7
</TABLE>

F-1
<PAGE> 44

REPORT OF INDEPENDENT AUDITORS

Stockholders
Kitty Hawk, Inc. and Subsidiaries

We have audited the accompanying consolidated balance sheets of Kitty Hawk,
Inc. and subsidiaries as of December 31, 1996 and 1997 and the related
consolidated statements of income, stockholders' equity, and cash flows for each
of the two years in the period ended August 31, 1996, for the year ended
December 31, 1997 and for the four months ended December 31, 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

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

In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Kitty Hawk,
Inc. and subsidiaries at December 31, 1996 and 1997 and the consolidated results
of their operations and their cash flows for each of the two years in the period
ended August 31, 1996, for the year ended December 31, 1997 and for the four
months ended December 31, 1996, in conformity with generally accepted accounting
principles.

ERNST & YOUNG LLP

Dallas, Texas
March 4, 1998

F-2
<PAGE> 45

KITTY HAWK, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

ASSETS

<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1996 1997
------------ ------------
<S> <C> <C>
Current assets
Cash and cash equivalents................................. $ 27,320,402 $ 17,906,714
Restricted cash and short-term investments................ -- 58,629,084
Trade accounts receivable................................. 37,828,018 122,190,906
Deferred income taxes..................................... 107,564 15,798,161
Inventory and aircraft supplies........................... 2,789,982 37,158,207
Prepaid expenses and other current assets................. 1,143,989 25,146,064
Deposits on aircraft...................................... 5,438,628 450,000
------------ ------------
Total current assets.............................. 74,628,583 277,279,136
Property and equipment, net................................. 48,398,843 545,496,622
Other assets, net........................................... -- 13,970,168
------------ ------------
Total assets...................................... $123,027,426 $836,745,926
============ ============

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable.......................................... $ 8,853,292 $ 43,646,806
Accrued expenses.......................................... 26,195,346 91,128,193
Accrued maintenance reserves.............................. 2,373,157 19,138,292
Revolving Credit Facility................................. 1,500,000 10,000,000
Current maturities of long-term debt...................... 2,187,888 2,395,208
------------ ------------
Total current liabilities......................... 41,109,683 166,308,499
Long-term debt.............................................. 21,080,452 392,248,252
Deferred income taxes....................................... 2,544,900 99,153,075
Minority interest........................................... -- 4,162,689
Commitments and contingencies
Stockholders' equity
Preferred stock, $1 par value: Authorized
shares -- 1,000,000, none issued....................... -- --
Common stock, $.01 par value: Authorized
shares -- 25,000,000; issued and
outstanding -- 10,669,517 and 16,750,957 at December
31, 1996 and 1997, respectively........................ 106,695 167,510
Additional capital........................................ 33,968,700 130,522,885
Retained earnings......................................... 26,293,298 44,183,016
Less common stock in treasury, 217,710 shares............. (2,076,302) --
------------ ------------
Total stockholders' equity........................ 58,292,391 174,873,411
------------ ------------
Total liabilities and stockholders' equity........ $123,027,426 $836,745,926
============ ============
</TABLE>

See accompanying notes.

F-3
<PAGE> 46

KITTY HAWK, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31, YEAR ENDED FOUR MONTHS ENDED DECEMBER 31,
---------------------------- DECEMBER 31, ------------------------------
1995 1996 1997 1995 1996
------------ ------------ ------------ ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Air freight carrier......... $ 41,117,564 $ 52,921,762 $137,286,267 $17,994,371 $20,577,072
Air logistics............... 62,592,819 89,492,974 112,556,233 51,733,438 39,408,484
------------ ------------ ------------ ----------- -----------
Total revenues...... 103,710,383 142,414,736 249,842,500 69,727,809 59,985,556
Costs of revenues:
Air freight carrier......... 28,104,280 38,760,430 100,598,398 11,684,882 13,784,331
Air logistics............... 57,428,344 80,728,619 95,092,512 45,996,786 33,795,567
------------ ------------ ------------ ----------- -----------
Total costs of
revenues.......... 85,532,624 119,489,049 195,690,910 57,681,668 47,579,898
Gross profit.................. 18,177,759 22,925,607 54,151,590 12,046,141 12,405,658
General and administrative
expenses.................... 7,832,167 9,079,891 15,105,827 2,861,518 2,724,763
Non-qualified employee profit
sharing expense............. 1,000,957 1,169,880 2,428,934 889,046 962,263
Stock option grants to
executives.................. -- 4,230,954 -- -- --
------------ ------------ ------------ ----------- -----------
Operating income.............. 9,344,635 8,444,962 36,616,829 8,295,577 8,718,632
Other income (expense):
Interest expense............ (1,184,921) (1,859,284) (6,923,998) (481,670) (684,173)
Other, net.................. (600,667) 291,255 1,110,109 37,507 625,910
------------ ------------ ------------ ----------- -----------
Income before minority
interest and income taxes... 7,559,047 6,876,933 30,802,940 7,851,414 8,660,369
Minority interest............. -- -- (497,420) -- --
------------ ------------ ------------ ----------- -----------
Income before income taxes.... 7,559,047 6,876,933 30,305,520 7,851,414 8,660,369
Income taxes.................. 3,142,653 2,767,744 12,415,802 3,096,769 3,366,917
------------ ------------ ------------ ----------- -----------
Net income.................... $ 4,416,394 $ 4,109,189 $ 17,889,718 $ 4,754,645 $ 5,293,452
============ ============ ============ =========== ===========
Basic and diluted earnings per
share....................... $ 0.55 $ 0.52 $ 1.60 $ 0.60 $ 0.55
============ ============ ============ =========== ===========
Weighted average common shares
outstanding................. 7,967,710 7,927,856 11,193,899 7,967,710 9,609,920
============ ============ ============ =========== ===========
</TABLE>

See accompanying notes.

F-4
<PAGE> 47

KITTY HAWK, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
NUMBER OF COMMON ADDITIONAL RETAINED TREASURY
SHARES STOCK CAPITAL EARNINGS STOCK TOTAL
---------- -------- ------------ ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balance at August 31, 1994..... 7,423,436 $ 74,234 $ -- $12,475,276 $ -- $ 12,549,510
Net income................... -- -- -- 4,416,394 -- 4,416,394
---------- -------- ------------ ----------- ----------- ------------
Balance at August 31, 1995..... 7,423,436 74,234 -- 16,891,670 -- 16,965,904
Stock option grants to
executives................ -- -- 4,230,954 -- -- 4,230,954
Exercise of employee stock
options................... 544,274 5,443 -- (1,013) -- 4,430
Purchase of treasury stock,
217,710 shares, at cost... -- -- -- -- (2,076,302) (2,076,302)
Tax benefit of stock option
grants to executives...... -- -- 404,570 -- -- 404,570
Net income................... -- -- -- 4,109,189 -- 4,109,189
---------- -------- ------------ ----------- ----------- ------------
Balance at August 31, 1996..... 7,967,710 79,677 4,635,524 20,999,846 (2,076,302) 23,638,745
Shares sold in initial public
offering.................. 2,700,000 27,000 29,311,510 -- -- 29,338,510
Shares issued to employees
under the Annual Incentive
Compensation Plan......... 1,807 18 21,666 -- -- 21,684
Net income for the four
months ended December 31,
1996...................... -- -- -- 5,293,452 -- 5,293,452
---------- -------- ------------ ----------- ----------- ------------
Balance at December 31, 1996... 10,669,517 106,695 33,968,700 26,293,298 (2,076,302) 58,292,391
Shares sold in secondary
offering, net of
expenses.................. 2,200,000 22,000 38,319,566 -- -- 38,341,566
Shares issued in connection
with acquisition (Note
2)........................ 4,099,150 40,992 60,308,744 -- -- 60,349,736
Retirement of treasury
shares.................... (217,710) (2,177) (2,074,125) -- 2,076,302 --
Net income................... -- -- -- 17,889,718 -- 17,889,718
---------- -------- ------------ ----------- ----------- ------------
Balance at December 31, 1997... 16,750,957 $167,510 $130,522,885 $44,183,016 $ -- $174,873,411
========== ======== ============ =========== =========== ============
</TABLE>

See accompanying notes.

