Skymall Inc – ‘10-K’ for 12/31/96

As of:  Monday, 3/31/97   ·   For:  12/31/96   ·   Accession #:  1029737-97-131   ·   File #:  0-21657

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Annual Report   —   Form 10-K
Filing Table of Contents

Document/Exhibit                   Description                      Pages   Size 

 1: 10-K        Annual Report for Skymall, Inc.                       42    240K 
 2: EX-11       Computation of Income (Loss) Per Share                 2±     7K 
 3: EX-27       Financial Data Schedule                                1      6K 

10-K   —   Annual Report for Skymall, Inc.
Document Table of Contents

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 ---------------------

 FORM 10-K

(MARK ONE)                                                                      

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

For the fiscal year ended  DECEMBER 31, 1996                                    

OR

   [ ]  TRANSITION  REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
AND EXCHANGE ACT OF 1934                                    

For the transition period from ________________ to __________________           

Commission File Number 000-21657

 SKYMALL, INC.
(Exact name of Registrant as specified in its charter)

      Nevada                                                86-0651100
      ------                                                ----------
(State or other jurisdiction of                              (I.R.S. Employer   
 incorporation or organization)                              Identification No.)

 1520 East Pima Street, Phoenix, Arizona 85034
 ---------------------------------------------
(Address of principal executive offices) (Zip Code) 

Registrant's telephone number, including area code  (602) 254-9777              
                                     -----------------

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

                                                  Name of each exchange on which
Title of each class                               registered
     ------------------------------               ------------------------------

None                                            
     ------------------------------               ------------------------------

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

Common Stock, .001 par value
----------------------------
(Title of class)

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           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. [ ]                                                

           On March 17, 1997, the aggregate market value of Common Stock held by
non-affiliates  of the Registrant was approximately  $26,238,098.  The aggregate
market  value was based on the closing  price of Common Stock as reported by the
Nasdaq National Market.                                                         

 APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:

           Indicate by check mark whether the registrant has filed all documents
and reports  required  to be filed by Section 12, 13 or 15(d) of the  Securities
Exchange Act of 1934 subsequent to the  distribution of securities  under a plan
confirmed by a court. Yes [ ] No [ ]                                            

APPLICABLE ONLY TO CORPORATE REGISTRANTS

           Indicate the number of shares outstanding of each of the Registrant's
classes of common stock, as of the latest practicable date.                     

           At March 17, 1997,  the number of shares of Common Stock  outstanding
was 8,654,000.                                                                  

 DOCUMENTS INCORPORATED BY REFERENCE

         The  Registrant's  Information  Statement  for its  Annual  Meeting  of
Shareholders,  to be held on May 15,  1997,  which  will be  filed  pursuant  to
regulation 14C within 120 days of the close of the Registrant's  fiscal year, is
incorporated by reference in answer to Part III of this report,  but only to the
extent indicated therein.                                                       

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 TABLE OF CONTENTS

                                                                          Page
                                                                          ----
PART I                                                                          
       Item 1.  Business................................................   1
       Item 2.  Properties..............................................  10
       Item 3.  Legal Proceedings.......................................  11
       Item 4.  Submission of Matters to a Vote of Security Holders.....  11

PART II                                                                         
Item 5.  Market for the Registrant's Common Stock and Related 
                     Stockholder Matters................................  11
       Item 6.  Selected Financial Data.................................  11
Item 7.  Management's Discussion and Analysis of Financial    
                     Condition and Results of Operations................  12
       Item 8.  Financial Statements and Supplementary Data............. F-1
Item 9.  Changes in and Disagreements with Accountants on     
                Accounting and Financial Disclosure.....................  37

PART III                                                                        
       Item 10. Directors and Executive Officers of the Registrant......  37
       Item 11. Executive Compensation..................................  37
Item 12. Security Ownership of Certain Beneficial Owners      
                     and Management.....................................  37
       Item 13. Certain Relationships and Related Transactions..........  37

PART IV                                                                         
Item 14. Exhibits, Financial Statement                        
                Schedules and Reports on Form 8-K.......................  37

SIGNATURES................................................................ S-1  

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ITEM 1.   BUSINESS                                                              

GENERAL                                                                         

        SkyMall is the largest  in-flight  catalog  company in the United States
that makes  high-quality  products  and  services  available  to more than 375.0
million  airline  passengers  per year.  The  Company  markets and sells a broad
selection of premium merchandise provided by participating merchants,  including
major  catalog  companies  and specialty  retailers,  such as Disney,  Hammacher
Schlemmer and The Sharper Image. The merchandise of each participating  merchant
is presented in a separate section of the SkyMall catalog to allow browsing from
"store to store,"  providing the convenience and variety of an upscale  shopping
mall  environment.  Substantially  all of the merchandise sold by the Company is
shipped  directly  to  customers  by  participating  merchants,   thus  avoiding
significant  inventory  risk. The Company has exclusive  agreements to place its
catalogs in aircraft seat pockets on 15 airlines,  which  carried  approximately
70% of all domestic  passengers in 1996,  including  America West,  Continental,
Delta, Southwest,  TWA, United and US Airways. As a result, the Company believes
that the  SkyMall  catalog is  available  to over 1.0 million  domestic  airline
passengers  each day.  SkyMall  has  experienced  substantial  growth  since the
Company  began   operations  in  1990.   Total   revenues  have  increased  from
approximately  $5.4  million in fiscal 1991 to  approximately  $43.7  million in
fiscal 1996, for a compound annual growth rate of 52%. The Company's revenue per
passenger enplanement on flights carrying the SkyMall catalog has increased from
approximately $0.038 in 1991 to approximately $0.093 for the year ended December
31, 1996, for a compound annual growth rate of 20%.                             

        BUSINESS   STRATEGY.   The   Company's   foundation   is  built  on  its
relationships with its customers,  airline partners and participating merchants.
The Company's  customers  enjoy the convenience of being able to shop for a wide
variety of innovative products while traveling.  The Company offers a fair price
guarantee  under  which the  Company  will  refund the price  difference  if the
customer finds the same item advertised  elsewhere at a lower price. In order to
enhance the ongoing appeal of its product  offerings,  the Company produces four
new  catalogs  per year.  The Company  maintains a toll free  24-hour  telephone
ordering  service (from air and ground phones) and an in-house staff of customer
service representatives who are trained to provide exemplary service in order to
build  strong  customer  loyalty and  increase  revenue from repeat and referral
business.                                                                       

        In exchange for placement of its catalogs in aircraft seat pockets,  the
Company pays each airline partner a monthly  commission based on net merchandise
revenues generated by the Company from sales to that airline's passengers.  Some
of the Company's  airline  agreements  also require  payment of minimum  monthly
fees. The Company's  airline partners  benefit from additional  revenue and from
being able to enhance the in-flight  experience of their passengers by providing
the Company's catalog as an additional amenity.                                 

        Participating  merchants obtain exposure for their products and services
to a demographically  diverse group of potential  customers with strong economic
profiles, generate additional revenues and acquire new customers to add to their
own proprietary mailing lists. Under contracts with participating merchants, the
Company  earns  percentages  of  revenues  generated  by  the  Company's  sales,
placement fees for inclusion of the merchants'  products in the SkyMall catalog,
or a  combination  thereof.  The  SkyMall  catalog  typically  features 40 to 60
participating  merchants.  Participating  merchants  recently  featured  in  the
SkyMall  catalog  are:  Brookstone(R),  Compaq  Computer,  The  Disney  Catalog,
Frontgate(R),   Hammacher  Schlemmer,   Hello  Direct(R),   Johnston  &  Murphy,
Mattel(R),   The  Metropolitan  Museum  of  Art,  Norm  Thompson   Solutions(R),
Pepperidge  Farm(R),  The  Safety  Zone,  SelfCare(R),   The  Sharper  Image(R),
Successories(R), SyberVision(R), Thomas Cook and The Wine Enthusiast(R).        

        GROWTH  STRATEGY.  The Company's  growth  strategies are to increase its
revenue per passenger  enplanement  and to increase  circulation  of the SkyMall
catalog.  The Company  plans to increase its revenue per  passenger  enplanement
through  innovative  marketing  programs,   some  of  which  are  modeled  after
successful   "duty-free"  in-flight  sales  programs  offered  on  international
flights.  The Company also plans to expand its  distribution  to  travelers  and
other potential  customers by securing  agreements  from additional  airlines to
carry the Company's catalogs, including both domestic and foreign airlines.     

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        The Company also plans to  implement  additional  distribution  channels
outside of its airline  franchise,  including  direct  marketing  "mail-to-home"
programs,  magazine inserts and catalog  placement in hotels,  railways,  rental
cars and other locations where travelers may be reached.  SkyMall recently began
test marketing the SkyMall concept with its first foreign  airline,  Japan-based
JAL. In addition,  in 1994,  Amtrak  began  carrying  the  Company's  catalog on
selected routes. The Company is currently employing advanced database management
techniques to utilize its rapidly growing customer  database of over one million
names for the development of direct targeted  marketing programs and to generate
additional revenues from database list rentals.                                 

MARKET OVERVIEW                                                                 

        A broad spectrum of companies market their goods and services to airline
passengers.  Fifty five percent (55%) of people with household incomes in excess
of $40,000  per year fly at least once each year,  while only 23% of people with
household incomes of $40,000 or less travel on airlines.  A significant  portion
of  in-flight  marketing  consists  of  "direct-response"  marketing,  where the
merchant seeks to entice the passenger to take  immediate  action in response to
viewing the  advertisement or marketing  materials,  such as placing a telephone
call to obtain the goods or services offered.  By contrast,  "image"  marketing,
which is also conducted  in-flight,  seeks to build brand awareness and foster a
favorable image of products or services and the company offering them.  Although
the primary  goal of the  SkyMall  catalog is to elicit a  direct-response  from
passengers,  merchants that offer goods and services in the SkyMall catalog also
build their brand awareness and image.                                          

        Although  many  products and services  are offered to  passengers  while
in-flight  through a number  of  media,  the  SkyMall  catalog  is unique in the
airline  marketing  industry  because it is the only  publication  available  to
passengers on major  domestic  airlines that is  exclusively  devoted to catalog
shopping.   Most  airlines  provide  their  passengers  with   airline-sponsored
"in-flight"  magazines,  which are placed in airline seat pockets along with the
SkyMall  catalog,  as well  as  other  magazines  and  periodicals.  Many of the
in-flight  magazines contain pages devoted exclusively to marketing products and
services.  None of these  in-flight  magazines,  however,  is devoted  solely to
shopping.                                                                       

        Video marketing is also conducted while  passengers are in-flight in the
form  of  video  promotions  played  on  monitors  located  at the  front  of or
interspersed  throughout passenger cabins and on seatback video displays.  Video
marketing on the monitors frequently  consists of various in-flight  programming
that is prepared by the airline and  sponsored by companies  that are  targeting
the  favorable  economic  profiles  of  airline  passengers.  Much of the  video
advertising included in this programming  consists of image marketing;  however,
some airlines,  particularly  on longer  flights,  make video shopping  services
available to their passengers  while in-flight.  Seatback video screens that are
available  to  passengers  on  certain   airlines  offer  movies,   information,
entertainment  and  in-flight  shopping.  The Company  believes that the current
quality of most  seatback  video  screens does not make them the most  effective
method of marketing products and services;  however,  as the quality of seatback
video screens  improves,  more shopping  services will likely become  available.
During 1996,  pursuant to various  nonexclusive  agreements  with certain of its
airline  partners,  the Company  offered video  shopping  services on both video
monitors  and  seatback  video  displays on  selected  flights.  Although  video
shopping  has not  historically  been a  significant  source of revenue  for the
Company, the Company plans to take advantage of new opportunities in this market
when  appropriate,  including  opportunities  resulting from enhancements in the
quality of video monitors and systems. See "-- Growth Strategy."                

        On many  international  flights,  airlines  offer  passengers  duty-free
products  while  in-flight  through  their  flight  attendants  who  deliver the
merchandise  to passengers at the time of purchase.  Because  airlines carry the
merchandise  on  the  plane,  the  product   selections  are  somewhat  limited,
consisting principally of spirits, tobacco, perfume and gift items.             

        Of the various media  employed by merchants to market goods and services
to airline  passengers,  the Company  believes that the SkyMall catalog is among
the most effective, due in part to the increasing popularity of catalog shopping
in  general.  Over the past 15  years,  consumers  have  increasingly  relied on
catalogs and direct mail to purchase goods and services. According to the Direct
Marketing  Association,  43.8% of the  adult  population  in the  United  States
ordered merchandise from catalogs in 1996 generating approximately $46.0 billion
in consumer  catalog sales.  If current trends  continue,  the Company  believes
in-flight   catalog   shopping  will  gain  increasing   acceptance  by  airline
passengers,  particularly  those who appreciate the  time-saving  convenience of
catalog shopping.                                                               

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CUSTOMER RELATIONSHIPS                                                          

        The Company's primary target customers are frequent  business  travelers
with   medium-to-high   incomes.   The  Company's   targeted   customer   spends
approximately $1,200 annually for merchandise while traveling.  According to the
Company's  market  research,  passengers who shop from the SkyMall catalog while
traveling do so because  they have limited time to shop and the SkyMall  catalog
offers a convenient  alternative to shopping in retail stores. In addition,  the
Company's   research  indicates  that  many  customer  purchases  are  "impulse"
purchases,  as well as purchases  for gifts.  The key elements of the  Company's
strategy to cater to the needs of its targeted customers are:                   

          OFFER PREMIUM MERCHANDISE. The Company offers high-quality merchandise
          from leading catalog and retail suppliers at competitive  prices.  The
          Company  maintains  close  working  relationships  with  participating
          merchants and carefully  studies the buying  patterns of its customers
          to ensure that catalog  space is devoted to products and services that
          have proven appeal to the Company's customers. In order to enhance the
          ongoing appeal of its product offerings, the Company produces four new
catalogs per year.                                          

          OFFER COMPETITIVE  PRICING AND A FAIR PRICE GUARANTEE.  SkyMall offers
          its customers the convenience of in-flight shopping at prices that are
          competitive  with  those of  merchants  offering  the same or  similar
          products.  To emphasize  its  competitive  pricing  strategy,  SkyMall
          offers its  customers a fair price  guarantee  under which the Company
          will refund the price difference to the customer if the customer finds
the same item advertised elsewhere at a lower price.        

          APPEAL TO A BROAD CONSUMER BASE. Airline travelers represent a diverse
          cross-section of the public.  Accordingly,  the Company's catalogs are
          designed to have a much broader appeal than most catalogs. The Company
          offers a wide variety of products,  including  health and beauty aids,
          children's toys, executive gifts,  educational foreign language tapes,
          gourmet cooking aids,  exercise  equipment,  luggage,  travel aids and
          stylish home  accessories.  Many of the Company's  products are luxury
          items, which are particularly  well-suited to the diverse demographics
          of airline passengers who have higher than average disposable incomes.

          PROVIDE CUSTOMERS WITH A CONVENIENT ONE-STOP SHOPPING SERVICE. SkyMall
          is a  "one-stop"  shopping  source for  customers  who may  purchase a
          variety of merchandise offered by many participating  merchants with a
          single phone call.  Although  most of the  merchandise  offered in the
          SkyMall catalog is available from other catalog and retail  companies,
          each of these companies typically has its own policies with respect to
          shipping and handling charges,  merchandise  returns,  sales taxes and
          price  guarantees,  and each  company  generally  also  has  different
          customer service hours and credit and payment  policies.  In addition,
          few of these companies  offer frequent flier credit for purchases.  By
          compiling the merchandise of its various participating  merchants into
          a single  catalog,  the Company  affords its customers  access to more
          than 1,000 products  offered by  approximately  40 to 60 participating
       merchants and the convenience of uniform customer service policies.