F-5
<PAGE> 48

KITTY HAWK, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
FOUR MONTHS ENDED
YEAR ENDED AUGUST 31, YEAR ENDED DECEMBER 31,
--------------------------- DECEMBER 31, ---------------------------
1995 1996 1997 1995 1996
------------ ------------ ------------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Operating activities:
Net income.............................. $ 4,416,394 $ 4,109,189 $ 17,889,718 $ 4,754,645 $ 5,293,452
Adjustments to reconcile net income to
net cash provided by (used in)
operating activities:
Depreciation and amortization......... 4,095,156 6,873,033 15,551,308 1,681,489 3,201,903
(Gain) loss on disposal of property
and equipment....................... -- 589,049 (1,461,449) -- --
Deferred income taxes................. 732,795 998,963 10,207,578 -- 172,418
Minority interest..................... -- -- 497,420 -- --
Stock option grants to executives..... -- 4,230,954 -- -- --
Changes in operating assets and
liabilities:
Trade accounts receivable........... 2,673,139 (1,228,256) (20,431,036) (27,954,848) (23,632,028)
Inventory and aircraft supplies..... 23,285 (1,615,426) (6,750,409) (298,872) (1,076,170)
Prepaid expenses and other.......... (51,396) (866,499) (3,960,795) (5,854,576) (4,898,293)
Accounts payable and accrued
expenses......................... (4,263,408) 3,868,840 3,090,555 22,405,693 20,515,993
Accrued maintenance reserves........ 1,429,886 297,211 5,961,327 281,184 49,691
------------ ------------ ------------- ------------ ------------
Net cash provided by (used in) operating
activities.............................. 9,055,851 17,237,058 20,594,217 (4,985,285) (373,034)
Investing activities:
Purchase of Kalitta Companies, net of
cash acquired......................... -- -- (315,550,749) -- --
Proceeds from sale of assets............ -- -- 1,816,800 -- 18,508,431
Capital expenditures.................... (17,929,106) (33,537,567) (113,460,317) (174,697) (13,795,891)
------------ ------------ ------------- ------------ ------------
Net cash provided by (used in) investing
activities.............................. (17,929,106) (33,537,567) (427,194,266) (174,697) 4,712,540
Financing activities:
Proceeds from 9.95% Senior Secured
Notes, net............................ -- -- 329,069,351 -- --
Proceeds from issuance of common stock,
net................................... -- 4,430 38,341,566 -- 29,338,510
Proceeds from issuance of long-term
debt, net............................. 9,911,240 23,117,000 50,418,441 5,725,000 1,500,000
Borrowings on Revolving Credit
Facility.............................. -- -- 16,230,000 -- --
Repayments of debt...................... (2,074,970) (3,186,663) (36,511,857) (1,011,103) (13,643,202)
Acquisition of treasury shares.......... -- (2,076,302) -- -- --
Distributions to minority interest...... -- -- (320,000) -- --
Note receivable from shareholder........ -- -- (41,140) -- --
Shares issued under Annual Incentive
Compensation Plan..................... -- -- -- -- 21,684
Tax benefit of stock option grant to
executives............................ -- 404,570 -- -- --
------------ ------------ ------------- ------------ ------------
Net cash provided by financing
activities.............................. 7,836,270 18,263,035 397,186,361 4,713,897 17,216,992
------------ ------------ ------------- ------------ ------------
Net increase (decrease) in cash and cash
equivalents............................. (1,036,985) 1,962,526 (9,413,688) (446,085) 21,556,498
Cash and cash equivalents at beginning of
period.................................. 4,838,363 3,801,378 27,320,402 3,801,378 5,763,904
------------ ------------ ------------- ------------ ------------
Cash and cash equivalents at end of
period.................................. $ 3,801,378 $ 5,763,904 $ 17,906,714 $ 3,355,293 $ 27,320,402
============ ============ ============= ============ ============
</TABLE>

See accompanying notes.

F-6
<PAGE> 49

KITTY HAWK, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Description of Business

Kitty Hawk, Inc. and its subsidiaries (the "Company") provide air freight
services through two related businesses: (i) an air freight carrier and (ii) an
air logistics service provider. The air freight carrier provides ACMI scheduled
services (includes supplying the aircraft, crew, maintenance, and insurance for
the customer), passenger and freight charter services, an overnight freight
service and third party maintenance operations. The air logistics service
provider arranges the delivery of time sensitive freight utilizing third parties
as well as its own fleet.

In November 1997, the Company acquired the Kalitta Companies (see Note 2).
The results of operations of the Kalitta Companies are included in the
accompanying financial statements from November 19, 1997 to December 31, 1997.

On December 4, 1996, the Company elected to change its fiscal year end to
December 31. Operating results for the four month period ended December 31, 1996
and 1995 are not necessarily indicative of the results that may be expected for
a calendar year. Operating results for the four month period ended December 31,
1995 (unaudited) include all adjustments management believes are necessary for a
fair presentation.

Principles of Consolidation

The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries, which include Kitty Hawk Charters, Inc.,
Kitty Hawk Aircargo, Inc., Aircraft Leasing, Inc., American International
Airways, Inc. ("AIA") (including a 60% limited partnership interest in American
International Cargo ("AIC")), Kalitta Flying Service, Inc. ("KFS"), Flight One
Logistics, Inc. ("FOL"), O.K. Turbines, Inc. ("OKT"), and American International
Travel, Inc. ("AIT"). All significant intercompany accounts and transactions
have been eliminated in consolidation. See Note 2.

Use of Estimates

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from these estimates.

Cash and Cash Equivalents

For purposes of reporting cash flows, cash and cash equivalents include
cash on hand and held in banks, money market funds, and other investments with
original maturities of three months or less.

Restricted Cash and Short-Term Investments

At December 31, 1997, restricted cash and short-term investments equaled
approximately $58.6 million. Of this amount, $56 million represents a portion of
the proceeds from the Notes (see Note 4) reserved for the acquisition and
subsequent modification of two Boeing 747 aircraft, which were acquired in
February 1998 at a cost of approximately $39.6 million. The balance of $2.6
million of restricted cash and short-term investments represents passenger cash
deposits held in escrow until charter services are provided.

Financial Instruments

The fair value of the 9.95% Senior Secured Notes is approximately $347.7
million based on the quoted price at December 31, 1997. Based on floating
interest rates provided therein, management believes the

F-7
<PAGE> 50
KITTY HAWK, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

recorded value of the remaining financial instruments included in the financial
statements approximates fair value.

Inventory and Aircraft Supplies

Inventory and aircraft supplies consist of aircraft parts and supplies and
are stated at the lower of cost (using the first-in, first-out or average cost
convention) or market.

Property and Equipment

Property and equipment are stated at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the assets, with
estimated residual values of up to 10% for aircraft and core values of up to
$300,000 for engines. Estimated useful lives are as follows:

<TABLE>
<S> <C>
Aircraft and engines
Boeing 747s............................................... 15 - 20 years
Lockheed L1011s........................................... 15 years
Douglas DC-8s............................................. 2 - 10 years
Boeing 727s............................................... 10 years
Douglas DC-9s............................................. 10 years
Other..................................................... 2 - 10 years
Machinery and equipment..................................... 3 - 12 years
Rotable aircraft parts...................................... 7 years
Buildings and leasehold improvements........................ 15 - 30 years
</TABLE>

Expenditures for additions, improvements, aircraft modifications, engine
overhauls and major maintenance costs are capitalized. Routine maintenance and
repairs are charged to expense when incurred. Costs of periodic airframe
maintenance (C-checks) are accrued. Major maintenance and engine overhauls are
depreciated on a straight line basis to the next scheduled major maintenance or
overhaul date.

Revenue Recognition

Revenues are recognized as services are provided.

Deferred Income Taxes

Deferred income taxes are recognized using the liability method and reflect
the tax impact of temporary differences between the recorded amounts of assets
and liabilities for financial reporting purposes and such amounts as measured by
existing tax laws and regulations.

Concentration of Credit Risk

The Company's air freight carrier business operates worldwide with
approximately 9.3% of 1997 revenues earned outside of North America (including
3.5% of 1997 revenues from operations within Asia). The air logistics service
provider principally operates in North America. Credit is extended based on an
evaluation of a customer's financial condition and, except in the case of
passenger charters, does not require a deposit or collateral. The Company's
allowance for doubtful accounts is based on current market conditions and
continuous evaluation of the customer's credit worthiness and has consistently
been within management's expectations.

Stock-Based Compensation

The Company accounts for stock-based compensation utilizing Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees." In October 1995, the Financial Accounting

F-8
<PAGE> 51
KITTY HAWK, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Standards Board issued Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" ("SFAS No. 123"). Under the provisions
of SFAS No. 123, the Company has elected to continue to apply the provisions of
APB Opinion No. 25 to its stock-based compensation arrangements and provide
supplementary financial statement disclosures as required under SFAS No. 123.

Basic and Diluted Earnings per Share

In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128 ("SFAS 128") "Earnings per Share." SFAS
128 replaced the calculation of primary and fully diluted earnings per share
presentation with basic and diluted earnings per share. Unlike primary earnings
per share, basic earnings per share excludes any dilutive effects of stock
options. Diluted earnings per share is similar to fully diluted earnings per
share. The adoption of SFAS 128 had no effect on previously reported amounts.