          PROVIDE  OUTSTANDING  CUSTOMER  SERVICE AND  TOLL-FREE  ORDERING.  The
          Company    maintains   an   in-house   staff   of   customer   service
          representatives who are trained to solve customer problems and who are
          friendly  and  helpful  with  customers  and  knowledgeable  about the
          products  sold  by  the  Company.   The  Company's   customer  service
          representatives  encourage  customers to purchase  additional products
          with each order to increase the Company's  average  revenue per order.
          The Company  believes  that the  customer  goodwill  developed  by its
          customer  service  representatives  builds strong customer loyalty and
          increases revenue from repeat and referral business.  The Company also
          offers  services  designed to maximize  convenience  to the  traveler,
          including 24-hour telephone and facsimile ordering, toll-free ordering
          from airline seat phones and a 60-day "no  questions  asked" return or
exchange policy.                                            

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AIRLINE RELATIONSHIPS                                                           

           SkyMall has exclusive relationships with its airline partners,  which
are a vital component of the Company's  business  strategy.  The SkyMall program
offers  airlines a low-risk means of  incrementally  increasing  their earnings.
Since commencing operations in 1991, the Company has grown from a single airline
partner to 15 airline partners,  including most of the major domestic  airlines.
In exchange for placement of its catalogs in aircraft seat pockets,  the Company
pays each airline partner a monthly commission based on net merchandise revenues
generated  by  the  Company  from  sales  to  that  airline's  passengers.  Some
agreements also require  payment of a minimum  monthly  commission or a boarding
cost that  reimburses the airline for the increased fuel costs  attributable  to
the weight of the catalogs.  For fiscal 1996,  minimum  monthly  commissions and
boarding  costs  paid by the  Company  to its  airline  partners  totalled  $2.5
million.  In addition to increasing  airline  earnings,  the  Company's  airline
partners  also benefit from being able to enhance the  in-flight  experience  of
their  passengers by providing the Company's  catalog as an additional  amenity.
SkyMall's agreements with its airline partners generally have a term of at least
one year and thereafter are  automatically  renewable on an annual basis subject
to  termination  on 60 to 180 days'  advance  notice by  either  SkyMall  or the
airline.  SkyMall  believes its relations with each of its airline  partners are
good.                                                                           

           The  SkyMall  catalog  is  currently  available  or will soon  become
available on all domestic and selected  international  flights of the  following
air carriers:                                                                   

     1996 DOMESTIC
                         ENPLANEMENTS              INITIAL
      CARRIERS(1)          (IN MILLIONS)(2)           CATALOG(3)
      -----------          ----------------           ----------
  Delta                        91.2                  July 1991
  United                       71.1                  June 1992
  US Airways                   55.4                  July 1991
  Southwest                    55.4                  July 1996
  Continental                  32.3                 April 1991
  TWA                          21.5                   Feb 1991
  America West                 17.8                   Feb 1994
  Alaska                       11.8                  July 1991
  Reno Air                      4.9                 April 1997
  Horizon                       3.8                  July 1991
  Atlantic Southeast            3.6                  July 1991
  SkyWest                       2.7                  July 1991
  Sun Country                   2.3                   Jan 1995
  Midway                        1.8                  June 1994
  Frontier                      1.3                  Sept 1995
   -----
Total            376.9              
   =====
----------                                                                      

(1) The Company's catalog carries the SkyMall name on all participating airlines
except (a) United,  where the  Company's  catalog  carries the name "High Street
Emporium" and (b) US Airways,  where the Company's  catalog begins  carrying the
name "Selections" effective April 1, 1997.                                      

(2) Source:  United States Department of Transportation.                        

(3) The Company's catalog has been available on these airlines continuously from
the date that the  initial  catalog  was  placed on the  airline,  except for US
Airways which suspended carrying the SkyMall catalog on July 1, 1996 but resumed
carrying the SkyMall catalog effective November 1, 1996.                        

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        The following  airline  partners each  accounted for in excess of 10% of
the Company's net merchandise sales for fiscal 1996:                            

                                  % OF NET MERCHANDISE SALES
         NAME OF AIRLINE           THROUGH DECEMBER 31, 1996
         ---------------           -------------------------
 United                          28%
 Delta                           25%
 Continental                     16%
 US Airways                      10%
                                 ---
            Total                79%
                                 ===
MERCHANT RELATIONSHIPS                                                          

        MERCHANT  AGREEMENTS.  The Company enters into agreements with merchants
who supply the products and services offered in the Company's catalog. Under its
contracts  with  participating  merchants,  the  Company  earns  percentages  of
revenues generated by the Company's sales or placement fees for inclusion of the
merchants'  products  in  the  SkyMall  catalog  or a  combination  thereof.  In
addition, most participating merchants are required to reimburse the Company for
certain paper, printing and distribution costs to the extent they exceed certain
budgeted amounts. Participating merchants agree to maintain sufficient levels of
inventory  to satisfy  customer  demand  and to ship all orders  within 72 hours
unless the merchandise is out of stock. Generally, the Company's agreements with
participating  merchants  provide  that the prices of  products  included in the
SkyMall catalog will be honored by the merchant for as long as SkyMall  receives
orders  from that  edition of the  catalog.  The  agreements  typically  have an
initial  term   consisting  of  a  single   quarterly   catalog  and  thereafter
automatically renew for successive catalog editions unless either the Company or
the  merchant  gives 60 days'  advance  notice  of  termination.  The  merchants
typically agree to indemnify the Company for any losses associated with injuries
caused to customers from the use of such  merchant's  product,  to carry product
liability  insurance  that  names  SkyMall  as an  additional  insured,  and  to
indemnify  the  Company  against  claims  that their  products  infringe  on the
intellectual property rights of third parties.                                  

        NAME BRAND STORES IN THE SKYMALL CATALOG.  SkyMall's  catalogs  assemble
premium,  name  brand  merchandise  and are  formatted  to allow  the  traveling
customer to browse from "store-to-store,"  providing the convenience and variety
of an upscale  shopping  mall  environment.  Its largest  "stores" are generally
well-known  catalog and retail  companies that have chosen to participate in the
SkyMall program in order to generate additional revenue,  build name recognition
and brand  awareness and acquire new  customers to add to their own  proprietary
mailing lists. The major catalog and retail companies  currently featured in the
SkyMall catalog or those who have participated in recent editions of the catalog
include:                                                                        

NAME BRAND STORES IN THE SKYMALL CATALOG

 British Links                                Norm Thompson Solutions(R)
Brookstone(R)                                Orvis(R)                 
Calyx & Corrolla                             Official Airline Guide   
  Chef's Catalog(R)                            Paul Frederick MenStyle(TM)
Compaq Computer                              Pepperidge Farm(R)       
Competitive Edge Golf(R)                     SelfCare(R)              
Frontgate(R)                                 Successories(R)          
Hammacher Schlemmer                          Syber Vision(R)          
Health Rider(R)                              The Cigar Enthusiast     
Hello Direct(R)                              The Disney Catalog       
     Huntington Clothiers(R)                      The Metropolitan Museum of Art
Johnston & Murphy                            The Safety Zone          
Mattel(R)                                    The Sharper Image(R)     
Neiman Marcus' Trifles                       The Wine Enthusiast(R)   
Nightingale Conant                           Thomas Cook              

        MERCHANDISE   SELECTION.   The  Company   responds  to  inquiries   from
approximately 50 merchants each week who inquire about showcasing their products
or services in the SkyMall catalog. As a result, the Company has been able to   

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identify  and  offer  to its  customers  the  unique  products  they  desire  at
competitive  prices.  Products are  selected  for each catalog by the  Company's
merchandising staff with the help of each of the major participating  merchants.
Approximately  one-third  of the  products  in each new  edition of the  SkyMall
catalog have not been previously featured in the SkyMall catalog.               

        PRODUCTS OFFERED.  The Company typically offers more than 1,000 products
in each of its catalogs,  which consist of approximately  150 pages. In order to
enhance the ongoing appeal of its product  offerings,  the Company produces four
new catalogs per year and regularly  replaces the products in its catalogs.  The
Company  seeks out new and unique  items that may not be  available  in ordinary
retail  stores,  with an emphasis on upscale  merchandise  selling for $29.95 or
more. During fiscal 1996, the Company's more popular product categories included
household items,  electronics,  personal care items, clothing,  multimedia items
and telephones.                                                                 

GROWTH STRATEGY                                                                 

        INCREASE  REVENUE PER  PASSENGER.  One of the Company's  primary  growth
strategies is to increase its revenue per passenger  enplanement.  The Company's
revenue per passenger  enplanement on flights  carrying the SkyMall  catalog has
increased  from  $0.038  in 1991 to  approximately  $0.093  for the  year  ended
December 31, 1996, for a compound annual growth rate of 20%.To increase  revenue
per passenger  enplanement,  the Company  recently has  implemented  or plans to
implement the following programs:                                               

          MARKETING AND PROMOTIONAL PROGRAMS.  The Company has developed several
          innovative marketing and promotional  programs,  some of which will be
          facilitated through the unique  relationships  between the Company and
          its  airline  partners.  Some of  these  programs  are  modeled  after
          successful   "duty-free"   in-flight   sales   programs   offered   on
          international  flights.  Although  the Company  does not plan to offer
          duty-free  merchandise  to  airline  passengers,  it  believes  it can
          emulate  several of the  marketing  aspects of  duty-free  shopping to
          increase  sales of  merchandise  offered in the SkyMall  catalog.  The
          Company  believes that duty-free  merchandising is successful for many
          reasons,  including:  (i)  there  is a  high  level  of  awareness  of
          duty-free  shopping  among  airline  passengers,  (ii)  customers  who
          purchase  duty-free  merchandise  perceive  they are  purchasing  such
          merchandise at a discount,  (iii) the duty-free merchandise is offered
          to passengers  only while the plane is in flight and  passengers  must
          therefore  purchase  merchandise  while in flight to take advantage of
          the perceived discount, (iv) flight attendants are paid commissions on
          sales of merchandise and (v) duty-free shopping markets an optimal mix
          of  products,   some  of  which  encourage   "impulse   purchases"  by
passengers.                                                 

          Among the plans under  consideration  or recently  implemented  by the
          Company to increase the use of SkyMall  catalogs  are:  (i)  enhancing
          promotion of the Company's  shopping  services through on-board flight
          attendant  announcements supported by videotape and audio programming;
          (ii) awarding  airline  passengers  frequent flier miles for purchases
          and permitting customers to redeem frequent flier miles as payment for
          product purchases;  (iii) mailing inserts in frequent flyer statements
          in order to promote awareness of the Company's  products and services;
          (iv) offering airlines and flight attendants  incentives for promoting
          the  use of the  Company's  catalogs  among  airline  passengers;  (v)
          establishing an in-flight "video shopping channel" and  advertisements
          for the  Company's  products and services on  in-flight  videos;  (vi)
          conducting  in-flight,  gate  and  jetway  promotions,  such  as  gift
          certificates,  discount  certificates and special offers to passengers
          who  order  while  in-flight;  (vii)  making  the  Company's  catalogs
          available in airport gate areas and  lounges;  and (viii)  continually
          upgrading and analyzing the  appropriate mix of products for inclusion
          in the SkyMall catalog to encourage passengers to make purchases.  The
          Company  believes the foregoing  programs  will  increase  revenue per
          passenger  enplanement  and will also  increase  the  awareness of the
          SkyMall  catalog  generally  so that airline  passengers  will be more
          likely to make purchases from the SkyMall catalog.  However, there can
          be no  assurance  that  the  Company  will  be  able  to  successfully
          implement the foregoing  marketing  programs,  including those modeled
          after successful duty-free programs and there can be no assurance that
          the successful implementation of the foregoing programs will result in
   an increase in the Company's revenue per passenger enplanement.

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          VIDEO  SHOPPING AND OTHER NEW  TECHNOLOGIES.  Several  companies  have
          recently  begun  making  interactive  video  systems  available to the
          airline industry that have greater  capabilities  than those currently
          available.  As more  sophisticated  interactive  video systems  become
          available,  the  Company  plans to  explore  opportunities  to provide
          shopping  services  on these  systems and has  developed a  prototype,
          multi-media catalog offering SkyMall products on interactive video. In
          order to become proficient in this new medium, in January of 1996, the
          Company  began  offering  its products and services on the Internet at
http://www.skymall.com.                                     

        INCREASE  CATALOG  CIRCULATION.  To expand its catalog  circulation  and
thereby  increase its customer  base,  the Company has  implemented  or plans to
implement a number of  programs  designed to  increase  the  circulation  of the
SkyMall catalog and reach new customers, including the following:               

          EXPANDING  DOMESTIC  AIRLINE  PARTNERSHIPS.  The Company  will seek to
          expand its catalog  circulation by securing agreements from additional
          domestic airlines to carry the SkyMall catalog. In furtherance of this
          strategy,  the Company  recently  entered into an agreement  with Reno
          Airlines, which has annual passenger enplanements of approximately 5.0
          million,  pursuant  to which Reno  Airlines  will begin  carrying  the
          SkyMall  catalog in April of 1997.  In addition,  the Company plans to
          pursue  opportunities to include a small selection of its products and
          services  in  in-flight  magazine  inserts  to give new  airlines  the
          opportunity  to test the Company's  services and to make the Company's
          products  and  services   available  on  smaller   airlines   where  a
          full-length  catalog  is not  cost  effective.  The  Company  recently
          completed  a test  program  in the  in-flight  magazine  of  Northwest
       Airlines, which is not presently an airline partner of the Company.

          DEVELOPING  INTERNATIONAL AIRLINE  PARTNERSHIPS.  According to the Air
          Transport  Association,  in 1995,  the most  recent  period  for which
          information  is available,  there were over 780 million  international
          airline passenger  enplanements  (excluding the U.S.), including 373.9
          million in Europe,  306.4  million  in Asia and 71.5  million  airline
          passenger  enplanements  in North and  South  America.  Although  some
          duty-free  merchandise  is available  on  international  flights,  the
          Company  believes that this market is substantially  underserved.  The
          Company believes that controlled and carefully  planned expansion into
          the larger  international  markets through  cooperative  ventures with
          potential  foreign partners offers a significant  growth  opportunity.
          The Company is in the process of evaluating  potential foreign markets
          and  developing  catalogs  in  foreign  languages  with  products  and
          services  designed  to appeal  to  targeted  international  travelers.
          Consistent with its growth strategy, SkyMall entered into an agreement
          in August 1996 with its first  foreign  airline,  Japan-based  JAL, to
          test certain  merchandise  from the SkyMall  catalog on a trial basis.
          The  testing  program  on JAL is  continuing  and  results  of various
aspects of the program are currently under evaluation.      

          DIRECT  MARKETING  PROGRAM.  Through its data management  system,  the
          Company  maintains  a  database  of  customer  information,  including
          customer names,  addresses and product purchases.  From this database,
          the Company  obtains  information  about customer  buying patterns and
          preferences.  The Company  strives to develop  customer  loyalty,  and
          repeat  customer  purchases have been an increasing  source of revenue
          for the Company. In 1996, 29% of the Company's customers had placed at
          least one  additional  order with the Company  within the preceding 24
          months.  To  increase  the number of repeat  customer  purchases,  the
          Company  is  in  the  process  of  implementing  a  direct   marketing
          "mail-to-home"  program to its customers,  particularly those who make
          several purchases during the year. Using information from its customer
          database,   the  Company   initiated   its  first   direct   marketing
          "mail-to-home" program in August 1996. The Company plans to expand its
          direct marketing efforts to selected customer groups and to tailor the
          marketing materials to the preferences of those groups as demonstrated
by their prior purchasing history.                          

          EXPANDING INTO OTHER TRAVEL RELATED MARKETS. The Company believes that
          its shopping services will appeal to travelers in locations other than
          airlines,  such as in hotels and rental  cars and while  traveling  by
          rail.  There are over three million hotel rooms in the United  States,
          providing a market that the Company  believes could be larger than its
          current  airline market.  In addition,  rail passengers in both in the
          United  States  and abroad may  present a  significant  market for the
          Company's  services.  In  furtherance  of this  strategy,  the Company
          entered into an agreement with Amtrak in 1994 under which Amtrak began

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          carrying the Company's  catalogs under the TravelMall name on selected
          routes, which serve approximately two million passengers annually. The
          Company is  considering  a program to make its  catalogs  available to
          travel agents to distribute to their customers when delivering  travel
          documents.  The Company is  evaluating  other  opportunities  to reach
          travelers,  and plans to implement additional non-airline based travel
programs when appropriate.                                  

BUSINESS OPERATIONS                                                             

       CUSTOMER SERVICE CENTER; ORDER PROCESSING AND FULFILLMENT.  The Company
maintains a well-trained, in-house staff of customer service representatives and
outsources  "overflow" calls to an independent call center. The Company recently
entered into an agreement with a major hotel chain under which the hotel chain's
call  processing  center  accepts the Company's  overflow  calls during the peak
holiday  ordering  season,  which is  typically  a slower  season  for the hotel
industry.  The Company believes this arrangement resulted in more cost-effective
processing  of its  overflow  calls during the 1996  holiday  peak.  The Company
monitors the quality of its customer  service  operations  closely and regularly
implements improvements in its customer service operations.                     

        The  Company's  customer  service  representatives  are  located  in its
customer service center in Phoenix, Arizona, where the Company accepts orders 24
hours per day. The Company's telephone equipment  distributes calls to the sales
representatives and provides detailed call reporting and analysis, which assists
the  Company  with its order  processing  and  marketing  efforts.  The  Company
maintains  no  significant  inventory.  Therefore,  once the Company  receives a
customer  order,  it is  transmitted to the  appropriate  merchant who ships the
merchandise  directly to the Company's  customers.  Most orders are delivered to
customers  within seven to ten days.  The Company's  average order size was $90,
$96 and $93,  respectively,  per  customer in fiscal  1994,  1995 and 1996.  The
Company's customer service  representatives are given incentives for outstanding
service.  At March 1, 1997,  the Company  employed  approximately  140  customer
service representatives.                                                        

        Over 85% of the  Company's  daily  orders are  received  on  "toll-free"
numbers,  including 5% from  toll-free  seat  phones.  Airline seat phones offer
customers a convenient  way to order goods and services  from the Company  while
in-flight.  Some  airline  passengers  who have  access to seat phones may place
orders  with  the  Company  while  in-flight  by  using a  "speed  dial"  number
programmed  into the seat phone.  When SkyMall began  operations  in 1990,  seat
phones were available to less than 5% of all domestic airline passengers. Today,
the Company estimates that seat phones are available to approximately 86% of all
domestic airline passengers. The Company believes that airlines will continue to
equip their planes with seat phones and that  passengers will be more accustomed
to  using  them as they are made  more  available  and the  quality  of  service
continues to improve.                                                           

        CREDIT SALES.  Of the more than 438,000  customer orders received by the
Company  during fiscal 1996,  approximately  91% of them were billed to customer
credit cards.  The remaining  customers  generally  paid for their  purchases by
personal check. To minimize credit losses, the Company obtains approval from the
customer's credit card company prior to processing each order. In addition, when
the customer  requests that his or her merchandise be shipped to an address that
is different than the customer's billing address, the Company typically verifies
the charge  authorization  directly  with the credit  card  holder at his or her
billing  address.  The  Company  verifies  personal  bank checks  received  from
customers with an independent  service bureau prior to processing the customer's
order. Although the Company's credit losses are generally immaterial,  under its
agreements  with  participating  merchants,  the Company has the right to obtain
reimbursement from the merchants for any reasonable credit losses it incurs.    

        INFORMATION SYSTEMS. The Company maintains an information system that is
used primarily to capture and process  customer  orders.  The Company  typically
receives approximately 2,000 calls per day in off-peak seasons and approximately
6,000  calls  per day  during  the peak of the  holiday  season.  The  Company's
information  system is designed to process  approximately  10,000 calls per day,
and at times  during the holiday  season of 1996 the call center  received  more
than 10,000 calls per day, which strained the Company's call center. The Company
plans to expand the capacity of its call center  during  1997,  including to the
extent feasible  expanding its outsourced call  processing  program,  to satisfy
increasing  customer  demand  during  the year  and at the  peak of the  holiday
season.                                                                         

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        Once the Company processes an order in its information system, the order
is forwarded to a merchant to be filled. Until recently, the Company transmitted
approximately  half of all orders to merchants  electronically  through  various
electronic  data  transmission  systems  maintained  by the  merchants,  and the
remaining orders were sent by facsimile or overnight delivery. In late 1996, the
Company began  implementation of a uniform electronic  transmission  system that
allows the  Company to transmit  customer  orders to  merchants  electronically,
which  the  Company  believes  will  reduce  delivery  times  to  the  Company's
customers.  Under the recently  implemented system,  orders received through the
Company's information system are forwarded to a third party, the LitleNet Direct
Commerce Network(SM) (the "Network"),  for further processing. The Network is in
the  process of  developing  a system  that will  electronically  deliver  order
information  to the  merchants  in a form  that is  compatible  with  each  such
merchant's  information  systems.  In  addition,  the Network  will manage order
information   relationships  and  enable  shipment  confirmation   according  to
individual  merchant  capabilities.  The  Company  contracts  for  access to the
Network  on a per  transaction  basis,  permitting  the  Company  to expand  its
information systems without additional infrastructure  development,  maintenance
and upgrade expense. Currently, approximately 30% of the Company's participating
merchants  receive  orders via the  Network,  with plans to have most  merchants
on-line through the Network by mid-1997.                                        

        CATALOG PRODUCTION AND DISTRIBUTION.  Catalog design and layout for each
section of SkyMall's catalog is generally provided directly by the participating
merchant but must be within  SkyMall's design  guidelines.  After the catalog is
designed,  the Company  submits its catalog to each of its airline  partners for
approval. The cover and some of the pages of the airline catalogs are customized
to  achieve  a look and feel  unique  to that  airline,  although  the  products
featured and the balance of the basic content are common to all of the Company's
catalogs.  After the catalogs are printed, the Company ships the catalogs to its
airline partners who distribute the catalogs to the cities in which they operate
and place the  catalogs on their  aircraft.  Each catalog has a source code that
permits the Company to track  catalog  distribution  and sales  attributable  to
catalogs carried by its airline's partners.                                     

HOUSE FILE                                                                      

        The Company  maintains a customer database or "house file" that contains
a variety of  information  about the more than one  million  customers  who have
purchased  merchandise  or  services  from  the  Company.  In  addition  to  the
customer's  name and address,  the Company's house file also contains a detailed
history  of all  purchases  made  by  SkyMall's  customers  with  SkyMall.  This
information  serves  as  a  useful  tool  for  the  Company  in  evaluating  the
effectiveness  of its marketing  efforts and in identifying  its best customers.
Like  other  catalog  companies,  the  Company  "rents"  its house file to other
catalog,  retail and direct marketing  companies for a fee. By renting its house
file, the Company is able to generate  additional  incremental  revenues without
incurring significant costs. The Company updates its house file on a daily basis
as  orders  are  received,  which  increases  the value of the  house  file.  In
addition, in connection with its growth strategy, the Company plans to implement
a direct marketing "mail-to-home" program to certain targeted customers and will
use its house file as the primary source of  information  for  implementing  the
mail-to-home program.                                                           

        Direct  marketing,  credit  card and other  companies  that  have  large
databases   containing   customer   information   have  begun  sharing  database
information  in order to  obtain  more  detailed  information  about  customers.
Enhancements in computer technology have made storing large amounts of data more
feasible and cost  effective,  and have  permitted  such companies to accumulate
more  information   about  customer  buying  patterns  and   preferences.   This
information  has  become  increasingly  important  to  companies  that  seek  to
cost-effectively  target  customers and improve  customer  response  rates.  The
Company plans to explore opportunities to combine its house files with the files
of other companies when appropriate to improve its direct marketing  efforts and
increase the value of its customer database.                                    

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COMPETITION                                                                     

        IN-FLIGHT   SHOPPING.   SkyMall   believes   that  its   long   standing
relationships  with its airline  partners and  participating  merchants  and its
customer  service  standards  create  substantial  barriers  to  entry  into the
in-flight catalog shopping  business.  Although several companies have attempted
to enter the in-flight  catalog  shopping  market,  none has been  successful in
providing  a  shopping  catalog  to  a  major  domestic  airline.  Nevertheless,
competitors,  some of which  may have  greater  financial,  marketing  and other
resources  than the Company,  may seek to enter the in-flight  catalog  shopping
market in competition with the Company.                                         

        IN-FLIGHT  MARKETING.  The Company  competes  with other  companies  who
market products and services to passengers while in-flight,  including those who
advertise in in-flight  magazines and other  periodicals,  sponsor airline video
and audio  programming  and offer  in-flight  video shopping  services.  Several
companies have announced plans to develop  seatback  interactive  video shopping
services,  each of which has greater  resources  than the  Company.  As seatback
interactive video shopping services become more available to airline passengers,
competition in the in-flight marketing business may increase.                   

        GENERAL  CATALOG AND RETAIL SALES.  The catalog sales and retail markets
are both highly  fragmented  and highly  competitive.  The Company  competes for
customers to some degree with all  retailers  and catalog  companies,  including
airport retailers,  duty-free  retailers,  specialty stores,  department stores,
specialty catalog companies and general merchandise  catalog companies,  many of
which have significantly  greater financial,  marketing and other resources than
the Company.  However,  because many of the Company's  competitors target people
with strong economic  profiles,  a number of the Company's  competitors are also
participants in the SkyMall catalog program.                                    

REGULATION                                                                      

        The Company's operations are subject to various federal, state and local
laws and  regulations,  including state sales tax laws and various Federal Trade
Commission  regulations  governing the sale of  merchandise by mail. The Company
collects  applicable sales taxes from its customers on all merchandise sales and
remits the sales taxes to state taxing authorities. The Federal Trade Commission
regulations  applicable to the Company's  operations impose various requirements
on the  processing  of customer  orders,  including  shipping  deadlines,  delay
notices,  order  cancellations  and  refunds.  The Company  believes  that these
regulations do not have a material impact on its business operations.           

EMPLOYEES                                                                       

        At March 1, 1996, the Company had 180 employees, including 6 employed in
management   positions,   17  in  sales  and   marketing,   17  in   accounting,
administrative and information  management positions and 140 in customer service
capacities.   Approximately  90%  of  the  Company's   employees  are  full-time
employees.  The  Company  makes  significant  use  of  temporary  and  part-time
employees to process orders during the holiday season.  The Company  believes it
has good relations with its employees.                                          

TRADEMARKS AND TRADE NAMES                                                      

        SkyMall  is a  registered  trademark  of the  Company.  The  loss of the
SkyMall  trademark  could  have a material  adverse  effect on the  Company.  In
addition,  the Company uses a number of other  trademarks and trade names in its
business,  none of which  the  Company  believes  are  material  to its  overall
operations.                                                                     

ITEM 2.    PROPERTIES                                                           

        The Company's executive offices are located in Phoenix,  Arizona,  where
the Company  leases  approximately  seven acres of land under  long-term  leases
expiring  in 2012,  with an option to extend to 2062.  Aggregate  annual  rental
expense on this land is approximately $37,000 per year. The improvements to this
land include offices, warehouses, storage facilities and a small retail shopping
center  aggregating  approximately  50,000  square feet,  which are owned by the
Company. In December of 1996, the Company entered into an agreement to sell     

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the small retail shopping center,  which consists of approximately 12,000 square
feet.  The  sale  of  the  shopping  center  is  subject  to  customary  closing
conditions.  In January of 1997,  the Company  refinanced  certain  debt and, in
connection with such  refinancing,  granted to its lender a security interest in
substantially  all of the foregoing  property,  except the small retail shopping
center.  See  "Management's  Discussion and Analysis of Financial  Condition and
Results of Operations - Liquidity."                                             

ITEM 3. LEGAL PROCEEDINGS                                                       

        The  Company  is  not  a  party  to  any  pending  or  threatened  legal
proceedings  that it  believes  will have a  material  impact  on the  Company's
business.                                                                       

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

        On October 11, 1996, prior to the Company's initial public offering, the
shareholders  of the Company  approved the  reincorporation  of the Company from
Arizona to Nevada by unanimous written consent.                                 

 PART II

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

        The Company's Common Stock is traded on the Nasdaq National Market under
the symbol "SKYM".  The high and low sales prices of the Company's  Common Stock
from  December  11, 1996 (the date of the  Company's  initial  public  offering)
through  December 31, 1996 were $9.25 and $8.00,  respectively.  As of March 19,
1997, the Company had 76 record holders of its Common Stock.                    

        The Company  has never paid a dividend on its Common  Stock and does not
anticipate paying dividends on its Common Stock in the foreseeable future. It is
the current policy of the Company's Board of Directors to retain any earnings to
finance  operations  and expand the  Company's  business.  The payment of future
dividends is within the  discretion  of the Board of  Directors  and will depend
upon the Company's future earnings, if any, its capital requirements,  financial
condition and other relevant factors.                                           

ITEM 6. SELECTED FINANCIAL DATA                                                 

SELECTED FINANCIAL AND OPERATING DATA 
(IN THOUSANDS, EXCEPT SHARE, PER SHARE AND OPERATING DATA)

        The selected  financial  data as of and for the years ended December 31,
1992, 1993, 1994, 1995 and 1996 are derived from the Financial Statements of the
Company,  which have been audited by Arthur  Andersen  LLP,  independent  public
accountants,  and should be read in  conjunction  with the Financial  Statements
included  elsewhere  in  this  Form 10-K  and the  related  notes  thereto  and 
"Management's  Discussion  and  Analysis of Financial  Condition  and Results of
Operations."                                                                    

                                                        [Enlarge/Download Table]

                                                                       YEAR ENDED DECEMBER 31,                      
                                           -------------------------------------------------------------------------
                                               1992            1993           1994           1995            1996   
                                           -----------     -----------    -----------    -----------     -----------
                                                                                                                    
STATEMENT OF OPERATIONS DATA:                                                                                       
Merchandise sales, net                     $    15,875     $    24,507    $    22,062    $    26,883     $    30,978
Placement fees and other                           178           2,560          8,241         16,198          12,707
                                           -----------     -----------    -----------     ----------     -----------
Total revenues                                  16,053          27,067         30,303         43,081          43,685
Cost of goods sold                              10,364          13,691         16,266         24,564          24,257
                                           -----------     -----------    -----------     ----------     -----------
Gross margin                                     5,689          13,376         14,037         18,517          19,428
Catalog expenses                                 4,071           6,890          9,644          9,532           7,670
Selling expenses                                 2,116           2,921          2,754          2,229           2,476
Customer service and fulfillment expenses        3,618           4,514          2,919          2,136           2,823
General and administrative expenses              4,784           4,530          5,886          3,112           3,340
Restructure charges                                 --              --          4,332             --              --
                                           -----------     -----------    -----------     ----------     -----------
Total operating expenses                        14,589          18,855         25,535         17,009          16,309

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                                                        [Enlarge/Download Table]

                                                                   YEAR ENDED DECEMBER 31,                         
                                        -------------------------------------------------------------------------- 
                                            1992            1993           1994           1995            1996     
                                        ------------    ------------   ------------   ------------    ------------ 
                                                                                                                   