Reclassifications

Certain amounts from prior years have been reclassified to conform to the
current year presentation.

Pending Accounting Pronouncements

In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS
130") and Statement of Financial Accounting Standards No. 131, "Disclosures
about Segments of an Enterprise and Related Information" ("SFAS 131"), both
effective for years beginning after December 15, 1997. SFAS 130 establishes
standards for reporting and display of comprehensive income and its components
in a full set of financial statements and is not expected to have a significant
impact on the Company. SFAS 131 establishes standards for the manner that public
business enterprises report information about operating segments in annual
financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports. Management
has not completed its review of SFAS 131 and, therefore, has not yet determined
the impact, if any, this statement will have on the Company's financial
reporting.

2. ACQUISITION OF THE KALITTA COMPANIES

On November 19, 1997, the Company acquired by merger all of the outstanding
common stock of AIA, KFS, FOL, OKT and AIT (collectively, the "Kalitta
Companies") in exchange for 4,099,150 shares of the Company's common stock
valued by an independent appraisal at approximately $60.3 million and $20
million in cash. The transaction has been accounted for as a purchase and
accordingly the results of operations for the year ended December 31, 1997
include the results of operations of the Kalitta Companies from November 19,
1997 through December 31, 1997. The purchase price allocation related to the
acquisition of the Kalitta Companies is based on available information and
management's best estimates and is subject to change as information becomes
available.

In accordance with the merger agreement, $3 million in cash and 650,000
shares of the Company's common stock issued to the former owner of the Kalitta
Companies are being held in escrow to secure certain indemnity obligations.
Generally the Company cannot bring any indemnification claims after May 19,
2000, except the Company may make indemnity claims for certain environmental
matters until May 19, 2001.

In September 1997, as an interim step to the acquisition of the Kalitta
Companies, the Company acquired sixteen Boeing 727s from AIA for approximately
$51 million cash. Of the $51 million, $45.9 million was financed with a note
payable under the Company's existing credit facility. This note payable was
subsequently refinanced upon the consummation of the acquisition of the Kalitta
Companies. See Note 4.

F-9
<PAGE> 52
KITTY HAWK, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

3. PROPERTY AND EQUIPMENT

Property and equipment consist of the following:

<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1996 1997
------------ ------------
<S> <C> <C>
Aircraft and engines................................... $ 53,140,853 $498,516,927
Aircraft work in process............................... 6,732,878 28,536,343
Machinery and equipment................................ 2,680,692 20,618,486
Buildings and leasehold improvements................... 778,879 17,417,290
Rotable aircraft parts................................. -- 7,773,297
Construction in progress............................... -- 1,986,262
Other.................................................. 455,556 757,442
------------ ------------
63,788,858 575,606,047
Less accumulated depreciation.......................... (15,390,015) (30,109,425)
------------ ------------
Net property and equipment................... $ 48,398,843 $545,496,622
============ ============
</TABLE>

4. LONG-TERM DEBT AND REVOLVING CREDIT FACILITY

Long-term debt and Revolving Credit Facility consist of the following:

<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1996 1997
------------ ------------
<S> <C> <C>
9.95% Senior Secured Notes............................... $ -- $340,000,000
Term Loan................................................ -- 45,900,000
Revolving Credit Facility................................ 1,500,000 10,000,000
Note payable, bearing interest at an adjusted Eurodollar
rate plus 1.50% to 2.00% based upon a fixed charge
coverage ratio of the Company. Note was paid in full in
November 1997.......................................... 10,605,923 --
Note payable, bearing interest at an adjusted Eurodollar
rate plus 1.50% to 2.00% based upon a fixed charge
coverage ratio of the Company. Note was paid in full in
November 1997.......................................... 11,682,000 --
Other notes payable due in monthly installments with
interest rates ranging from 7.5% to 10.5% with maturity
dates ranging from 1998 through 2009................... 980,417 8,743,460
----------- ------------
24,768,340 404,643,460
Less current portion..................................... 3,687,888 12,395,208
----------- ------------
$21,080,452 $392,248,252
=========== ============
</TABLE>

Maturities of long-term debt at December 31, 1997 are as follows:

<TABLE>
<S> <C>
1998........................................................ $ 12,395,208
1999........................................................ 11,348,593
2000........................................................ 10,292,051
2001........................................................ 10,360,388
2002........................................................ 19,913,553
Thereafter.................................................. 340,333,667
------------
$404,643,460
============
</TABLE>

F-10
<PAGE> 53
KITTY HAWK, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

In connection with the acquisition of the Kalitta Companies in November
1997, the Company privately placed $340 million of 9.95% Senior Secured Notes
due 2004 (the "Notes") pursuant to Rule 144A of the Securities Act of 1933. Net
proceeds to the Company were $329.1 million. Costs incurred in issuing the Notes
are being amortized over seven years. The net proceeds of the Notes, along with
the net proceeds of the November 1997 common stock offering (see Note 8), were
used to refinance approximately $33 million of existing Kitty Hawk debt and to
pay off approximately $250 million of the Kalitta Companies' pre-Merger debt as
part of the acquisition of the Kalitta Companies, provide for $56 million of
cash to acquire and modify two Boeing 747s, provide for $20 million of cash to
acquire the Kalitta Companies, with the balance used for working capital and
expenses incurred in connection with the acquisition.

Interest on the Notes is due on May 15 and November 15. The Notes are
secured by a fleet of aircraft including nine Boeing 747s (including one in
cargo modification), eight Lockheed L1011s and 13 Boeing 727s. At December 31,
1997 the carrying value of the aircraft securing the Notes is approximately $338
million. Each of the Company's subsidiaries are guarantors on the Notes,
exclusive of the 60% limited partnership interest in AIC. In March 1998, the
Company concluded an exchange offer for the Notes thereby exchanging the Notes
for new 9.95% Senior Secured Notes due 2004 (the "New Notes"). The form and
terms of the New Notes are identical to the Notes, except the New Notes are
registered under the Securities Act of 1933 and therefore do not bear a legend
restricting their transfer.

The Notes and the New Notes provide for certain covenants which limit the
amount of indebtedness of the Company and its subsidiaries, restrict the payment
of dividends, restrict the selling of subsidiary stock and provide for an
interest coverage ratio. As of December 31, 1997, the Company was in compliance
with all applicable covenants.

The New Notes are due in full in November 2004. However, at any time after
November 15, 2001, the Company at its option may redeem the Notes based on a
percentage of the principal balance plus accrued and unpaid interest. The
redemption rates are: during the 12 month period beginning November 15, 2001,
104.975%, during the 12 month period beginning November 15, 2002, 102.488%, and
during the 12 month period beginning November 15, 2003, 100%. Additionally, any
time prior to November 15, 2000, the Company may redeem up to 35% of the
original principal amount of the New Notes with the proceeds of one or more
public offerings at a redemption price of 109.95% plus accrued and unpaid
interest, provided that at least $150 million of aggregate principal amount of
the New Notes remains outstanding after each redemption.

On November 19, 1997, the Company entered into a credit agreement (the
"Credit Agreement") with a bank which provides for a $45.9 million Term Loan
(the "Term Loan") and a $100 million Revolving Credit Facility (the "Revolver").
The proceeds of the Term Loan were used to fully refinance a note previously
entered into in September 1997, the proceeds of which were used to acquire
sixteen Boeing 727s from AIA prior to the acquisition of the Kalitta Companies
(see Note 2). The Term Loan is due in sixteen quarterly principal installments
of $2.25 million beginning in March 1999 with the balance due upon maturity in
November 2002. The Term Loan bears interest at the Company's option at either
prime plus 0% to 1.5% or LIBOR plus 0% to 3% (margins above prime and LIBOR are
based on certain financial covenant performance as defined in the Credit
Agreement). The applicable rate at December 31, 1997 was 8.97%.

Borrowings under the Revolver provide the Company with cash availability
for working capital and general corporate purposes. Advances under the Revolver
bear interest at the Company's option at either prime plus 0% to 1.25% or LIBOR
plus 0% to 2.75% (margins above prime and LIBOR are based on certain financial
covenant performance as defined in the Credit Agreement). The applicable rate at
December 31, 1997 was 9.75%. At December 31, 1997, $10 million was outstanding
under the Revolver which was subsequently paid off during January 1998. All
principal balances outstanding under the Revolver are due in full upon maturity
in November 2002. Balances drawn on the revolver are subject to certain
borrowing base provisions as defined. In January 1998, the borrowing base
provisions were amended to include additional eligible receivables and
inventory. Available borrowings, as amended, were approximately $44.3 million.
F-11
<PAGE> 54
KITTY HAWK, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The balances outstanding under the Credit Agreement are secured by the
sixteen Boeing 727s acquired from AIA (see Note 2) with a carrying value of
approximately $55 million at December 31, 1997, cash, accounts receivable,
rotable parts, inventory, intangibles and contract rights of the Company, and
the stock of each of the Company's subsidiaries, including the Company's 60%
interest in AIC. Each of the Company's subsidiaries are guarantors on the Credit
Agreement, exclusive of AIC. Fees incurred in connection with the Credit
Agreement of approximately $2.65 million are being amortized over a period of
five years. The Credit Agreement allows for up to $20 million of outstanding
letters of credit, subject to the borrowing base provisions, as defined. As of
December 31, 1997, the Company had approximately $5.2 million of unused letters
of credit available. Borrowings under the Credit Agreement are subject to
certain financial covenants, including a funded debt to EBITDA ratio, a minimum
net worth balance and cash flow coverage ratio.