Interest expense and other income                                                                                  
(expense), net                                  (740)           (287)          (688)          (750)           (651)
                                        ------------    ------------   ------------   ------------    ------------ 
Income (loss) before income taxes             (9,640)         (5,766)       (12,186)           758           2,468 
Income taxes                                      --              --             --             --             280 
                                        ------------    ------------   ------------   ------------    ------------ 
Net income (loss)                             (9,640)         (5,766)       (12,186)           758           2,188 
Preferred stock dividends                         --              --             --             --              77 
                                        ------------    ------------   ------------   ------------    ------------ 
Net income (loss) available for common                                                                             
shares                                  $     (9,640)   $     (5,766)  $    (12,186)  $        758    $      2,111 
                                        ============    ============   ============   ============    ============ 
Net income (loss) per common share      $      (2.04)   $      (1.69)  $      (3.43)  $        .14    $        .38 
Weighted average shares outstanding        4,729,380       3,413,073      3,557,787      5,431,337       5,611,913 

SELECTED OPERATING DATA:                                                                                           
Number of domestic enplanements(1)       436,310,000    448,647,000     481,755,000    498,611,000     530,661,000 
Domestic enplanement percentage(2)                74%            76%             72%            64%             63%
Revenue per passenger enplanement(3)    $      0.049   $      0.072    $      0.064   $      0.084    $      0.093 
Number of airlines at end of period(4)            11             15              21             20              15 
Number of catalogs produced(5)            11,915,000     15,661,000      15,747,000     17,162,000      15,729,000 
Average number of pages per catalog(6)            80            102             133            137             148 
Revenue per catalog produced(7)         $       1.33   $       1.56    $       1.40   $       1.57    $       1.97 

                                                                           DECEMBER 31,                            
                                        -------------------------------------------------------------------------- 
                                             1992          1993            1994           1995             1996    
                                        ------------   ------------   -------------   ------------    ------------ 
BALANCE SHEET DATA:                                                                                                
Cash and cash equivalents, including                                                                               
escrow accounts                         $      1,797   $        171    $        896   $        775    $     11,491 
Working capital (deficit)                     (1,506)        (3,580)         (7,540)        (4,734)          6,692 
Total assets                                   8,757         10,394           5,913          4,726          19,721 
Long-term debt                                    40          2,978           8,082         10,818             139 
Shareholders' equity (deficit)          $      1,941   $     (3,603)   $    (15,791)  $    (15,033)   $      8,601 

----------                                                                      
(1)  Represents  the number of revenue  passengers  flown on scheduled  domestic
airlines in the given period.                                         
(2)  Represents the passenger enplanements on domestic airlines that carried the
     SkyMall  catalog  during  the  period  as a  percentage  of total  domestic
  passenger enplanements in the period by all scheduled domestic airlines.
(3)  Revenue per passenger  enplanement is net merchandise  sales for the period
     divided by the  number of  domestic  enplanements  during the period on all
scheduled domestic airlines that carried the SkyMall catalog.         
(4)  Represents  the number of  airlines at end of period with which the Company
     had an  agreement  to carry the  SkyMall  catalog.  During  the year  ended
     December 31, 1996, the Company eliminated  unprofitable  circulation of the
     SkyMall catalog by eliminating  routes on certain  airlines and terminating
     agreements  with  certain  smaller  regional  airlines.  See  "Management's
    Discussion and Analysis of Financial Condition and Results of Operations."
(5)  Represents the number of catalogs produced by the Company during the period
for distribution to airlines.                                         
(6)  Represents  the average  number of pages in the SkyMall  catalog during the
period.                                                               
(7)  Represents  net  merchandise  sales for the period divided by the number of
catalogs produced by the Company during the period.                   

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

        The Company  commenced  operations in late 1990 with an initial business
strategy  of  establishing  exclusive  relationships  with major  United  States
airlines,  delivering  merchandise  ordered by  passengers  at the airport  upon
landing and offering concierge services.  In 1991, the Company acquired its only
major  competitor,  which resulted in the addition of five new airline  partners
for the Company.  Since its first full year of operations  in 1991,  the Company
has  experienced  rapid  growth.  From 1991 to 1994,  the  Company  devoted  its
resources  to  increasing  revenue  per  passenger   enplanement  and  expanding
circulation  of the SkyMall  catalog.  During this  period,  the Company  gained
market share by acquiring exclusive contracts with airline partners,  developing

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relationships  with  participating  merchants  and gaining  knowledge  about its
consumer  market.  Total  revenue  increased  from $5.4 million in 1991 to $30.3
million in 1994 and revenue per passenger enplanement grew from $0.038 to $0.064
in the same period.                                                             

        In late  1994,  management  focused  its  emphasis  on  translating  the
Company's  growth  into  profitability.  Beginning  in late  1994,  the  Company
implemented  increases in placement fees charged to participating  merchants for
inclusion  of their  merchandise  in the SkyMall  catalog.  As a result of these
increases,  placement  fees and other  revenues  increased  from $2.6 million in
fiscal 1993 to $16.2 million in fiscal 1995.  During late 1994, the Company also
simplified its business  strategy by  outsourcing  its  merchandise  fulfillment
operations  to  participating   merchants.   Through  its  market  research  and
experience,  the Company  determined that while customers valued the convenience
of in-flight shopping, most passengers preferred delivery at home rather than at
the airport.  Although airport delivery and concierge services were essential in
attracting new airline partners to the program, they were no longer necessary to
maintain  the  Company's  airline   relationships.   Accordingly,   the  Company
discontinued  its airport  delivery  service  and began its current  practice of
forwarding merchandise orders to participating merchants for fulfillment.  Thus,
the Company no longer  maintains any  significant  inventory and has  eliminated
from its  business  operations  the  costs and risks  associated  with  managing
inventory  and a  complex  airport  delivery  system.  The  Company  also  began
significantly   reducing  its  operating   expenses  in  late  1994,   including
outsourcing  its  concierge  operation,   reducing  its  work  force,  requiring
merchants  to provide  their own  creative  catalog  materials  and  eliminating
unprofitable  circulation.  These  actions  substantially  reduced the Company's
operating  costs,  from $25.5  million in fiscal 1994  (including a $4.3 million
restructure  charge) to $17.0 million in fiscal 1995 and $16.3 million in fiscal
1996. As a result of these changes in placement fees and operating expenses, the
Company's  results of  operations  improved  from a net loss of $12.2 million in
fiscal  1994 to $0.8  million  net income in fiscal  1995 and $2.2  million  net
income in fiscal 1996.                                                          

          In fiscal  1996,  the  Company's  principal  sources of revenues  were
merchandise sales (71% of total revenues) and placement fees from  participating
merchants (28% of total revenues). The Company also rented its customer database
to direct  marketing  companies  (1% of total  revenues),  which was included in
placement  fees and other  revenues in the  Company's  statement of  operations.
Merchandise  sales represent the Company's total fulfilled sales at retail sales
prices, net of returns and allowances,  from products displayed in the Company's
catalog.  Placement fees are charged to participating merchants for inclusion of
their  merchandise  in the  SkyMall  catalog.  These fees are  designed to cover
catalog expenses and to stabilize the Company's  revenues by reducing the impact
of  fluctuations  in  merchandise  sales.  In exchange for placement  fees,  the
Company offers the participating  merchants'  products in the Company's catalogs
and performs  order  taking and  processing  services.  The  placement  fees are
recognized  ratably over the life of the catalog  (currently  quarterly).  Order
taking and processing service expenses are recognized in the period incurred.   

          Customers place their orders by telephone,  mail,  e-mail or facsimile
to the Company's call center. The Company forwards  customers' order information
to  participating  merchants  who then ship  products  directly to the Company's
customers.  Upon notification  from a participating  merchant of the shipment of
goods, the Company recognizes the merchandise sale and the related cost of goods
sold, and establishes a reserve for anticipated  returns. The cost of goods sold
represents  the  amount  paid  by the  Company  to  participating  merchants  in
connection  with the sale of merchandise  included in the SkyMall  catalog.  The
percentage of sales that the Company pays to participating merchants varies from
agreement  to  agreement;  generally,  the  higher the  placement  fee paid by a
participating  merchant,  the higher  percentage of sales paid by the Company to
the  merchant,  and vice  versa.  The Company  believes  that a  combination  of
placement fees with a variable percentage of sales component,  together with the
payment of sales  commissions  to its airline  partners,  creates a situation in
which  SkyMall,  participating  merchants  and the airlines all benefit from and
have incentives to promote growth in merchandise sales.                         

          The  Company's  major  costs  include  costs  of goods  sold;  catalog
expenses,  which include paper,  printing and catalog production costs;  selling
expenses,  which are primarily  sales  commissions  to airlines and airline fuel
reimbursement  costs;  customer service and fulfillment  costs,  which include a
full-service  call  center and a  drop-ship  and  order-processing  coordination
center;  and  general  and  administrative  expenses,  which  include  corporate
salaries, employee benefits, facilities, legal and accounting expenses.         

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RESULTS OF OPERATIONS                                                           

          The  following  table  sets  forth,  for the  periods  indicated,  the
percentage  relationships  that certain items bear in relation to total revenues
of the Company.                                                                 

                                                 YEAR ENDED DECEMBER 31,
                                                ------------------------
                                                1994    1995    1996
                                                ----    ----    ----

Net merchandise sales                            73%     62%     71%

Placement fees and other                         27%     38%     29%
                                               ---     ---     ---
Total revenues                                  100%    100%    100%
                                               ---     ---     ---
Gross margin                                     46%     43%     44%
                                               ---     ---     ---
Catalog expenses                                 32%     22%     18%

Selling expenses                                  9%      5%      6%

Customer service and fulfillment expense         10%      5%      6%

General and administrative expenses              19%      7%      8%

FISCAL YEAR ENDED DECEMBER 31, 1996 COMPARED TO THE FISCAL YEAR ENDED           
DECEMBER 31, 1995                                                               

        REVENUE AND GROSS MARGIN.  Net  merchandise  sales  increased from $26.9
million in fiscal 1995 to $31.0 million in fiscal 1996, or 15%.  Placement  fees
and other revenues  decreased from $16.2 million in fiscal 1995 to $12.7 million
in fiscal  1996,  or 22%.  Beginning in the first  quarter of fiscal  1996,  the
Company began  changing the mix of agreements  with  participating  merchants to
reduce placement fees and to increase the percentages of sales revenues retained
by the Company in order to  position  the  Company to benefit  from  anticipated
sales increases in the fourth quarter. In addition, a significant  participating
merchant,  which  had  previously  paid  only  placement  fees  to the  Company,
decreased  its number of pages in the  SkyMall  catalog.  SkyMall  replaced  the
merchant  on these  pages with new  participating  merchants,  most of which had
arrangements with lower placement fees and a significantly  higher percentage of
sales  retained  by the  Company.  As a result,  due to the change in sales mix,
gross margin as a percentage of total revenues increased from 43% in fiscal 1995
to 44% in fiscal 1996.                                                          

        OPERATING  EXPENSES.  Total  operating  expenses  decreased  from  $17.0
million in fiscal 1995 to $16.3  million in fiscal 1996, or 4%, due primarily to
a $1.9 million  reduction in catalog  expenses.  This  reduction  resulted  from
elimination of  unprofitable  circulation of the SkyMall  catalog by eliminating
routes on certain  airlines and  terminating  agreements  with certain  regional
airlines and lower pricing on the Company's  printing  contract.  As a result of
the elimination of unprofitable circulation and increased net merchandise sales,
revenue per catalog increased from $1.57 in fiscal 1995 to $1.97 in fiscal 1996,
or 25%.  The  reduction  in catalog  expenses  was offset by  increases  of $0.3
million, $0.7 million and $0.2 million in selling expenses, customer service and
fulfillment expenses, and general and administrative expenses, respectively.    

        INCOME FROM  OPERATIONS.  Income  from  operations  increased  from $1.5
million in fiscal 1995 to $3.1 million in fiscal 1996, primarily due to the $0.7
million  reduction  in the  Company's  total  operating  expenses,  and the $0.9
million increase in gross margin.                                               

          INCOME TAXES. Prior to October 21, 1996, the Company had elected to be
taxed  under  Subchapter  S of  the  Internal  Revenue  Code  and  corresponding
provisions of Arizona tax laws.  As a result of the election,  federal and state
income  taxes on the net income of the Company were  payable  personally  by the
shareholders.  Accordingly,  the statements of income for all prior years do not
include a provision for federal and state income taxes. Had the Company been a C
corporation for these periods,  no federal or state income taxes would have been
due as a result of net operating loss  carry-forwards from the earlier years. In
the fourth quarter of fiscal 1996 and thereafter,  the Company became subject to

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federal  and  state  income  taxes  as a  result  of its  conversion  from  an S
corporation to a C corporation  and no net operating  losses  incurred while the
Company was an S  corporation  are  available  to the  Company to offset  future
earnings.  As a result of the change from an S corporation  to a C  corporation,
the Company recorded a provision for income taxes of $280,000 in fiscal 1996.   

FISCAL YEAR ENDED  DECEMBER 31, 1995 COMPARED TO FISCAL YEAR ENDED  DECEMBER 31,
1994                                                                            

        REVENUE AND GROSS MARGIN.  Net  merchandise  sales  increased from $22.1
million in 1994 to $26.9 million in fiscal 1995, or 22%, due primarily to better
fulfillment  of orders in 1995.  Due to a lack of  working  capital  in 1994 and
certain order fulfillment problems due to a computer conversion, the Company was
unable to purchase adequate inventory to fulfill many orders.  With restructured
operations in place in 1995, order  fulfillment  percentages  returned to normal
levels,  which are  approximately  90% of all orders  received  by the  Company.
Placement  fees and other  revenues also  increased  from $8.2 million in fiscal
1994 to $16.2  million in fiscal 1995,  or 98%, due  primarily to the  Company's
decision in late 1994,  effective for the fourth quarter 1994 catalog, to change
its revenue mix to emphasize placement fees, which provide a more stable revenue
base.  Gross margin as a percentage of total revenues  decreased from 46% to 43%
due to  higher  total  revenues  which  were the  result  of the shift to higher
placement  fees  and  a  higher  cost  of  sales  under  its   agreements   with
participating merchants.                                                        

        OPERATING EXPENSES. Total operating expenses, exclusive of the Company's
one-time  restructure  charge,  decreased  from $21.2  million in fiscal 1994 to
$17.0 million in fiscal 1995, or 20%. This decrease was due  principally  to the
Company's implementation of cost containment initiatives beginning in the fourth
quarter of fiscal 1994.  Catalog costs  decreased 1% from $9.6 million in fiscal
1994 to $9.5  million in fiscal 1995.  Despite a 48%  increase in average  paper
prices and a 12% increase in pages printed, the Company realized offsetting cost
reductions from requiring  participating merchants to provide their own creative
materials,  lower printing prices and the elimination of fees that had been paid
by the Company to some  merchants to  participate  in the program.  Although net
merchandise  sales increased  substantially,  selling expenses  decreased by 21%
from $2.8 million in fiscal 1994 to $2.2 million in fiscal 1995 because  SkyMall
began to require  merchants  to  reimburse  SkyMall for credit  card  processing
expenses.  Likewise,  customer service and fulfillment expenses decreased by 28%
from $2.9  million  in fiscal  1994 to $2.1  million  in fiscal  1995 due to the
Company's  decision  in the  fourth  quarter  of 1994 to  require  participating
merchants  to drop ship  merchandise  to the  Company's  customers  rather  than
maintain its own inventory. General and administrative expenses decreased by 47%
from $5.9 million in fiscal 1994 to $3.1 million in fiscal 1995.  In  connection
with the Company's  1994  restructuring,  personnel in  merchandise  fulfillment
operations,  merchandising,  purchasing and concierge services were eliminated, 
saving the Company nearly $1.0 million in payroll  expenses.  The Company closed
its  fulfillment  operations  in seven cities which  resulted in savings of $0.4
million  in  facilities  expenses.  Administrative  expenses  decreased  by $0.8
million  from fiscal 1994 to fiscal 1995 due to  simplification  of the business
and a reduction in professional fees.                                           

        RESTRUCTURE  CHARGE.  In 1994, the Company incurred a one-time charge of
$4.3 million  relating to the restructure of the business.  The costs associated
with the restructure included:                                                  

               (i) Losses on a long-term  major vendor  contract ($3.6 million).
          In September 1994, the Company entered into a series of contracts with
          a participating  merchant.  The contractual  arrangements provided the
          working capital which allowed the Company to continue operations,  but
          is estimated to cost the Company  approximately  $3.6 million  between
         September 1994 and mid-1997 when this contract is expected to expire.