The Company made cash interest payments of $1,088,928, $1,765,523,
$3,129,864 and $664,164 during fiscal years ended 1995, 1996, the year ended
December 31, 1997 and for the four months ended December 31, 1996, respectively.

5. INCOME TAXES

The provision for income taxes consists of the following:

<TABLE>
<CAPTION>
FOUR MONTHS
YEAR ENDED AUGUST 31, YEAR ENDED ENDED
----------------------- DECEMBER 31, DECEMBER 31,
1995 1996 1997 1996
---------- ---------- ------------ ------------
<S> <C> <C> <C> <C>
Current income tax:
Federal............................. $1,829,723 $1,352,390 $ 1,340,293 $2,768,672
State............................... 580,135 416,391 867,931 425,827
---------- ---------- ----------- ----------
Total current income tax.... 2,409,858 1,768,781 2,208,224 3,194,499
---------- ---------- ----------- ----------
Deferred income tax:
Federal............................. 627,993 758,138 8,075,702 141,169
State............................... 104,802 240,825 2,131,876 31,249
---------- ---------- ----------- ----------
Total deferred income tax... 732,795 998,963 10,207,578 172,418
---------- ---------- ----------- ----------
$3,142,653 $2,767,744 $12,415,802 $3,366,917
========== ========== =========== ==========
</TABLE>

The differences between the provision for income taxes and the amount
computed by applying the statutory federal income tax rate to income before
income taxes are as follows:

<TABLE>
<CAPTION>
FOUR MONTHS
YEAR ENDED AUGUST 31, YEAR ENDED ENDED
------------------------ DECEMBER 31, DECEMBER 31,
1995 1996 1997 1996
---------- ---------- ------------ ------------
<S> <C> <C> <C> <C>
Income tax computed at
statutory rate............... $2,570,076 $2,338,157 $10,606,932 $3,031,129
State income taxes, net of
federal benefit.............. 452,058 433,763 1,968,123 297,928
Other, net..................... 120,519 (4,176) (159,253) 37,860
---------- ---------- ----------- ----------
Total................ $3,142,653 $2,767,744 $12,415,802 $3,366,917
========== ========== =========== ==========
</TABLE>

F-12
<PAGE> 55
KITTY HAWK, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The components of the net deferred tax liabilities recognized on the
accompanying balance sheets are as follows:

<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1996 1997
------------ -------------
<S> <C> <C>
Deferred tax liabilities:
Property and equipment.............................. $(3,461,603) $(100,183,240)
Other............................................... (66,228) (1,540,625)
----------- -------------
Total deferred tax liabilities.............. (3,527,831) (101,723,865)
----------- -------------
Deferred tax assets:
Airframe reserves................................... 916,705 6,973,906
Non deductible accruals and reserves................ 173,790 9,231,540
Other............................................... -- 2,091,076
----------- -------------
Total deferred tax assets................... 1,090,495 18,368,951
----------- -------------
Net deferred tax liability.................. $(2,437,336) $ (83,354,914)
=========== =============
</TABLE>

At December 31, 1997, the Company's net deferred tax liability has
increased from December 31, 1996 primarily as a result of the acquisition of the
Kalitta Companies. The acquisition resulted in approximately $70.7 million of
net deferred tax liabilities being recorded for the difference between the book
basis and tax basis of the assets acquired and the liabilities assumed.

The Company made cash income tax payments of $4,552,371, $2,078,673,
$3,629,043 and $571,420 during fiscal years 1995, 1996, the year ended December
31, 1997 and for the four months ended December 31, 1996, respectively.

6. COMMITMENTS AND CONTINGENCIES

In December 1996, the Company sold at cost two recently acquired and
modified Boeing 727 aircraft to a third party and entered into an operating
lease agreement for such aircraft commencing January 1, 1997, ending December
31, 1997, with monthly lease payments of approximately $252,000, with five
successive one year renewal options. The Company has an option to purchase the
aircraft at the end of each year, and guarantees to the lessor certain minimum
sale values if the Company elects not to renew the lease or exercise its
purchase option. On January 1, 1998, the Company elected to renew the lease for
another year. Lease expense during fiscal year 1997 was approximately $3.03
million.

The Company also leases a Boeing 727 aircraft in cargo configuration under
a seven year operating lease at a monthly rate of $50,000, which expires in
2003. Lease expense during 1997 was $450,000.

The Company's acquisition of the Kalitta Companies resulted in the Company
leasing office buildings, hangars, cargo storage, and related facilities under
noncancelable operating leases which expire on various dates through 2011. In
addition, the Company periodically leases aircraft and other equipment under
month-to-month lease agreements. Total rent expense incurred by the Kalitta
Companies included in the 1997 results of operations was approximately $809,000.

F-13
<PAGE> 56
KITTY HAWK, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Minimum annual rentals at December 31, 1997 are as follows:

<TABLE>
<S> <C>
1998........................................................ $ 6,653,010
1999........................................................ 2,489,278
2000........................................................ 2,284,762
2001........................................................ 2,068,724
2002........................................................ 2,025,517
Thereafter.................................................. 8,314,728
-----------
$23,836,019
===========
</TABLE>

The Company currently licenses its sorting space for its overnight freight
service at the Hulman Regional Airport in Terre Haute, Indiana from Roadway
Global Air for a term which will expire in August 1998. Because of the growth in
the volume of freight shipped in its domestic scheduled service, the lack of
available expansion space and the limited airport facilities in Terre Haute, the
Company plans to move this sorting center to Fort Wayne, Indiana in the spring
of 1999. The Company has entered into discussions with the Hulman Regional
Airport Authority to obtain an interim lease of its current space in Terre Haute
until it is able to move to Fort Wayne. There is no assurance that the Company
will be able to obtain an interim lease of its current space at Terre Haute.

The Company has firm purchase commitments to acquire hushkits for ten of
its Boeing 727 aircraft for a total purchase price of up to $22.1 million.

Airline operators must comply with Federal Aviation Administration noise
regulations primarily promulgated under the Airport Noise and Capacity Act of
1990 (the "Noise Regulations"). Currently, the Company is in compliance with the
Noise Regulations. The Company owns 73 aircraft and leases 5 aircraft which are
affected by the Noise Regulations of which 41 are currently in compliance with
Stage III noise control standards of the Noise Regulations or are currently
being modified to be in compliance with such standards by January 1, 2000. Any
aircraft not in compliance may not be operated in the United States until it
complies with such standards. European countries have similar regulations. The
estimated cost of modifications to bring the Company's entire fleet into
compliance is estimated to be between $80 million and $90 million including the
modification to the Boeing 727 aircraft noted above.

The Company may elect not to modify certain aircraft to meet the standards
because the estimated cost may exceed the economic benefits of such
modifications. If the Company elects not to modify these aircraft, they must be
removed from its fleet in the United States before January 1, 2000.

In February 1998, the Company purchased two Boeing 747s for approximately
$39.6 million with the exchange of restricted cash. See Note 1. Upon delivery,
the Company entered into a contract with a third party to modify the aircraft to
cargo configuration at an approximate total cost of $26 million. Modification is
expected to commence in June and August with completion scheduled in September
and November, respectively. Until such time, the aircraft will be used in the
passenger charter services operations. These two aircraft were pledged to secure
a portion of the Notes.

The Company is aware of the presence of environmental contamination on
properties that the Company acquired in connection with its acquisition of the
Kalitta Companies. Pursuant to the merger agreement, the former owner of the
Kalitta Companies, has agreed, subject to certain limitations, to indemnify the
Company until May 19, 2001 against any losses arising with respect to
environmental liabilities related to contamination at any of the Kalitta
Companies facilities. In the opinion of management, none of the costs of
responding to the presence of any such contamination that may be borne by the
Company will have a material adverse affect on the Company's financial position
or results of operations.