               (ii)  Abandoned  facilities  and equipment  ($1.0  million).  The
          Company  abandoned   leasehold   improvements  and  equipment  in  its
          merchandise  fulfillment operations requiring the Company to write-off
          assets that would no longer be used in the business.  The Company also
          had long-term lease commitments for two warehouse facilities which the
          Company  continued to pay in fiscal 1995 and fiscal 1996 for which the
associated loss was recorded in fiscal 1994.                

               (iii)  Uncollectible  accounts  receivable  ($0.8 million).  Many
          receivables from pre-restructure placement fees, which would have been
          offset against inventory  purchases,  became  uncollectible  after the
restructure.                                                

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               (iv)  Severance and  outsourcing  expenses  ($0.2  million).  The
          Company  incurred  severance  costs as part of the  reductions  in its
          workforce.  The  Company  also paid a one-time  fee to  outsource  its
concierge services.                                         

          The foregoing costs were partially offset by a benefit of $1.3 million
in debt forgiveness from participating merchants and vendors.                   

          INCOME  (LOSS)  FROM  OPERATIONS.   The  Company  earned  income  from
operations of $1.5 million in fiscal 1995 compared to a loss from  operations of
$11.5 million in fiscal 1994. This improvement was due primarily to the positive
impact in 1995 of the 1994  restructure,  the effect of  implementation  of cost
containment  measures in late 1994 and the recognition of the restructure charge
in fiscal 1994.                                                                 

LIQUIDITY AND CAPITAL RESOURCES                                                 

          While  the  Company  was   developing   and   executing  its  original
inventory-based  business  plan from  start-up  to late 1994,  the Company had a
significant  need for capital to fund  investment in facilities  and  equipment,
inventory,  working capital and start-up operating losses. At December 31, 1994,
the Company had an  accumulated  deficit of $34.2 million and a working  capital
deficit of $7.5 million.  During this period,  the Company's  primary sources of
cash  included  debt  and  equity  financing  from  shareholders,  a  bank  loan
guaranteed  by  a  shareholder,   credit  from  suppliers  and  cash  flow  from
operations. The Company also financed its operations through the restructure and
deferral of accounts payable in connection with the Company's 1994 restructure. 

          In fiscal 1995 and fiscal 1996, the Company's  principal  requirements
for cash  were to fund  working  capital  needs and to pay debt  obligations  to
vendors.  The Company no longer needed significant capital to fund inventory and
warehouse  facilities.  The Company's primary sources of cash during this period
were  cash  flow  from  operations,   vendor  credit  supported  by  shareholder
guarantees,  and  loans  from  shareholders.   Cash  flow  from  operations  was
sufficient to fund  operating  expenses,  but was not adequate to also fund debt
service to vendors relating to the 1994  restructure.  The Company made its debt
payments to vendors in 1995 but became  delinquent  in 1996. In order to finance
its working capital shortfalls,  management and certain  shareholders took steps
to  strengthen  the  Company's  financial  condition  and improve the  Company's
liquidity.  These steps  included  (i)  issuing  approximately  $2.6  million of
Convertible  Preferred  Stock, net of offering costs, the proceeds of which were
used to pay past due debts and notes payable to vendors,  (ii) converting  notes
and  other  obligations  to  shareholders  of $5.0  million  to 5,000  shares of
Convertible  Preferred  Stock and (iii) issuing  approximately  $14.0 million of
common  stock  in an  initial  public  offering,  net  of  offering  costs.  The
Convertible  Preferred  Stock  automatically  converted into Common Stock of the
Company upon completion of its initial public offering.                         

        In October  1996,  the Company  obtained a line of credit from a bank in
the amount of $4.0  million.  The proceeds of this line were used to repay notes
payable  to  shareholders.  In  January  of 1997,  the  Company  terminated  the
foregoing  line of credit  and  obtained  a $5.0  million  five  year,  reducing
revolving line of credit from a bank.  Available borrowings reduce by $1 million
annually, until February 2002, when the line expires.  Advances made on the line
bear  interest at either Prime or LIBOR,  at the option of the  Company,  and at
rates  ranging from Prime to Prime plus 1.5 percent,  or LIBOR plus 2.25 percent
to LIBOR plus 3.25 percent, depending on certain financial ratios at the time of
advance.  The line is collateralized by substantially all assets of the Company,
and contains convenants that require maintenance of certain financial ratios.   

          The  Company  believes  it will  generate  sufficient  cash  flow from
operations to  adequately  fund its  operations  over the next twelve months and
liquidate its remaining  notes payable to vendors and other  liabilities as they
come due. Additionally, management believes that the working capital provided by
the  offering  of Common  Stock  will allow the  Company  to further  reduce its
operating costs by taking advantage of trade discounts.                         

          Cash provided by (used for) operating  activities was ($2.2)  million,
$1.1 million and $2.2 million in fiscal 1994, 1995 and 1996, respectively.  The 
improvement  in fiscal 1995  compared to fiscal 1994 was due primarily to higher
placement fees and lower operating costs resulting from the 1994 restructure and
continuing cost reduction activities thereafter.  The improvement in fiscal 1996
compared to fiscal 1995 was due primarily to cost reduction activities.         

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          Cash used for investing activities was $0.4 million, $0.2 million, and
$0.4 million in fiscal 1994, 1995 and 1996, respectively. These investments were
primarily  for computer  and  telecommunications  equipment  and  furniture  and
fixtures.                                                                       

        Cash  provided  by (used for)  financing  activities  was $3.3  million,
$(1.0)  million  and  $9.0  million  in  fiscal  years  1994,   1995  and  1996,
respectively.  Cash  provided of $3.3  million in 1994 was  primarily  from $3.0
million in loans from shareholders.  Cash used for financing  activities of $1.0
million for fiscal 1995 resulted from  approximately $2.2 million in payments on
notes  payable  to  vendors  which was  partially  offset  by loans and  accrued
interest of $1.2 million provided by shareholders. Cash provided of $9.0 million
in 1996 was from $14.0 million in proceeds from the issuance of Common Stock and
$2.5 million in proceeds from the issuance of Convertible Preferred Stock, which
was offset by payments on notes payable of $7.5 million.                        

FLUCTUATIONS IN QUARTERLY RESULTS                                               

          The Company's operating results may fluctuate from period to period as
a result of the seasonal nature of the retail industry.  The Company  recognizes
its highest  sales levels  during the fourth  quarter  holiday  season,  and the
fourth quarter typically  accounts for approximately 33% of the Company's annual
merchandise sales.                                                              

          The following table sets forth certain unaudited information about the
Company's  revenue and results of operations  on a quarterly  basis for 1995 and
1996.                                                                           

                                                        [Enlarge/Download Table]

                                          YEAR ENDED                             YEAR ENDED            
                                       DECEMBER 31, 1995                      DECEMBER 31, 1996        
                           -------------------------------------  -------------------------------------
                           1ST QTR   2ND QTR   3RD QTR   4TH QTR  1ST QTR   2ND QTR   3RD QTR   4TH QTR
                           -------   -------   -------   -------  -------   -------   -------   -------
                                                                                                       
Merchandise sales, net     $6,299    $5,956    $6,123     $8,504  $5,882    $6,550     $6,474   $12,072

Placement fees and other    4,466     3,829     3,609      4,294   3,073     2,720      2,838     4,076
                           ------    ------    ------     ------  ------    ------     ------   -------
Total revenues             10,765     9,785     9,732     12,798   8,955     9,270      9,312    16,148
                           ------    ------    ------     ------  ------    ------     ------   -------
Gross Margin                4,958     3,982     4,242      5,334   4,259     4,414      4,139     6,616
                           ------    ------    ------     ------  ------    ------     ------   -------
Catalog expense             2,336     2,397     2,310      2,489   2,151     1,828      1,726     1,965

Selling expenses              514       534       546        635     514       620        531       811

Customer service and                                                                                   
fulfillment                   526       495       513        602     457       515        539     1,312

General and administrative    887       702       718        804     753       695        842     1,050
                           ------    ------    ------     ------  ------    ------     ------   -------
Total operating expenses   $4,263    $4,128    $4,087     $4,530  $3,875    $3,658     $3,638   $ 5,138
                           ======    ======    ======     ======  ======    ======     ======   =======

NET OPERATING  LOSSES IN SUB S CORPORATION - CONVERSION TO C CORPORATION FOR TAX
PURPOSES                                                                        

          Prior to October 21,  1996,  the Company had elected to be taxed under
Subchapter  S of the  Internal  Revenue  Code and  corresponding  provisions  of
Arizona tax laws. As a result of the election, federal and state income taxes on
the net income of the  Company  were  payable  personally  by the  shareholders.
Accordingly,  the  statements  of income  for all prior  years do not  include a
provision  for  federal  and  state  income  taxes.  Had  the  Company  been a C
corporation for these periods,  no federal or state income taxes would have been
due as a result of net operating loss  carry-forwards from the earlier years. In
the fourth quarter of fiscal 1996 and thereafter,  the Company became subject to
federal  and  state  income  taxes  as a  result  of its  conversion  from  an S
corporation to a C corporation  and no net operating  losses  incurred while the
Company was an S  corporation  are  available  to the  Company to offset  future
earnings.                                                                       

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RECENTLY ISSUED ACCOUNTING STANDARDS                                            

        The  Company  accounts  for its  stock-based  compensation  plans  under
Accounting  Principles  Board  Opinion  No. 25,  (APB No.  25),  under  which no
compensation cost has been recognized. In October 1995, the Financial Accounting
Standards  Board issued  Statement of Financial  Accounting  Standards  No. 123,
"Accounting for Stock-based  Compensation" (SFAS No. 123). SFAS No. 123 requires
that companies that account for  stock-based  compensation  as prescribed by APB
No. 25 and disclose the pro forma  effects on earnings and earnings per share as
if SFAS No. 123 had been adopted,  in addition to certain other disclosures with
respect to stock  compensation  and the  assumptions  used to determine  the pro
forma effects of SFAS No. 123. As the Company has adopted the "disclosure  only"
provisions  of SFAS No. 123,  there is no impact on results of  operations  as a
result of the adoption of this standard.                                        

INFLATION                                                                       

        Management  does not believe that inflation has had a material effect on
the  Company's  operations  during the past several  years with the exception of
unusually significant increases in paper prices in 1995 and the first six months
of 1996 and a subsequent  significant  decrease in the third and fourth quarters
of 1996.  The Company's  average  paper price  increased 48% from fiscal 1994 to
fiscal  1995 from $38.91 cwt to $57.61  cwt,  costing the Company an  additional
$1.7 million in 1995  compared to costs at 1994 prices.  The average paper price
decreased from $57.61 cwt in fiscal 1995 to $55.40 in fiscal 1996 as a result of
a decrease  in the cost of paper  purchased  for the  fourth  quarter of 1996 to
$42.13 cwt,  which is only 8% higher than the 1994 level.  The  Company's  paper
costs are expected to be approximately  $40.00 cwt in the first quarter of 1997.
Increases in labor,  aircraft fuel, paper,  printing,  shipping,  or merchandise
costs could adversely affect the Company's  operations.  In the past, except for
paper  price  increases,  the  Company  has been  able to modify  its  operating
procedures  or increase  its prices to  substantially  offset  increases  in its
costs.                                                                          

FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISK                                  

        Certain  statements  herein,  in future  filings by the Company with the
Securities  and  Exchange  Commission  and in the  Company's  written  and  oral
statements  made by or with the  approval  of an  authorized  executive  officer
constitute "forward-looking statements" within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the  Securities  Exchange Act of 1934,
and the Company intends that such  forward-looking  statements be subject to the
safe  harbors  created  thereby.  The words and phrases  "should be," "will be,"
"believes," "expects," "anticipates," "plans," "intends" and similar expressions
identify  forward-looking  statements.  These forward looking statements reflect
the  Company's  current  views  with  respect  to future  events  and  financial
performance,  but are subject to many  uncertainties and factors relating to the
Company's operations and business environment which may cause the actual results
of the Company to be materially  different from any future results  expressed or
implied  by such  forward-looking  statements.  Examples  of such  uncertainties
include,  but are not limited to, the Company's  dependence on its relationships
with its airline partners,  fluctuations in paper prices and airline fuel costs,
customer credit risks,  competition  from other catalog  companies and retailers
and the Company's reliance on information and telecommunications systems, all of
which  are  discussed  more  fully  in the  Company's  other  filings  with  the
Securities  and Exchange  Commission.  The Company  undertakes  no obligation to
publicly update or revise any forward-looking  statements whether as a result of
new information, future events or otherwise.                                    

18

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA                             

 INDEX TO FINANCIAL STATEMENTS

Report of Independent Public Accountants.................................    F-2

Balance Sheets as of December 31, 1995 and 1996..........................    F-3

Statements of Operations for the Years Ended December 31, 1994,                 
  1995 and 1996..........................................................    F-4

Statements of Shareholders' Equity (Deficit) for the Years Ended                
  December 31, 1994, 1995 and 1996.......................................    F-5

Statements of Cash Flows for the Years Ended December 31, 1994,                 
  1995 and 1996..........................................................    F-6

Notes of Financial Statements............................................    F-7

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REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Shareholders of SkyMall, Inc.:                                           

        We have  audited the  accompanying  balance  sheets of SkyMall,  Inc. (a
Nevada  corporation),  as of  December  31,  1995  and  1996,  and  the  related
statements of operations, shareholders' equity (deficit) and cash flows for each
of the three  years in the period  ended  December  31,  1996.  These  financial
statements   are  the   responsibility   of  the   Company's   management.   Our
responsibility  is to express an opinion on these financial  statements based on
our audits.                                                                     

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

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

 ARTHUR ANDERSEN LLP

Phoenix, Arizona,                                                               
February 17, 1997.                                                              

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BALANCE SHEETS
 (AMOUNTS IN THOUSANDS, EXCEPT SHARES AND PAR VALUE)

                                                            DECEMBER 31,
                                                          1995      1996
                                                          --------   -------
ASSETS
CURRENT ASSETS:                                                                 
Cash and cash equivalents, including escrow accounts       $    775   $11,491 
Accounts receivable, net                                        892     4,150 
Merchandise inventory, net                                       22        14 
Prepaid catalog costs                                         1,242     1,900 
Deferred income taxes                                            --        59 
                                                          --------   -------
    Total current assets                                     2,931    17,614
PROPERTY AND EQUIPMENT, net                                    1,581     1,949  
OTHER ASSETS, net                                                214       158  
                                                          --------   -------
    TOTAL ASSETS                                          $  4,726   $19,721
                                                          ========   =======
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:                                                            
Accounts payable                                           $  4,695   $ 8,623 
Accrued liabilities                                             329       792 
Income taxes                                                     --       280 
Reserve for restructure charges                                  --       165 
Current portion of notes payable and capital leases              77        72 
Current portion of notes payable to vendors                   2,564       870 
Current portion of notes payable to shareholders                 --       120 
                                                          --------   -------
    Total current liabilities                                7,665    10,922
DEFERRED INCOME TAXES                                             --        59  
RESERVE FOR RESTRUCTURE CHARGES                                1,276        --  
NOTES PAYABLE AND CAPITAL LEASES, net of                                        
current portion                                                  --       128 
NOTES PAYABLE TO VENDORS, net of                                                
current portion                                               2,326        11 
NOTES PAYABLE TO SHAREHOLDERS,                                                  
net of current portion                                        8,492        -- 
                                                          --------   -------
    Total liabilities                                       19,759    11,120
                                                          --------   -------
COMMITMENTS AND CONTINGENCIES                                                   
(Note 9)                                                                        

SHAREHOLDERS' EQUITY (DEFICIT):                                                 
Convertible preferred stock                                      --        -- 
Common stock, $0.001 par value; 50,000,000 shares authorized;                 
Issued and outstanding shares - 5,150,000 in 1995                       
  and 8,654,000 in 1996                                          5         9
Additional paid-in capital                                   18,438     7,588 
Retained earnings (accumulated deficit)                     (33,476)    1,004 
                                                          --------   -------
    Total shareholders' equity (deficit)                   (15,033)    8,601
                                                          --------   -------
    TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)  $  4,726   $19,721
                                                          ========   =======

The accompanying notes are an integral part of these balance sheets.

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STATEMENTS OF OPERATIONS
 (AMOUNTS IN THOUSANDS, EXCEPT SHARES AND PER SHARE)

                                                                [Download Table]

                                                      FOR  THE YEAR ENDED           
                                                           DECEMBER 31,             
                                                  1994          1995        1996    
                                               ----------   ----------   ---------- 
REVENUES:                                                                           
                                                                                    
   Merchandise sales, net                      $   22,062   $   26,883   $   30,978 
   Placement fees and other                         8,241       16,198       12,707 
                                               ----------   ----------   ---------- 
           Total revenues                          30,303       43,081       43,685 
COST OF GOODS SOLD                                 16,266       24,564       24,257 
                                               ----------   ----------   ---------- 
           Gross margin                            14,037       18,517       19,428 
                                               ----------   ----------   ---------- 
OPERATING EXPENSES:                                                                 
   Catalog expenses                                 9,644        9,532        7,670 
   Selling expenses                                 2,754        2,229        2,476 
   Customer service and fulfillment expenses        2,919        2,136        2,823 
   General and administrative expenses              5,886        3,112        3,340 
   Restructure charge                               4,332           --           -- 
                                               ----------   ----------   ---------- 
           Total operating expenses                25,535       17,009       16,309 
                                               ----------   ----------   ---------- 

INCOME (LOSS) FROM OPERATIONS                     (11,498)       1,508        3,119 

   Interest expense                                  (394)         (92)         (60)
   Interest expense to shareholders                  (206)        (663)        (669)
   Other income (expense)                             (88)           5           78 
                                               ----------   ----------   ---------- 
INCOME (LOSS) BEFORE INCOME TAXES                 (12,186)         758        2,468 
   Income taxes                                        --           --          280 
                                               ----------   ----------   ---------- 
NET INCOME (LOSS)                                 (12,186)         758        2,188 

PREFERRED STOCK DIVIDENDS                              --           --           77 
                                               ----------   ----------   ---------- 
NET INCOME (LOSS) AVAILABLE FOR COMMON SHARES  $  (12,186)  $      758   $    2,111 
                                               ==========   ==========   ========== 
NET INCOME (LOSS) PER                                                               
   COMMON SHARE                                $    (3.43)  $      .14   $      .38 
                                               ==========   ==========   ========== 
WEIGHTED AVERAGE                                                                    
   SHARES OUTSTANDING                           3,557,787    5,431,337    5,611,913 
                                               ==========   ==========   ========== 

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

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 SKYMALL, INC.

STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
 (AMOUNTS IN THOUSANDS, EXCEPT SHARES)

                                                        [Enlarge/Download Table]

                                     CONVERTIBLE PREFERRED STOCK      COMMON STOCK      ADDITIONAL
                                     ---------------------------  --------------------   PAID-IN  
                                        SHARES         AMOUNT       SHARES    AMOUNT     CAPITAL  
                                     -----------  --------------  ---------   ------    --------- 
                                                                                                  
BALANCE, January 1, 1994                     --       $    --     2,654,212    $   3    $ 18,440  
  Reissuance of shares pursuant                                                                   
    to Stock Redemption and                                                                       
    Royalty Agreement                        --            --     2,268,898        2          (2) 
  Issuance of shares for guarantee                                                                
    of debt                                  --            --       226,890       --          --  
  Net loss                                   --            --            --       --          --  
                                        -------       -------     ---------    -----    --------  
BALANCE, December 31, 1994                   --            --     5,150,000        5      18,438  
  Net income                                 --            --            --       --          --  
                                        -------       -------     ---------    -----    --------  
BALANCE, December 31, 1995                   --            --     5,150,000        5      18,438  
  Issuance of preferred shares,                                                                   
    net of issuance costs                 3,000         2,555            --       --          --  
  Conversion of shareholder debt                                                                  
    to preferred shares                   5,000         5,000            --       --          --  
  Payment of dividend on preferred                                                                
    shares                                   --           (77)           --       --          --  
  Issuance of common shares pursuant                                                              
    to preferred shares issued and                                                                
    converted                            (8,000)       (7,478)    1,504,000        2       7,476  
  Issuance of shares pursuant to                                                                  
    IPO, net of issuance costs               --            --     2,000,000        2      13,966  
  Elimination of accumulated                                                                      
    deficit upon conversion from S                                                                
    to C corporation                         --            --            --       --     (32,292) 
  Net income                                 --            --            --       --          --  
                                        -------       -------     ---------    -----    --------  
BALANCE, December 31, 1996                   --       $    --     8,654,000    $   9    $  7,588  
                                        =======       =======     =========    =====    ========  

                                        RETAINED                                                  
                                        EARNINGS/                                                 
                                      (ACCUMULATED                                                
                                        DEFICIT)        TOTAL                                     
                                      ------------    ---------                                   
                                                                                                  
BALANCE, January 1, 1994              $ (22,048)      $ (3,605)                                   
  Reissuance of shares pursuant                                                                   
    to Stock Redemption and                                                                       
    Royalty Agreement                        --             --                                    
  Issuance of shares for guarantee                                                                
    of debt                                  --             --                                    
  Net loss                              (12,186)       (12,186)                                   
                                       --------       --------                                    
BALANCE, December 31, 1994              (34,234)       (15,791)                                   
  Net income                                758            758                                    
                                       --------       --------                                    
BALANCE, December 31, 1995              (33,476)       (15,033)                                   
  Issuance of preferred shares,                                                                   
    net of issuance costs                    --          2,555                                    
  Conversion of shareholder debt                                                                  
    to preferred shares                      --          5,000                                    
  Payment of dividend on preferred                                                                
    shares                                   --            (77)                                   
  Issuance of common shares pursuant                                                              
    to preferred shares issued and                                                                
    converted                                --             --                                    
  Issuance of shares pursuant to                                                                  
    IPO, net of issuance costs               --         13,968                                    
  Elimination of accumulated                                                                      
    deficit upon conversion from S                                                                
    to C corporation                     32,292             --                                    
  Net income                              2,188          2,188                                    
                                       --------        -------                                    
BALANCE, December 31, 1996             $  1,004        $ 8,601                                    
                                       ========        =======                                    

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

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STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)

                                                        [Enlarge/Download Table]

                                                                          FOR THE YEAR ENDED       
                                                                              DECEMBER 31,         
                                                                     ----------------------------- 
                                                                       1994       1995      1996   
                                                                     --------    ------   -------- 
CASH FLOWS FROM OPERATING ACTIVITIES:                                                              
                                                                                                   
   Net income (loss)                                                 $(12,186)  $   758   $  2,188 
   Adjustments to reconcile net income (loss) to net cash                                          
      provided by (used for) operating activities-                                                 
      Depreciation and amortization                                       197       244        342 
      Loss on abandonment of equipment and other assets                 1,011        --         -- 
      Provision for restructure charge                                  3,321        --         -- 
      Provision for merchandise inventory                                  75        --          2 
      (Increase) decrease in:                                                                      
          Accounts receivable                                             (28)      174     (3,258)
          Merchandise inventory                                         4,659       182          6 
          Prepaid catalog costs                                          (380)      430       (658)
          Other assets                                                    204        --         (2)
      (Decrease) increase in:                                                                      
          Accounts payable                                              2,902       341      3,928 
          Accrued liabilities                                            (556)     (283)       463 
          Income taxes                                                     --        --        280 
          Reserve for restructure                                      (1,386)     (768)    (1,111)
                                                                     --------   -------   -------- 
           Net cash provided by (used for) operating activities        (2,167)    1,078      2,180 
                                                                     --------   -------   -------- 
CASH FLOWS FROM INVESTING ACTIVITIES:                                                              
   Purchase of property and equipment                                    (400)     (164)      (448)
                                                                     --------   -------   -------- 
           Net cash used for investing activities                        (400)     (164)      (448)
                                                                     --------   -------   -------- 
CASH FLOWS FROM FINANCING ACTIVITIES:                                                              
   Payments on notes payable and capital leases                            --        --        (81)
   Payments on notes payable to vendors                                    --    (2,235)    (4,009)
   Proceeds from (payments on) notes payable to shareholders, net       3,292     1,200     (3,372)
   Proceeds from issuance of preferred stock, net of issuance costs        --        --      2,555 
   Payment of dividends on preferred stock                                 --        --        (77)
   Proceeds from issuance of common stock, net of issuance costs           --        --     13,968 
                                                                     --------   -------   -------- 
           Net cash provided by (used for) financing activities         3,292    (1,035)     8,984 
                                                                     --------   -------   -------- 
INCREASE (DECREASE) IN CASH AND                                                                    
   CASH EQUIVALENTS                                                       725      (121)    10,716 

CASH AND CASH EQUIVALENTS,                                                                         
   beginning of year                                                      171       896        775 
                                                                     --------   -------   -------- 
CASH AND CASH EQUIVALENTS,                                                                         
   end of year                                                       $    896   $   775   $ 11,491 
                                                                     ========   =======   ======== 
Income taxes paid                                                    $     --   $    --   $     -- 
                                                                     ========   =======   ======== 
Total interest paid                                                  $    378   $   356   $  1,217 
                                                                     ========   =======   ======== 
Interest paid to shareholders                                        $     25   $   272   $  1,157 
                                                                     ========   =======   ======== 
SUPPLEMENTAL DISCLOSURE OF                                                                         
   NONCASH ACTIVITY:                                                                               
   Conversion of accounts payable to notes payable to vendors        $  5,564   $    --   $     -- 
                                                                     ========   =======   ======== 
   Notes payable converted to notes payable to shareholders          $     --   $ 4,000   $     -- 
                                                                     ========   =======   ======== 
   Capital leases incurred                                           $     --   $    --   $    204 
                                                                     ========   =======   ======== 
   Notes payable to shareholders converted to preferred stock        $     --   $    --   $  5,000 
                                                                     ========   =======   ======== 

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

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 NOTES TO FINANCIAL STATEMENTS

(1)     THE COMPANY:                                                            

Nature of Organization                                          

        SkyMall,  Inc.  ("Company")  was  incorporated  in  1989  as an  Arizona
corporation  (and  reincorporated  in  Nevada  in  October  1996).  The  Company
commenced  operations in 1990 after signing an agreement with a major airline to
provide retail  merchandise  service  through  inflight  catalogs.  In 1991, the
Company purchased the assets of GiftMaster,  Inc., which included contracts with
three major  airlines  and two  regional  airlines.  The  Company  operates on a
calendar  year end of  December  31. At  December  31,  1996,  the  Company  had
agreements with 15 airlines to place its catalogs in the aircraft seat pockets. 

Reincorporation and Restatement of Shares                       

        In October,  1996, the Company reincorporated in the State of Nevada. In
connection with the  reincorporation,  the Company  completed a 1,592 to 1 share
exchange,  including  treasury  shares,  resulting in 5,150,000 shares of common
stock outstanding. The accompanying financial statements and footnotes have been
restated for the change in the number of shares of common stock  outstanding for
all periods presented.                                                          

(2)     SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:                             

Use of Estimates in Preparation of Financial Statements         

        The  preparation  of financial  statements in conformity  with generally
accepted  accounting  principles  requires  management  to  make  estimates  and
assumptions  that  affect  the  reported  amounts  of  assets  and  liabilities,
disclosure of  contingent  assets and  liabilities  at the date of the financial
statements,  and the  reported  amounts  of  revenues  and  expenses  during the
reporting  period.  Actual  results  could  differ  from  those  estimates.   In
management's opinion, methodologies used to determine estimates are adequate and
consistent with prior periods.                                                  

Revenue Recognition                                             

        Merchandise  sales  represent the  Company's  total  fulfilled  sales at
retail sales prices,  net of returns and allowances,  from products displayed in
the Company's  catalog.  The Company's  agreements  with  participating  vendors
provide that the vendor ship the  products  directly to the  Company's  customer
upon  notification  of the  order  to the  vendor.  Upon  notification  from the
participating  vendors of the shipment of the goods, the Company  recognizes the
merchandise sale and related cost of goods sold at the agreed-upon product cost,
and establishes a reserve for anticipated returns.                              

        In addition, under contracts with some of its participating vendors, the
Company  earns  revenues  generated  by  placement  fees  for  inclusion  of the
merchants' products in the SkyMall catalog. Placement fees are designed to cover
catalog  expenses and to stabilize the Company's  revenue by reducing the impact
of fluctuations in merchandise sales. Catalogs are issued four times a year. The
Company offers the participating vendor's products in the Company's catalogs and
performs order taking and processing services. The placement fees are recognized
ratably  over the life of the  catalog.  Order  taking  and  processing  service
expenses are recognized in the period incurred.                                 

        The cost of goods sold  represents  the amount payable by the Company to
vendors  in  connection  with sales of  merchandise  included  in the  Company's
catalog. The percentage of sales that the Company pays to the vendor varies from
agreement  to  agreement;  generally,  the  higher the  placement  fee paid by a
participating  merchant,  the higher  percentage of sales paid by the Company to
the merchant, and vice versa.                                                   

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NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

        In  addition,  the  Company  generates  revenue  from the  rental of its
customer  list.  List revenue is included in placement fees and other revenue in
the accompanying statements of operations.                                      

Shipping and Handling Charges                                   

        The Company charges its retail customers  standard fees for shipping and
handling costs. The fees collected are offset against the amounts charged to the
Company by its vendors for these  fulfillment  services provided by the vendors.
Any net amount  remaining is included in placement fees and other revenue in the
accompanying  financial statements and is not significant for any of the periods
presented.                                                                      

Impairment of Long-Lived Assets                                 

        The Company assesses the recoverability of long-lived assets,  including
equipment and leasehold  improvements  and  purchased  contracts by  determining
whether the assets can be recovered  from  undiscounted  future cash flows.  The
amount of impairment,  if any, is measured based on projected  future cash flows
using a discount rate reflecting the Company's average cost of funds.           