F-14
<PAGE> 57
KITTY HAWK, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Service Bulletins and Directives issued under the FAA's "Aging Aircraft"
program or issued on an ad hoc basis cause certain of the Company's aircraft to
be subject to extensive aircraft examinations and require certain of the
Company's aircraft to undergo structural inspections and modifications to
address problems of corrosion and structural fatigue, among other things, at
specified times. It is possible that additional Service Bulletins or Directives
applicable to the Company's fleet could be issued in the future. The cost of
compliance with such Directives and Service Bulletins cannot currently be
estimated, but could be substantial.

The Company operates a fleet of 31 Boeing 727s, all of which were
previously converted from passenger configuration to cargo configuration by the
installation of a large cargo door and numerous interior modifications related
to the installation of cargo container handling systems. The FAA has issued a
proposed Directive, which if adopted, would limit the cargo capacity of 30 of
these Boeing 727s until certain modifications are made. The costs to make such
modifications and the amount of revenue that could be lost cannot currently be
estimated. However, the Company believes this Directive will not have a material
adverse effect on the Company.

7. LEGAL PROCEEDINGS

The United States Postal Service ("USPS") selected the Company's air
freight carrier in September 1992 as the successful bidder on a contract for a
multi-city network of air transportation services supporting the USPS Express
Mail system. Two unsuccessful bidders sued the USPS to enjoin the award. The
Company intervened. This litigation (the "ANET Litigation") was settled in April
1993 by agreements under which the USPS terminated the Company's contract for
convenience and awarded the contract to the incumbent contractor, Emery
Worldwide Airlines, Inc. ("Emery").

In March 1995, the Company was served with a complaint in a qui tam lawsuit
filed on behalf of the U.S. Government by a third-party plaintiff seeking to
share a recovery under the Federal False Claims Act (the "Act"). The suit, filed
in May 1994, was filed under seal in accordance with the Act, to enable the U.S.
Government to review the claim before its disclosure to the defendants. The U.S.
Government declined to pursue the claim, but the third-party plaintiff chose to
continue. The suit claimed that the Company and another defendant fraudulently
failed to disclose to the USPS, both in the Company's successful bid and in the
settlement of the ANET Litigation, that some of the aircraft the Company
proposed to purchase and use to perform the contract were aging aircraft with
high use, and claimed that the Company and Emery similarly fraudulently
conspired in connection with the settlement of the ANET Litigation. The suit
sought to recover treble the $10 million settlement payment made by the USPS in
settling the ANET Litigation, plus the third party plaintiff's costs and fees.

The Company moved to dismiss the suit with prejudice on grounds that it was
barred by the Act. The Company also sought to recover its attorneys' fees from
the plaintiff and to obtain sanctions against the plaintiff's attorneys. The
Company believes the suit was clearly frivolous because, among other things, the
Company in the ANET bid identified each aircraft by serial number, age, hours
and cycles, and made available use and maintenance records for each aircraft as
required by the request for proposal, and that the USPS reviewed and inspected
the aircraft, data and records and found them acceptable. In May 1996, the court
dismissed the suit and awarded the Company its attorneys' fees and costs. The
plaintiff has asked the court to reconsider its ruling. The Company does not
expect the outcome of this matter to have a material adverse effect upon the
Company's financial condition or results of operations.

In January 1996, the FAA issued a series of Airworthiness Directives (the
"Directives") on certain Boeing 747 aircraft which were modified for freight
hauling by GATX-Airlog Company, a subsidiary of General American Transportation
Corp. ("GATX"). The Directives, which became effective on January 30, 1996, were
issued because of concerns relating to the integrity of the cargo door and
surrounding floor area in the event the aircraft were operated at their maximum
cargo capacity of approximately 220,000 pounds. In spite of the fact that the
aircraft affected by the Directives have flown over 83,000 hours without
incident, the
F-15
<PAGE> 58
KITTY HAWK, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Directives require certain modifications to be made to the aircraft. Absent such
modifications, the Directives limit the cargo capacity of these aircraft to
120,000 lbs., a limit which restricts the Company's ability to profitably
operate the aircraft.

One of each of the Company's Boeing 747-200 and Boeing 747-100 freighters
are affected by the Directives and have been out of service since January 1996.
GATX has proposed a solution to the problem identified by one of the Directives
which has been approved by the FAA. An appropriate means to test the proposed
solution, however, has not yet been identified. Currently, the Company
anticipates modifying one aircraft to be in compliance with a portion of the
Directive for which the FAA has approved a solution by the second half of 1998,
which will allow the Company to operate it with a reduced cargo capacity of
160,000 lbs. The Company is awaiting engineering solutions to address the
remaining Directives. If the cost necessary to fully implement these solutions
and return both the Boeing 747-100 and -200 to maximum cargo capacity is
uneconomical, the Company may either operate one or both of the aircraft at
limited loads or use one or both for spare parts. The Company is currently
involved in litigation against GATX to recover the cost to repair these aircraft
as well as revenues lost as a consequence of the aircraft downtime. Any amounts
which are recovered from the litigation are first to be applied to reimburse the
Company for its legal costs and then to correct the mechanical problems
associated with the Boeing 747s. Any additional amounts will be allocated 10% to
the Company and 90% to the former owner of the Kalitta Companies. In the event
the amounts recovered by the Company, if any, are insufficient to reimburse the
Company for its legal costs incurred in connection with this litigation, the
former owner of the Kalitta Companies will reimburse the Company for the
unreimbursed portion of its legal costs incurred after November 19, 1997.

Additionally, in the normal course of business, the Company is a party to
matters of litigation, none of which, in the opinion of management, will have a
material adverse effect on the Company's financial condition or the results of
operations.

8. STOCKHOLDERS' EQUITY

In October 1994 the Company granted non-qualified options to two executives
to purchase a total of 337,848 shares of common stock at $7.81 per share.

During the fiscal year ended August 31, 1996, the Company canceled 245,708
of the options outstanding and granted to an executive a non-qualified option to
purchase 390,707 shares of common stock at $0.01 per share. The new option had a
term of nine years and was fully vested. In June 1996, the Company canceled the
remaining 92,140 options outstanding and granted to another executive a
non-qualified option to purchase 153,567 shares of common stock at $0.01 per
share. The new option had a term of nine years and was fully vested. On June 26,
1996, the executives fully exercised their options. Based on an independent
appraisal commissioned by the Company, the fair value of the options of
$4,230,954 is reflected as a charge to earnings in the accompanying statement of
income for the year ended August 31, 1996. No additional options have been
issued. Accordingly, no supplemental disclosures under SFAS No. 123 are
necessary.

9. RELATED PARTY TRANSACTIONS

The Company leased its primary office and maintenance space in Dallas,
Texas under an operating lease from a party who was a member of the Company's
Board of Directors until August 1997. Rent expense under this lease was
$252,595, $254,934, $21,000 and $84,305 for fiscal years 1995, 1996, the year
ended December 31, 1997 and for the four months ended December 31, 1996,
respectively. Under the lease agreement, the Company had the option to purchase
the office facilities and the landlord's interest in the associated ground lease
at any time prior to March 1, 1997 for consideration of $2,200,000, less $5,000
for each monthly rental payment made after March 1, 1993. Effective February
1997, the Company exercised its option and purchased the facility for $1.76
million.

F-16
<PAGE> 59
KITTY HAWK, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

As a result of the acquisition of the Kalitta Companies, one of the
Company's vendors became a related party as the vendor is owned by a relative of
the former owner of the Kalitta Companies. The Kalitta Companies also lease
certain aircraft to this vendor as well as provide ground handling services in
certain locations. Additionally, the Company uses this related company for
subcharter flight and lift capacity for the Company's overnight scheduled cargo
service. Total revenues earned during 1997 (subsequent to the acquisition of the
Kalitta Companies) from this related company were approximately $379,000 with
related accounts receivable of approximately $813,000. Subsequent to the
acquisition of the Kalitta Companies, the Company incurred approximately $1.8
million of expenses with this related party and owed approximately $200,000 to
this related party at December 31, 1997.

The Company leases an office facility through May 2007 from a company which
is owned by the former owner of the Kalitta Companies and two of his relatives.
The annual rent on this facility is $713,000.

The Company has entered into an agreement to sponsor the racing activities
of a racing team owned by the former owner of the Kalitta Companies. The
agreement provides for annual payments of up to $2 million for two years.

10. EMPLOYEE COMPENSATION PLANS AND ARRANGEMENTS

The Company has a retirement savings plan under Section 401(k) of the
Internal Revenue Code which covers substantially all employees meeting minimum
service requirements. Under the plan, voluntary contributions are made by
employees and the Company provides matching contributions based upon the
employees' contribution. The Company incurred $121,217, $159,967, $268,230 and
$56,378 in matching contributions related to this plan during fiscal years 1995,
1996, the year ended December 31, 1997 and for the four months ended December
31, 1996, respectively. The Kalitta Companies have two separate 401(k) employee
savings plans, covering substantially all employees. Company contributions are
discretionary and were $40,000 in 1997.

The Company has adopted:

- An Omnibus Securities Plan (the "Plan") under which 300,000 shares of its
common stock are reserved for issuance to its employees and members of
the board of directors. The Plan is administered by the Company's
Compensation Committee which may grant stock based and non-stock based
compensation to the Plan participants. In March 1998, 6,840 total shares
of common stock were issued to current and former members of the Board of
Directors for services performed during 1996 and 1997 leaving 293,160
shares available under the plan.

- An Annual Incentive Compensation Plan (the "Compensation Plan") under
which the Compensation Committee awards semiannual bonuses to employees
of the Company. The aggregate amount of bonuses available for award is
limited to 10% of the Company's income before income taxes and the
bonuses to be paid under the Compensation Plan. The Company may elect to
pay the full amount of the bonuses in common stock, which is limited to
total stock distributions of 200,000 shares of common stock. As of
December 31, 1996, 198,193 shares were available for distribution under
the Compensation Plan.

- An Employee Stock Purchase Plan under which up to 100,000 shares of the
Company's common stock are reserved for purchase by Company employees. In
January 1998, 9,084 shares were issued under the plan, leaving 90,916
shares available under the plan.

11. SIGNIFICANT CUSTOMERS

The Company provided air logistics services to one customer which accounted
for approximately 47%, 41%, 18% and 16% of its total revenues in fiscal years
1995, 1996, the year ended December 31, 1997 and for

F-17
<PAGE> 60
KITTY HAWK, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

the four months ended December 31, 1996, respectively. The contract for these
services is effective through May 31, 2000; however, such contract may be
canceled by either party with 30 days notice. Another customer accounted for
approximately 10%, 15%, 18% and 44% of the Company's total revenues in fiscal
years 1995, 1996, the year ended December 31, 1997 and for the four months ended
December 31, 1996, respectively. Related accounts receivable from this customer
at December 31, 1996 and 1997 were approximately $27,086,000 and $44,468,000,
respectively. The Company provided air freight carrier services to one customer
which accounted for approximately 18% and 12% of its total revenues in the year
ended December 31, 1997 and for the four months ended December 31, 1996.

12. EARNINGS PER COMMON SHARE

The following table sets forth the computation of basic and diluted
earnings per share:

<TABLE>
<CAPTION>
FOUR MONTHS ENDED
YEAR ENDED AUGUST 31, YEAR ENDED DECEMBER 31,
----------------------- DECEMBER 31, ------------------------
1995 1996 1997 1995 1996
---------- ---------- ------------ ----------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Numerator for basic and
diluted earnings per
share -- net
income:.............. $4,416,394 $4,109,189 $17,889,718 $4,754,645 $5,293,452
========== ========== =========== ========== ==========
Denominator for basic
and diluted earnings
per share -- weighted
average shares
outstanding.......... 7,967,710 7,927,856 11,193,899 7,967,710 9,609,920
========== ========== =========== ========== ==========
</TABLE>

The weighted average number of common shares outstanding during the years
ended August 31, 1995 and 1996 include the effect of options to purchase 390,707
and 153,567 shares of the Company's common stock at $0.01 granted to certain
executives in December 1995 and June 1996, respectively, in accordance with
Securities and Exchange Commission Staff Accounting Bulletin 98.

On June 28, 1996 the Company approved a 1.2285391-for-1 stock split
effected as a stock dividend. All references to common stock and per share data
have been restated to give effect to the split.

13. COLLECTIVE BARGAINING AGREEMENTS

Approximately 15% of the Company's employees, consisting of pilots and
flight engineers, (as successor to the Kalitta Companies) are members of the
Teamsters Union and are employed pursuant to a Collective Bargaining Agreement.
The Collective Bargaining Agreement became amendable on August 29, 1997, but
remains in effect while the parties are in negotiations for a successor
collective bargaining agreement. Pilots and flight engineers subject to the
agreement are guaranteed pay based upon a minimum of 60 block hours per month.
The agreement requires that all flight crew personnel must meet minimum
qualifications and includes typical seniority, furlough, grievance, group health
insurance, sick leave and vacation provisions. The seniority provisions require
that the most senior flight crews have the opportunity to operate larger
aircraft or move to new crew positions as aircraft or crew positions become
available by reason of flight crew attrition or aircraft acquisitions. As a
consequence, the contract obligates to Company to incur costs to retrain crews
as they advance in seniority and progress to new aircraft or crew positions. In
addition, the Company may incur costs to train flight crews to fill positions
vacated by more senior flight crews. The Collective Bargaining Agreement
provides that so long as the agreement is in effect, the Teamsters Union will
not authorize a strike and the Company (as successor to the Kalitta Companies)
will not lockout union employees. Although the Company and the Teamsters Union
have commenced "interest-based" bargaining, there can be no assurance that a new
Collective Bargaining Agreement can be reached or that negotiations will not
result in work stoppages, substantial increases in salaries or wages, changes in
work rules or other changes adverse to the Company.

F-18
<PAGE> 61
KITTY HAWK, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

14. PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

The following sets forth the unaudited pro forma consolidated statement of
operations for each of the four quarters in the year ended December 31, 1997 and
for the years ended December 31, 1996 and 1997, in each case giving effect to
the acquisition of the Kalitta Companies, the issuance of the Notes, Term Loan,
and the acquisition of the sixteen Boeing 727s from the Kalitta Companies as if
each of the transactions had been consummated at the beginning of 1996 and 1997
for each of the respective years. This information is presented for illustrative
purposes only and does not purport to present the results of operations of the
Company had these transactions occurred on the dates indicated, nor are they
necessarily indicative of the consolidated results of operations which may be
expected to occur in the future.

No pro forma adjustments have been applied to reflect (i) revenues or
operating costs expected to be generated from the Boeing 747s recently purchased
and being modified with approximately $56 million of the net proceeds from the
Notes or (ii) operating efficiencies or cost savings (other than approximately
$1.5 million of insurance savings) expected to result from the Merger. In
addition, pro forma results have not been adjusted to eliminate abnormally high
engine maintenance expenses, costs incurred to add and maintain flight crews in
anticipation of increased air freight carrier business which has not yet
materialized in part due to delays in acquiring aircraft and start-up costs
associated with establishing the Kalitta Companies' wide-body passenger charter
business.

PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
YEAR ENDED
QUARTER ENDED DECEMBER 31,
--------------------------------------------------- -------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1997 1997 1997 1997 1997 1996
--------- -------- ------------- ------------ -------- --------
(UNAUDITED)
(IN THOUSANDS EXCEPT FOR PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Air freight carrier.......... $100,421 $113,579 $138,588 $136,945 $489,533 $438,265
Air logistics................ 13,215 14,017 18,647 66,678 112,557 77,168
Maintenance and other........ 6,411 8,078 8,810 5,932 29,231 36,348
-------- -------- -------- -------- -------- --------
Total revenues....... 120,047 135,674 166,045 209,555 631,321 551,781
-------- -------- -------- -------- -------- --------
Costs of revenues:
Air freight carrier.......... 105,911 95,711 110,462 118,792 430,876 387,013
Air logistics................ 11,875 12,944 17,219 53,055 95,093 67,938
Maintenance and other........ 4,513 5,687 7,035 5,013 22,248 22,316
-------- -------- -------- -------- -------- --------
Total costs of
revenues........... 122,299 114,342 134,716 176,860 548,217 477,267
-------- -------- -------- -------- -------- --------
Gross profit (loss)............ (2,252) 21,332 31,329 32,695 83,104 74,514
General and administrative
expenses..................... 8,395 8,458 10,179 11,128 38,160 31,843
Stock option grant to
executives................... -- -- -- -- -- 4,231
Non-qualified employee profit
sharing expense.............. 271 400 490 1,268 2,429 1,243
-------- -------- -------- -------- -------- --------
Operating income (loss)........ (10,918) 12,474 20,660 20,299 42,515 37,197
Other income (expense):
Interest expense,
net................ (10,147) (9,993) (10,131) (9,813) (40,084) (40,859)
Other, net........... 1,793 123 (1,439) (832) (355) 1,557
-------- -------- -------- -------- -------- --------
</TABLE>