        Recoverability  of  long-lived  assets is  dependent  upon,  among other
things, the Company's ability to continue to achieve profitability,  so as to be
able to meet its obligations when they become due. In the opinion of management,
based upon  current  information  and  projections,  long-lived  assets  will be
recovered over the period of benefit.                                           

Cash and Cash Equivalents                                       

        Cash equivalents include investments purchased with an original maturity
of three months or less. As a result of the Company's  restructure  in 1994, the
Company is required to pay some  vendors  through  escrow  accounts.  The escrow
accounts  serve as  security  for these  vendors  and are  funded  through  cash
receipts of placement fees and sales of  merchandise  in the ordinary  course of
business.  Total cash  balances in such escrow  accounts as of December 31, 1995
and 1996 were approximately $618,000 and $169,000,  respectively.  These amounts
are  included  in  cash  and  cash  equivalents  in the  accompanying  financial
statements.                                                                     

Accounts Receivable                                             

        Accounts  receivable at December 31, 1995 and 1996,  include amounts due
from  credit card  companies,  amounts  for items  shipped  but not billed,  and
receivables from vendors for placement fees. The allowance for doubtful accounts
is based on balances  past due at year end, and as of December 31, 1995 and 1996
was $175,000 for each year.                                                     

Inventory                                                       

        Inventory  consists mainly of logo merchandise which cannot be delivered
via drop ship by vendors.  Inventory  is stated at the lower of cost  (first-in,
first-out) or market.  The Company typically has arrangements  whereby inventory
items may be returned to vendors if not sold.  The  Company  has  established  a
reserve of  approximately  $8,000 and  $10,000 at  December  31,  1995 and 1996,
respectively,  for damaged,  obsolete or discontinued merchandise that cannot be
returned to vendors.                                                            

Prepaid Catalog Costs                                           

        Prepaid catalog costs include primarily catalog  production costs, which
are deferred and amortized on a straight-line basis over the period each catalog
issue is in use, currently three months.                                        

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NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

Income Taxes                                                    

        Through  October 21, 1996, the  stockholders  of the Company  elected to
utilize the provisions of subchapter S of the Internal  Revenue Code. In lieu of
corporate income taxes, the stockholders of a subchapter S corporation are taxed
on their portion of the Company's  taxable  income.  Therefore,  no provision or
liability for Federal income taxes was recorded through October 21, 1996.       

        Effective  October 22,  1996,  the  Company's S  corporation  status was
terminated in connection with its issuance of preferred  stock,  and the Company
became a C  corporation.  Pursuant to the rules of the  Securities  and Exchange
Commission,  the accumulated deficit at October 22, 1996 of $32,292,000 has been
reclassified to additional paid-in capital.                                     

        Concurrently  with this  change in tax status,  the Company  adopted the
provisions of Statement of Financial  Accounting  Standards No. 109, "Accounting
for Income Taxes" (SFAS No. 109).                                               

Stock-based Compensation                                        

        The  Company  accounts  for its  stock-based  compensation  plans  under
Accounting  Principles  Board  Opinion  No. 25,  (APB No.  25),  under  which no
compensation cost has been recognized. In October 1995, the Financial Accounting
Standards  Board issued  Statement of Financial  Accounting  Standards  No. 123,
"Accounting for Stock-based  Compensation" (SFAS No. 123). SFAS No. 123 requires
that companies that account for  stock-based  compensation  as prescribed by APB
No. 25 and disclose the pro forma  effects on earnings and earnings per share as
if SFAS No. 123 had been adopted,  in addition to certain other disclosures with
respect to stock  compensation  and the  assumptions  used to determine  the pro
forma effects of SFAS No. 123. See Note 10 for these disclosures.               

Concentration of Credit Risk                                    

        Financial   instruments   that   potentially   subject  the  Company  to
concentrations  of credit  risk  consist of  accounts  receivable  and  accounts
payable.                                                                        

        Concentrations  of credit risk with respect to accounts  receivable  and
accounts payable may be limited due to the large number of participating vendors
comprising  the  balances  and the fact  that  certain  receivable  and  payable
balances may be offset.  The Company performs ongoing credit  evaluations of its
merchants, but does not require collateral to support receivables.  In addition,
the Company  has a right of offset  using  amounts  payable to vendors on future
purchases.  The Company has established an allowance for doubtful accounts based
on factors surrounding the credit risk of specific customers, historical trends,
and other information.                                                          

        Net  Income  (Loss)  Per Common  Share and  Supplemental  Net Income Per
Common Share                                                    

        Net income  (loss)  per  common  share is  computed  using the  weighted
average  number  of  shares  of  common  stock  and  common  stock   equivalents
outstanding  during the year. In accordance with the rules of the Securities and
Exchange Commission, options granted, and other common stock equivalents issued,
by the Company for the twelve month period prior to the Company's initial public
offering have been included in the  calculation of common and common  equivalent
shares as if they were  outstanding for all periods  presented.  Dilutive common
equivalent  shares  subsequent to the initial public offering are computed using
the treasury  stock  method.  Fully  diluted net income  (loss) per share is not
presented since such amounts would not have a material dilutive effect.         

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NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

          Supplemental net income per common share - Assuming  proceeds from the
issuance  of  2,000,000  common  shares at the  public  offering  of $8,  net of
issuance costs, were used to repay $5.0 million of the Company's indebtedness to
shareholders  as of  January 1, 1996,  net  income per common  share  would have
increased from $.38 to $.44 in 1996.                                            

Financial Instruments                                       

          The Company's financial  instruments include cash, accounts receivable
and accounts  payable.  Due to the short-term nature of these  instruments,  the
fair value of these instruments  approximates  their recorded value. The Company
does not have material financial instruments with off-balance sheet risk.       

(3)       PROPERTY AND EQUIPMENT:                                               

          Property and equipment are stated at historical cost.  Depreciation of
property  and  equipment  is provided  over the  estimated  useful  lives of the
respective assets using the  straight-line  method.  Leasehold  improvements are
amortized  on a  straight-line  basis over their  estimated  useful lives or the
terms of the  respective  leases,  whichever  is shorter.  Assets  leased  under
capital  lease  agreements  are carried in property and  equipment,  and related
lease amortization is included in accumulated  depreciation.  The following is a
summary of property and equipment:                                              

                                ESTIMATED         DECEMBER 31,
                                      USEFUL      --------------------
                                 LIFE (YEARS)    1995         1996
                                   ------------   -------      -------
                                                  (amounts in thousands)
Equipment                              3-10         $1,717       $2,342 
Buildings and leasehold                                                 
improvements                          15-31          1,297        1,320 
Furniture, fixtures and other           3-7            269          273 
                                                   ------       ------
                                                    3,283        3,935
Less -- Accumulated                                                     
  depreciation                                      (1,702)      (1,986)
                                                   ------       ------
                                                   $1,581       $1,949
                                                   ======       ======
(4)        OTHER ASSETS:                                                        

        Other assets include  intangibles  acquired in 1991 from the purchase of
GiftMaster,  Inc., which are amortized using the straight-line method over their
estimated useful lives. The following is a summary of other assets:             

                                 ESTIMATED          DECEMBER 31,
                                    USEFUL        ------------------
                                  LIFE (YEARS)     1995         1996
                                  ------------    -----         ----
                                                    (Amounts in thousands)
Purchased airline contracts              10          $326         $326  
Other, primarily deposits                              19           21  
                                                   ----         ----
                                                    345          347
Less - Accumulated amortization                      (131)        (189) 
                                                   ----         ----

                                                   $214         $158
                                                   ====         ====

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NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

(5)    NOTES PAYABLE AND CAPITAL LEASES:                                        

Notes payable consisted of the following:                       
                                                        DECEMBER 31,
                                                       -------------
                                                       1995     1996
                                                       ----     ----
                                                      (Amounts in thousands)
Note payable, interest at 8%, due in monthly                    
installments (including interest) of                          
approximately $4,700 through June 1997,                       
   secured by equipment and rents                     $  77    $  20

Capital leases, interest at varying rates                       
of 18% to 23%, due in monthly installments                    
(including interest) of approximately $7,000                  
   through May 2001, secured by equipment                --      180
                                                      -----    -----
                                                         77      200
   Less: current portion                                 (77)     (72)
                                                      -----    -----
                                                      $  --    $ 128
                                                      =====    =====

        At December 31, 1996,  aggregate annual  maturities of notes payable and
capital leases were as follows:                                                 

                  (Amounts in thousands)
1997                         $  72              
1998                            64              
1999                            26              
2000                            28              
2001                            10              
               -----
               $ 200
               =====

        In October 1996,  the Company  obtained a line of credit from a bank for
$4  million.  The  proceeds  from this line of credit  were used to repay  notes
payable to shareholders.  The loan was paid in full during 1996, and the line of
credit remained available to the Company through January of 1997.               

        In January 1997, the Company obtained a $5 million  five-year,  reducing
revolving line of credit ("line") from a bank. Available borrowings reduce by $1
million annually,  until February 2002, when the line expires.  Advances made on
the line bear  interest at either Prime or LIBOR,  at the option of the Company,
and at rates  ranging from Prime to Prime plus 1.5  percent,  or LIBOR plus 2.25
percent to LIBOR plus 3.25 percent, depending on certain financial ratios at the
time of advance.  The line is  collateralized by substantially all assets of the
Company,  and contains  covenants that require maintenance of certain financial 
ratios.                                                                         

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NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

(6)     NOTES PAYABLE TO SHAREHOLDERS:                                          

Notes payable to shareholders consisted of the following:       

                                                          DECEMBER 31,
                                                          ----------------------
                                                           1995           1996
                                                          -------        -------
                                                          (Amounts in thousands)
Note payable dated March 11, 1995, converted to                 
       preferred stock/paid in full during 1996        $4,000        $  --

Note payable dated March 17, 1994, converted to                 
       preferred stock/paid in full during 1996         2,000           --

Note payable dated March 17, 1994, converted to                 
       preferred stock/paid in full during 1996         1,000           --

Note payable dated June 30, 1995, converted to                  
       preferred stock/paid in full during 1996           850           --

     Note payable for royalties (Note 8)                   70           38

     Accrued interest                                     572           82
                                                       ------        -----
                                                        8,492          120
      Less: current portion                                 --         (120)
                                                       ------        -----
                                                       $8,492        $  --
                                                       ======        =====

        During  1996,  the  Company  converted  $5 million  of notes  payable to
shareholders  to preferred stock and obtained a line of credit for $4 million to
pay accrued interest due under  shareholders'  notes and the remaining principal
balance due on notes  payable to  shareholders  (see Note 5). The line of credit
was repaid with proceeds from the Company's IPO, and the line of credit remained
available  to the  Company  through  January  1997  when it was  terminated  and
replaced by a $5 million line of credit (see Note 5).                           

Shareholder Guarantees                                          

        From April 1993 through March 1995 a shareholder  guaranteed the amounts
outstanding  under the  Company's  line of  credit  with a bank.  In 1993,  this
shareholder  was issued  shares in exchange for this  guarantee.  In 1994,  this
shareholder   received  226,890   additional  shares  related  to  anti-dilution
provisions  between the then existing  shareholders.  The additional shares were
valued at par, which is consistent  with the value assigned to the shares giving
rise to this issuance.                                                          

        A  shareholder  of the  Company  had  guaranteed  the payment of certain
catalog costs incurred through December 31, 1996.                               

(7)     RESTRUCTURE AND RECAPITALIZATION:                                       

Financial and Operational Restructure                           

        In  the  fourth  quarter  of  1994,   the  Company   completed  a  major
restructuring   of  its  business   operations   and   relationships   with  its
participating   vendors.   The  Company   discontinued   carrying  inventory  by
outsourcing  order  fulfillment  to its  vendors.  Vendors  currently  drop ship
directly to customers. The Company also outsourced or discontinued its non-core,
nonessential  business  activities,  such  as  concierge  services  and  airport
delivery of products.  The Company focused on its business of providing catalogs
in airline seat pockets,  producing a high quality  catalog,  selecting  quality
merchandise for inclusion in its catalog,  and conducting  customer order taking

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NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

and processing services.  Also, the Company disposed of substantially all of its
remaining inventory, closed its warehouses,  received concessions of amounts due
to vendors, deferred the payment of its other vendor payables, and significantly
reduced  the size of its  workforce.  In  addition,  the  Company  entered  into
agreements  with one of its major  participating  vendors to provide the Company
with working capital,  $1.0 million in cash and to provide services for computer
processing,  catalog  production,  database  management  and other  services  in
exchange for inventory,  trade names, the use of the Company's customer list and
placement  fees at rates  below  cost for a  substantial  number of pages in its
catalogs.                                                                       

        All  of  these   activities   resulted  in  a   restructure   charge  of
approximately  $4.3 million in 1994,  which  included the following  (amounts in
millions):                                                                      

Loss on long-term major vendor contract discussed above          $ 3.6      
Losses on fixed asset abandonment and disposal of unneeded                  
equipment and facilities                                        1.0   
Employee termination, severance costs and other                     .2      
Uncollectible accounts receivable                                   .8      
Restructure of and reduction in accounts payable                  (1.3)     
                                                           -----
                                                           $ 4.3
                                                           =====
Notes Payable to Vendors                                        

        In connection with the Company's  restructuring,  the Company negotiated
extended  payment terms with its major  vendors.  In addition to agreeing to the
extended  payment terms,  certain vendors agreed to settlements of approximately
60% of the original  balance owed at the time of the  agreement.  These  amounts
were  converted to notes  payable,  generally  with payment  terms of 36 months,
beginning  January 1, 1995 and include  interest at 8%. During 1996, the Company
negotiated an agreement  with one of the vendors  whereby the Company  agreed to
cure its default and issued to the vendor  warrants to purchase 58,824 shares of
the Company's common stock at the IPO price. An expense of approximately  $4,000
was recorded in 1996 related to these warrants.  The proceeds  received from the
private  placement were used to cure this and other defaults.  Remaining amounts
due subsequent to December 31, 1997, are classified as long-term.  Other vendors
were paid 50% of the balance  owed to them as full  settlement  by December  31,
1994.  As of December 31, 1996,  future  payments  related to these notes are as
follows (amounts in thousands):                                                 

1997          $  870            
1998              11            
  ------
  $  881
  ======

(8)     STOCK REDEMPTION AND ROYALTY AGREEMENT:                                 

        In April 1993,  the Company  redeemed  2,268,898  shares of common stock
held by a shareholder in exchange for certain intellectual  property,  including
the  Company's  principal  trademarks  and trade names.  The Company  secured an
exclusive  license to use the intellectual  property acquired by the shareholder
in return for a 1% royalty on the Company's sales commencing January 1, 1994.   

        On October 1, 1994, the shareholder exercised an option to terminate the
Company's obligation to pay the royalty,  transferred the intellectual  property
back to the  Company  and was  issued  2,268,898  shares of common  stock by the
Company. At the time such option was exercised, the Company owed the shareholder
approximately   $180,000  pursuant  to  the  license.  The  shareholder  forgave
approximately  $72,000 of such amount and agreed to a payment  schedule  for the
remainder, of which amount $38,000 is outstanding as of December 31, 1996 and is
included as notes payable to shareholders (see Note 6).                         

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NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

(9)     COMMITMENTS AND CONTINGENCIES:                                          

Litigation                                                      

        The  Company  is from  time-to-time  subject  to  complaints  and claims
arising  in  the  ordinary  course  of  business,  including  claims  concerning
infringement  on patent and trademark  rights of others.  In each instance,  the
Company's  suppliers had warranted  that the products  were not  infringing  and
indemnified  the Company  against any loss in  connection  with such claim.  The
Company  believes that its actions with respect to products  offered for sale in
its  catalogs are  reasonable  and in  compliance  with  applicable  contractual
provisions.  The Company further believes that none of the claims and complaints
of which it is currently  aware will materially  affect its business,  financial
position or future  operating  results,  although no assurance can be given with
respect  to the  ultimate  outcome  of any such  claims or with  respect  to the
occurrence of any future claims.                                                

Leases                                                          

        The Company has entered into several  operating leases for equipment and
facilities.  As of December 31, 1996,  the future  minimum  payments under these
leases are as follows (amounts in thousands):                                   

1997               $ 96         
1998                 92         
1999                 54         
2000                 43         
2001                 43         
Thereafter          597         
          ----
          $925
          ====
        Other equipment and property are leased on a monthly basis.  Total lease
expense for the years ended December 31, 1994,  1995 and 1996 was  approximately
$264,000, $193,000 and $140,000, respectively.                                  