F-19
<PAGE> 62
KITTY HAWK, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

<TABLE>
<CAPTION>
YEAR ENDED
QUARTER ENDED DECEMBER 31,
--------------------------------------------------- -------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1997 1997 1997 1997 1997 1996
--------- -------- ------------- ------------ -------- --------
(UNAUDITED)
(IN THOUSANDS EXCEPT FOR PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
Income (loss) before minority
interest and income taxes.... (19,272) 2,604 9,090 9,654 2,076 (2,105)
Minority interest.............. 338 555 966 1,177 3,036 1,146
-------- -------- -------- -------- -------- --------
Income (loss) before income
taxes........................ (19,610) 2,049 8,124 8,477 (960) (3,251)
Income taxes (benefit)......... (7,460) 820 3,249 3,391 -- --
-------- -------- -------- -------- -------- --------
Net income (loss).............. $(12,150) $ 1,229 $ 4,875 $ 5,086 $ (960) $ (3,251)
======== ======== ======== ======== ======== ========
Income (loss) per common
share -- basic and diluted... $ (0.73) $ 0.07 $ 0.29 $ 0.30 $ (0.06) $ (0.22)
======== ======== ======== ======== ======== ========
Weighted average common shares
outstanding.................. 16,751 16,751 16,751 16,751 16,751 14,776
======== ======== ======== ======== ======== ========
Other Pro Forma Information:
Adjusted EBITDA(1)........... $ 1,206 $ 24,082 $ 31,937 $ 31,089 $ 88,314 $ 82,293
======== ======== ======== ======== ======== ========
Depreciation and
amortization.............. $ 10,271 $ 11,272 $ 12,641 $ 11,485 $ 45,669 $ 39,308
======== ======== ======== ======== ======== ========
Capital expenditures......... $ 79,985 $ 37,066 $ 58,613 $ 38,692 $214,356 $141,635
======== ======== ======== ======== ======== ========
</TABLE>

- ---------------

(1) Adjusted EBITDA is calculated as income (loss) before minority interest,
income taxes, interest expense and depreciation and amortization. Adjusted
EBITDA excludes approximately $4,231 from stock options granted to
executives in 1996.

F-20
<PAGE> 63

INDEX TO EXHIBITS

<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
2.1 -- Agreement and Plan of Merger, dated September 22, 1997
(the "Merger Agreement"), by and among Kitty Hawk and
certain of its subsidiaries, M. Tom Christopher, AIA,
AIT, FOL, KFS, OK and Conrad A. Kalitta, filed as an
exhibit to the Registrant's Registration Statement on
Form S-1 (Reg. No. 333-36125), which exhibit is herein
incorporated by reference.
2.2 -- Amendment No. 1 to the Merger Agreement, dated October
23, 1997, by and among Kitty Hawk and certain of its
subsidiaries, M. Tom Christopher, AIA, AIT, FOL, KFS, OK
and Conrad A. Kalitta, filed as an exhibit to the
Registrant's Registration Statement on Form S-1 (Reg. No.
333-36125), which exhibit is herein incorporated by
reference.
2.3 -- Amendment No. 2 to the Merger Agreement, dated October
29, 1997, by and among Kitty Hawk and certain of its
subsidiaries, M. Tom Christopher, AIA, AIT, FOL, KFS, OK
and Conrad A. Kalitta, filed as an exhibit to the
Registrant's Registration Statement on Form S-1 (Reg. No.
333-36125), which exhibit is herein incorporated by
reference.
2.4 -- Amendment No. 3 to the Merger Agreement, dated November
14, 1997 by and among Kitty Hawk and certain of its
subsidiaries, M. Tom Christopher, AIA, AIT, FOL, KFS, OK
and Conrad A. Kalitta, filed as an exhibit to the
Registrant's Registration Statement on Form S-4 (Reg. No.
333-43645), which exhibit is herein incorporated by
reference.
3.1 -- Certificate of Incorporation of Kitty Hawk, Inc. (the
"Company"), filed as an exhibit to the Registrant's
Registration Statement on Form S-1 (Reg. No. 33-85698)
dated as of December 1994, which exhibit is incorporated
herein by reference.
3.2 -- Amendment No. 1 to the Certificate of Incorporation of
the Company, filed as an exhibit to the Registrant's
Registration Statement on Form S-1 (Reg. No. 33-85698)
dated as of December 1994, which exhibit is incorporated
herein by reference.
3.3 -- Amended and Restated Bylaws of Kitty Hawk, filed as an
exhibit to the Registrant's Registration Statement on
Form S-4 (Reg. No. 333-43645), which exhibit is herein
incorporated by reference.
4.1 -- Specimen Common Stock Certificate, filed as an exhibit to
the Registrant's Registration Statement on Form S-1 (Reg.
No. 333-8307) dated as of October 1996, which exhibit is
incorporated herein by reference.
4.2** -- Stockholders' Agreement dated November 1997 among the
Company, M. Tom Christopher and Conrad A. Kalitta, filed
as an exhibit to the Registrant's Registration Statement
on Form S-4 (Reg. No. 333-43645), which exhibit is herein
incorporated by reference.
4.3 -- Specimen Global Note in respect of 9.95% Senior Secured
Notes due 2004 (Old Notes), filed as an exhibit to the
Registrant's Registration Statement on Form S-4 (Reg. No.
333-43645), which exhibit is herein incorporated by
reference.
4.4 -- Indenture, dated November 15, 1997, in regard to 9.95%
Senior Secured Notes due 2004 by and among the Company
and certain of its subsidiaries and Bank One, N.A. as
Trustee and Collateral Trustee, filed as an exhibit to
the Registrant's Registration Statement on Form S-4 (Reg.
No. 333-43645), which exhibit is herein incorporated by
reference.
</TABLE>
<PAGE> 64

<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
4.5 -- First Supplemental Indenture, dated February 5, 1998, in
regard to 9.95% Senior Secured Notes due 2004 by and
among the Company and certain of its subsidiaries and
Bank One, N.A. as Trustee and Collateral Trustee, filed
as an exhibit to the Registrant's Registration Statement
on Form S-4 (Reg. No. 333-43645), which exhibit is herein
incorporated by reference.
10.1** -- Settlement Agreement dated as of August 22, 1994 by and
between the Company, Kitty Hawk Aircargo, Inc., Aircraft
Leasing, Inc., M. Tom Christopher, American International
Airways, Inc. and Conrad Kalitta, filed as an exhibit to
the Registrant's Registration Statement on Form S-1 (Reg.
No. 33-85698) dated as of December 1994, which exhibit is
incorporated herein by reference.
10.2** -- Salary Continuation Agreement dated as of June 15, 1993
by and between the Company and M. Tom Christopher, filed
as an exhibit to the Registrant's Registration Statement
on Form S-1 (Reg. No. 33-85698) dated as of December
1994, which exhibit is incorporated herein by reference.
10.3** -- Split Dollar Insurance Agreement dated as of June 15,
1993 by and between the Company and James R. Craig, filed
as an exhibit to the Registrant's Registration Statement
on Form S-1 (Reg. No. 33-85698) dated as of December
1994, which exhibit is incorporated herein by reference.
10.4** -- Split Dollar Insurance Agreement dated as of June 15,
1993 by and between the Company and James R. Craig, filed
as an exhibit to the Registrant's Registration Statement
on Form S-1 (Reg. No. 33-85698) dated as of December
1994, which exhibit is incorporated herein by reference.
10.5** -- Kitty Hawk, Inc. Amended and Restated Omnibus Securities
Plan, dated as of September 3, 1996, filed as an exhibit
to the Registrant's Registration Statement on Form S-1
(Reg. No. 333-8307) dated as of October 1996, which
exhibit is incorporated herein by reference.
10.6** -- Kitty Hawk, Inc. Amended and Restated Employee Stock
Purchase Plan, dated as of September 3, 1996, filed as an
exhibit to the Registrant's Registration Statement on
Form S-1 (Reg. No. 333-8307) dated as of October 1996,
which exhibit is incorporated herein by reference.
10.7** -- Kitty Hawk, Inc. Amended and Restated Annual Incentive
Compensation Plan, dated as of September 3, 1996, filed
as an exhibit to the Registrant's Registration Statement
on Form S-1 (Reg. No. 333-8307) dated as of October 1996,
which exhibit is incorporated herein by reference.
10.8** -- Kitty Hawk, Inc. 401(k) Savings Plan, filed as an exhibit
to the Registrant's Registration Statement on Form S-1
(Reg. No. 33-85698) dated as of December 1994, which
exhibit is incorporated herein by reference.
10.9** -- Employment Agreement dated as of October 27, 1994 by and
between the Company and M. Tom Christopher, filed as an
exhibit to the Registrant's Registration Statement on
Form S-1 (Reg. No. 33-85698) dated as of December 1994,
which exhibit is incorporated herein by reference.
10.10** -- Amended and Restated Employment Agreement dated as of
June 12, 1996 by and between the Company and Richard R.
Wadsworth, filed as an exhibit to the Registrant's
Registration Statement on Form S-1 (Reg. No. 333-8307)
dated as of October 1996, which exhibit is incorporated
herein by reference.
10.11** -- Amended and Restated Employment Agreement dated as of
December 31, 1995 by and between the Company and Tilmon
J. Reeves, filed as an exhibit to the Registrant's
Registration Statement on Form S-1 (Reg. No. 333-8307)
dated as of October 1996, which exhibit is incorporated
herein by reference.
</TABLE>
<PAGE> 65

<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
10.12 -- Purchase Agreement between Federal Express Corporation
and Postal Air, Inc. (predecessor to the Company) dated
as of October 22, 1992 (the "FEASI Agreement"), filed as
an exhibit to the Registrant's Registration Statement on
Form S-1 (Reg. No. 333-8307) dated as of October 1996,
which exhibit is incorporated herein by reference.
10.13 -- Amendment No. 1 dated November 17, 1992 to the FEASI
Agreement, filed as an exhibit to the Registrant's
Registration Statement on Form S-1 (Reg. No. 333-8307)
dated as of October 1996, which exhibit is incorporated
herein by reference.
10.14 -- Amendment No. 2 dated February 1993 to the FEASI
Agreement, filed as an exhibit to the Registrant's
Registration Statement on Form S-1 (Reg. No. 333-8307)
dated as of October 1996, which exhibit is incorporated
herein by reference.
10.15 -- Amendment No. 3 dated June 11, 1993 to the FEASI
Agreement, filed as an exhibit to the Registrant's
Registration Statement on Form S-1 (Reg. No. 333-8307)
dated as of October 1996, which exhibit is incorporated
herein by reference.
10.16 -- Amendment No. 4 dated May 10, 1994 to the FEASI
Agreement, filed as an exhibit to the Registrant's
Registration Statement on Form S-1 (Reg. No. 333-8307)
dated as of October 1996, which exhibit is incorporated
herein by reference.
10.17 -- Amendment No. 5 dated September 29, 1995 to the FEASI
Agreement, filed as an exhibit to the Registrant's
Registration Statement on Form S-1 (Reg. No. 333-8307)
dated as of October 1996, which exhibit is incorporated
herein by reference.
10.18 -- Amendment No. 6 dated December 6, 1996 to the FEASI
Agreement, filed as an exhibit to the Company's Form 10-Q
for the quarter ended November 30, 1996, which exhibit is
incorporated herein by reference.
10.19 -- Second Amended and Restated Credit Agreement, dated as of
November 19, 1997, by and among the Company (as borrower)
and Wells Fargo Bank (Texas), National Association (as
agent), filed as an exhibit to the Registrant's
Registration Statement on Form S-4 (Reg. No. 333-43645),
which exhibit is herein incorporated by reference.
10.20 -- Agreement, dated July 20, 1995, between American
International Airways, Inc. and the Pilots, Co-Pilots and
Flight Engineers in the service of American International
Airways, Inc., as represented by The International
Brotherhood of Teamsters -- Airline Division, filed as an
exhibit to the Registrant's Registration Statement on
Form S-1 (Reg. No. 333-36125), which exhibit is herein
incorporated by reference.
10.21** -- Employment Agreement by and between Conrad A. Kalitta and
AIA, filed as an exhibit to the Registrant's Registration
Statement on Form S-1 (Reg. No. 333-36125), which exhibit
is herein incorporated by reference.
10.22** -- Amended and Restated Consulting Agreement by and between
Conrad A. Kalitta and AIA, filed as an exhibit to the
Registrant's Registration Statement on Form S-1 (Reg. No.
333-36125), which exhibit is herein incorporated by
reference.
10.23 -- License Agreement (the "License Agreement"), dated May
15, 1995, by and between Roadway Global Air, Inc. ("RGA")
and American International Freight ("AIF"), a division of
AIA, filed as an exhibit to the Registrant's Registration
Statement on Form S-1 (Reg. No. 333-36125), which exhibit
is herein incorporated by reference.
</TABLE>
<PAGE> 66

<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
10.24 -- Amendment to License Agreement, dated August 14, 1997, by
and between RGA and AIF, filed as an exhibit to the
Registrant's Registration Statement on Form S-1 (Reg. No.
333-36125), which exhibit is herein incorporated by
reference.
10.25 -- Escrow and Security Agreement, dated November 19, 1997,
between the Company and Bank One, N.A. as Trustee and
Collateral Trustee placing the Pledged Securities into
escrow, filed as an exhibit to the Registrant's
Registration Statement on Form S-4 (Reg. No. 333-43645),
which exhibit is herein incorporated by reference.
12.1* -- Statement of computation of ratio of earnings to fixed
charges.
21.1 -- Subsidiaries of the Registrant, filed as an exhibit to
the Registrant's Registration Statement on Form S-4 (Reg.
No. 333-43645), which exhibit is herein incorporated by
reference.
23.1* -- Consent of Ernst & Young LLP.
25.1 -- Statement of Eligibility and Qualification (Form T-1)
under the Trust Indenture Act of 1939 of Bank One, N.A.,
filed as an exhibit to the Registrant's Registration
Statement on Form S-4 (Reg. No. 333-43645), which exhibit
is herein incorporated by reference.
27.1* -- Financial Data Schedule.
</TABLE>

- ---------------

* Filed herewith.

** This exhibit is a management contract or compensatory plan or arrangement.

<PAGE> 1
EXHIBIT 12.1
KITTY HAWK, INC.

CALCULATION OF RATIO OF EARNINGS TO FIXED CHARGES
($ IN THOUSANDS)

<TABLE>
<CAPTION>
FISCAL YEAR YEAR FOUR MONTHS
ENDED ENDED ENDED
AUGUST 31, DECEMBER 31, DECEMBER 31,
---------------- ------------ ----------------
1995 1996 1997 1995 1996
------ ------ ------------ ------ ------
<S> <C> <C> <C> <C> <C>
Earnings
Income before income taxes... $7,559 $6,877 $30,803 $7,851 $8,660
Add: Fixed charges........... 1,289 1,998 8,971 528 730
------ ------ ------- ------ ------
Total.................. $8,848 $8,875 $39,774 $8,379 $9,390
====== ====== ======= ====== ======
Fixed charges
Interest expense............. $1,185 $1,859 $ 7,495 $ 482 $ 684
Add: Interest factor of
operating lease expense.... 104 139 1,476 46 46
------ ------ ------- ------ ------
Total.................. $1,289 $1,998 $ 8,971 $ 528 $ 730
====== ====== ======= ====== ======
Ratio of earnings to fixed
charges...................... 6.9x 4.4x 4.4x 15.9x 12.9x
====== ====== ======= ====== ======
</TABLE>

<PAGE> 1
Exhibit 23.1

CONSENT OF INDEPENDENT AUDITORS

We consent to the incorporation by reference in the Registration Statement (Form
S-8 No. 333-15667) pertaining to the Kitty Hawk, Inc. Amended and Restated
Annual Incentive Compensation Plan, in the Registration Statement (Form S-8 No.
333-23597) pertaining to the Kitty Hawk, Inc. Amended and Restated Omnibus
Securities Plan and in the Registration Statement (Form S-8 No. 333-28553)
pertaining to the Kitty Hawk, Inc. Amended and Restated Employee Stock Purchase
Plan of our report dated March 4, 1998, with respect to the consolidated
financial statements of Kitty Hawk, Inc. included in this Annual Report on Form
10-K for the year ended December 31, 1997.

/s/ ERNST & YOUNG LLP

Dallas, Texas
March 27, 1998

<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF KITTY HAWK, INC. FOR THE YEAR ENDED
DECEMBER 31,1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH ANNUAL
REPORT ON FORM 10-K.
</LEGEND>

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-1-1997
<PERIOD-END> DEC-31-1997
<CASH> 17,906,714
<SECURITIES> 0
<RECEIVABLES> 122,190,906
<ALLOWANCES> 0
<INVENTORY> 37,158,207
<CURRENT-ASSETS> 277,279,136
<PP&E> 575,606,047
<DEPRECIATION> 30,109,425
<TOTAL-ASSETS> 836,745,926
<CURRENT-LIABILITIES> 166,308,499
<BONDS> 392,248,252
0
0
<COMMON> 167,510
<OTHER-SE> 174,705,901
<TOTAL-LIABILITY-AND-EQUITY> 836,745,926
<SALES> 249,842,500
<TOTAL-REVENUES> 249,842,500
<CGS> 195,690,910
<TOTAL-COSTS> 195,690,910
<OTHER-EXPENSES> 2,428,934
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,923,998
<INCOME-PRETAX> 30,305,520
<INCOME-TAX> 12,415,802
<INCOME-CONTINUING> 17,889,718
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 17,889,718
<EPS-PRIMARY> 1.60
<EPS-DILUTED> 1.60

</TABLE>