Lease Revenue                                                   

        The  Company   leases   certain  of  its   facilities  to  others  under
non-cancelable leases and month-to-month agreements. Lease revenue of $103,000, 
$110,000  and $118,000  for the years ended  December  31, 1994,  1995 and 1996,
respectively,  is  included  in  other  income  (expense)  in  the  accompanying
financial  statements.  As of December 31, 1996 future minimum lease payments to
be received under non-cancelable leases are as follows (amounts in thousands):  

1997                $118        
1998                 112        
1999                 103        
2000                  68        
2001                  68        
Thereafter            23        
            ----
            $492
            ====

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NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

401(k) Plan                                                     

        Under the  Company's  401(k)  plan (the  401(k)  Plan)  adopted in 1992,
eligible  employees  may direct  that a portion of their  compensation,  up to a
legally established maximum, be withheld by the Company and contributed to their
account.  All  contributions are placed in a trust fund which is invested by the
401(k)  Plan's  trustee.  The 401(k)  Plan  permits  participants  to direct the
investment of their account  balances  among mutual or investment  funds and the
Company   provides  a   matching   contribution   of  25%  of  a   participant's
contributions.                                                                  

        The total  contributions  made by the  Company  during  the years  ended
December 31, 1994, 1995 and 1996 were not significant in any period.            

Employment contract                                             

        In  September  1996,  the Company  entered into an  employment  contract
agreement  with  its  president  and  chief  executive  officer,  which  expires
September 30, 1999, at an annual  compensation  level of $190,000 and bonuses as
the Board of Directors  may specify.  The contract may be renewed for a two-year
period upon its initial expiration. The contract may be terminated earlier under
terms and circumstances described in the agreement. Under certain circumstances,
the  president and chief  executive  officer may receive up to two years of base
salary upon termination.                                                        

(10)    STOCK-BASED COMPENSATION:                                               

Stock Option Plans                                              

        The Company has an incentive and  nonqualified  stock option plan, which
allows the  Company to grant to officers  and key  employees,  (the  Officer and
Employee  Plan)  options  covering  up to 650,000  shares of common  stock at an
exercise price of not less than fair market value at the date of grant.         

        In October  1996,  the Company  adopted a  Non-Employee  Director  Stock
Option Plan (the Director Plan),  which allows the Company to grant non-employee
directors  options  covering up to 100,000 shares of common stock at an exercise
price of not less than fair market value at the date of grant.                  

        Under the Officer and Employee  Plan,  the option  exercise price equals
the stock's fair market value on date of grant. The Plan options  generally vest
40%  upon  grant,  and an  additional  20%  upon  completion  of  each  year  of
employment;  options  expire ten years  after the date of grant or three  months
after grantee's employment termination.                                         

        Under the Director Plan,  each  non-employee  Board member is granted an
option to purchase  5,000  common  shares upon  appointment  to the Board and an
option to  purchase  3,000  shares  annually,  subject to  certain  limitations.
Options  are 100%  vested  upon  grant and  expire  ten years  after the date of
issuance.                                                                       

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NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

        A summary of the status of the  Company's  Plans at December  31,  1994,
1995 and 1996, and changes  during the years ended  December 31, 1994,  1995 and
1996, is presented in the table below:                                          

                                                        [Enlarge/Download Table]

                                                           DECEMBER 31,                      
                                    ---------------------------------------------------------
                                            1994                 1995              1996      
                                    -----------------    ----------------    ----------------
                                             Weighted            Weighted            Weighted
                                             Average             Average             Average 
                                    Shares   Exercise    Shares  Exercise    Shares  Exercise
                                    (000)     Price      (000)    Price      (000)    Price  
                                    -----   ---------    -----   --------    -----   --------
                                                                                             
Outstanding at beginning of period   162     $7.39        271     $7.39       271     $7.39  
Granted                              433      7.39         --        --       187      5.82  
Exercised                             --        --         --        --        --        --  
Cancel shares repriced                --        --         --        --      (135)     7.39  
Shares repriced                       --        --         --        --       135      5.56  
Forfeited                           (324)     7.39         --        --        --        --  
Expired                               --        --         --        --        --        --  
                                    ----     -----        ---     -----       ---     -----  
Outstanding at end of period         271     $7.39        271     $7.39       458     $6.21  
                                    ====     =====        ===     =====       ===     =====  
Exercisable at end of period         119                  173                 294            
                                    ====                  ===                 ===            

        The Company  accounts for its stock-based  compensation  plans under APB
No. 25, under which no compensation expense has been recognized,  as all options
have  been  granted  with an  exercise  price  equal  to the  fair  value of the
Company's  common  stock on the date of grant.  The Company  estimated  the fair
value of each  option  grant as of the date of  grant  using  the  Black-Scholes
option pricing model with the following weighted average assumptions:  risk-free
interest rate of 5.5 percent,  expected life of 1 to 10 years,  dividend rate of
zero, and expected volatility of 50 percent.  Using these assumptions,  the fair
value of the stock options  granted in 1995 and 1996 is  approximately  zero and
$461,000,  respectively,  which would be amortized as compensation  expense over
the vesting period of the options.  Options generally vest over three years. Had
compensation  costs been determined  consistent with SFAS No. 123, utilizing the
assumptions  detailed above,  the Company's net income and net income per common
share would have been reduced to the following pro forma amounts (in thousands):

              FOR THE YEAR ENDED
              DECEMBER 31,
              ------------------
              1995        1996
              ----        ----
Net income:                                                             
As reported                   $758        $2,188                
Pro forma                      758         1,943                
Net income per common share:                                            
As reported                   $.14        $  .38                
Pro forma                      .14           .35                

        Because  SFAS No.  123  method of  accounting  has not been  applied  to
options  granted prior to January 1, 1995, the resulting pro forma  compensation
cost may not be representative of that expected in future years.                

        In February 1997,  the Company  granted 65,000 options under the Officer
and Employee Plan.                                                              

Stock Warrants                                                  

        In October 1996, the Company issued  200,000  warrants to  underwriters,
180,000 warrants to preferred  shareholders,  and 58,824 warrants to a vendor to
purchase common stock at an exercise price of $9.60,  $8.00 and $8.00 per share,
respectively.                                                                   

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NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

(11)    INCOME TAXES:                                                           

        Under the asset and  liability  method  of SFAS No.  109,  deferred  tax
assets  and  liabilities   are  recognized  for  the  future  tax   consequences
attributable to differences  between the financial statement carrying amounts of
existing  assets and  liabilities  and their  respective tax bases and operating
loss and tax credit  carryforwards.  Deferred  tax assets  and  liabilities  are
measured  using  enacted tax rates  expected  to apply to taxable  income in the
years in which those  temporary  differences  are  expected to be  recovered  or
settled.  The effect on the deferred tax assets and  liabilities  of a change in
tax rates is  recognized  in income in the period that  includes  the  enactment
date.                                                                           

        The  cumulative  effect of the  change in the method of  accounting  for
income taxes is not significant.                                                

        Pro forma  income taxes have not been  provided for 1994 and 1995.  As a
result of the losses  recognized in the related periods,  any income tax benefit
would have been fully offset by the  establishment of a valuation  allowance for
deferred tax assets had the Company been taxed as a subchapter C corporation.   

        Significant   components  of  the  Company's  deferred  tax  assets  and
liabilities are as follows (amounts in thousands):                              

Deferred tax liabilities:                                 
       Tax over book depreciation                              $  59
                                                               -----
     Total deferred tax liabilities                               59
                                                               -----
Deferred tax assets:                                      
       Nondeductible reserves for bad debts and sales returns    787
       Restructure reserve                                        86
       Accrued liabilities                                        94
                                                               -----
     Total deferred tax assets                                   967
        Valuation reserve                                        (908)
                                                               -----
     Net deferred tax assets                                      59
                                                               -----
     Net deferred taxes                                        $  --
                                                               =====

        Significant  components  of the federal and state income tax expense are
(amounts in thousands):                                                         

Current:                                                  
       Federal expense                                         $ 190
       State expense                                              90
                                                               -----
           Total current                                         280
                                                               -----
Deferred:                                                 
       Federal                                                    --
       State                                                      --
                                                               -----
           Total deferred                                         --
                                                               -----
     Income tax expense                                        $ 280
                                                               =====

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NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

        A  reconciliation  of the  Company's  effective  income  tax rate to the
federal statutory rate follows:                                                 

Federal statutory rate                         34%          
State tax, net of federal benefit               7           
Income attributable to S corporation          (29)          
Other                                          (1)          
                                   ---
                                     11%
                                   ===

        Income earned prior to the termination of the S status is taxable to the
individual shareholders.                                                        

(12)    MAJOR VENDORS:                                                          

        The following table sets forth net merchandise sales, placement fees and
cost of sales as a percentage  of the total of each  category for the  Company's
largest participating vendor:                                                   
                        FOR THE YEAR ENDED
                          DECEMBER 31,
                          --------------------------
                          1994       1995       1996
                          ----       ----       ----
Net merchandise sales          21%        49%        24%    
Placement fees                 34%        44%        12%    
Cost of goods sold             25%        54%        30%    

        No other vendors  accounted for greater than 10% of any category  listed
above.                                                                          

        Also,  net  merchandise  sales  of the  Company's  products  on the five
largest  airlines  represent  approximately  87%,  80%  and  86%  of  total  net
merchandise  sales  for the  years  ended  December  31,  1994,  1995 and  1996,
respectively.                                                                   

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ITEM 9.  CHANGES  IN  AND  DISAGREEMENTS  WITH  ACCOUNTANTS  ON  ACCOUNTING  AND
FINANCIAL DISCLOSURES                                         

None.                                                           

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT                     

        Information with respect to the directors and executive  officers of the
Company  is  incorporated  herein  by  reference  to the  Information  Statement
relating to the Company's Annual Meeting to be held on May 15, 1997.            

ITEM 11. EXECUTIVE COMPENSATION                                                 

        Information  with  respect to  executive  compensation  is  incorporated
herein by  reference  to the  Information  Statement  relating to the  Company's
Annual Meeting to be held on May 15, 1997.                                      

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT         

        Information with respect to the security ownership of certain beneficial
owners and  management is  incorporated  herein by reference to the  Information
Statement relating to the Company's Annual Meeting to be held on May 15, 1997.  

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS                         

        Information   with   respect  to  certain   relationships   and  related
transactions  is incorporated  herein by reference to the Information  Statement
relating to the Company's Annual Meeting to be held May 15, 1997.               

 PART IV

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

(a)(1) Financial Statements.                                  

Balance Sheets as of December 31, 1995 and 1996             

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

          Statements  of  Shareholders'  Equity  (Deficit)  for the Years  ended
December 31, 1994, 1995 and 1996                            

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

Notes to Financial Statements                               

(a)(2) and (d)                                              

None.                                                       

(b) Reports on Form 8-K.                                    

None.                                                       

(a)(3) and (c) Exhibits.                                    

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 EXHIBIT
                                                                     PAGE NUMBER
EXHIBIT                                                               OR METHOD 
NUMBER                   DESCRIPTION                                  OF FILING 
------                   -----------                                 -----------
3.1a    Articles of Incorporation of Registrant ........................  **  
3.1b    Certificate of Amendment to Articles of Incorporation ..........  **  
3.2     Bylaws of Registrant ...........................................  **  
4.1     Amended Certificate of Designation for Preferred Stock .........  **  
4.2     Form of Common Stock Certificate ...............................  **  
4.3     Form of Representative's Warrant Agreement .....................  **  
10.1     Employment Agreement between Robert M. Worsley and SkyMall, Inc.  **   
10.2     Form of Airline Customer Services Agreement.....................  **   
10.2a    Schedule of Omitted Material Terms from Material Airline               
           Customer Services Agreement ...............................  **
10.2b    Airline Customer Services Agreement between SkyMall, Inc. and          
       Continental Airlines, Inc., dated January 1, 1992, as amended..  **
10.2c    Airline Customer Services Agreement between SkyMall, Inc.              
       and United Airlines, Inc., dated May 1, 1992 ..................  **
10.5     Form of Tax Indemnification Agreement ..........................  **   
10.6     SkyMall, Inc. 1994 Stock Option Plan, as amended ...............  **   
10.7     Non-Employee Director Stock Option Plan ........................  **   
10.8a    Lease Agreement between Pasqualetti Properties, Inc. and               
       Smitty's Super Valu, Inc. dated June 24, 1960 .................  **
10.8b    Agreement between Rose Pasqualetti Perkins, Amos Pasqualetti,          
Anthony Pasqualetti, Ben Pasqualetti and Smitty's Super     
       Valu, Inc. dated March 2, 1961 ................................  **
10.8c    Addendum to Lease between Amos Pasqualetti, Ben S. Pasqualetti,        
  Rose Pasqualetti Jenkins, Estate of Anthony J. Pasqualetti and
       Smitty's Super Valu, Inc. dated May 11, 1966 ..................  **
10.8d    Sublease between Schwan Brothers Properties and Smitty's Super         
       Valu, Inc. dated August 1, 1984 ...............................  **
10.8e    Lease Amending Agreement between Smitty's Super Valu, Inc.,            
Pasquo Investments, and Amos Pasqualetti and Victoria       
       McFarland dated October 1, 1984 ...............................  **
10.8f    Addendum to Sublease between Smitty's Super Valu, Inc. and             
       Schwan Brothers Properties dated January 1, 1985 ..............  **
10.8g    Assignment of Sublease from Pima Partners to SkyMall, Inc.             
       dated July 12, 1990 ...........................................  **
11       Statement Re: Computation of per share earnings ................   *   
21       Subsidiaries of Registrant. .................................... N/A   
23.1     Consent of Accountants.......................................... N/A   
25.1     Powers of Attorney ............................................. S-1   

---------                                                                       

*    Filed herewith.                                                            

**   Incorporated  by reference  to Form S-1  Registration  Statement  (File No.
333-14539).                                                           

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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 on Form 10-K to
be signed on its behalf by the undersigned, thereunto duly authorized, this 31st
day of March, 1997.                                                             

               SKYMALL, INC.

                          By /s/ Robert M. Worsley
                                           -------------------------------------
                                       Robert M. Worsley
                                     President

 POWER OF ATTORNEY

        KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints ROBERT M. WORSLEY and DAVID A. WIRTHLIN, and each
of them, his true and lawful  attorneys-in-fact  and agents,  with full power of
substitution and resubstitution for him and in his name, place and stead, in any
and all  capacities,  to sign any and all  amendments  to this Form 10-K  Annual
Report, and to file the same, with all exhibits thereto,  and other documents in
connection therewith with the Securities and Exchange Commission,  granting unto
said attorneys-in-fact and agents, and each of them, full power and authority to
do and perform each and every act and thing  requisite  and necessary to be done
in and about the premises,  as fully and to all intents and purposes as he might
or  could  do  in  person  hereby   ratifying  and   confirming  all  that  said
attorneys-in-fact and agents, or his substitute or substitutes,  may lawfully do
or cause to be done by virtue hereof.                                           

        Pursuant to the  requirements  of the  Securities  Exchange Act of 1934,
this  report on Form 10-K has been  signed  below by the  following  persons  on
behalf of the registrant and in the capacities and on the dates indicated:      

 SIGNATURE                              TITLE                     DATE
 ---------                              -----                     ----
/s/ Robert M. Worsley                                                           
--------------------------   Chairman of the Board,                             
     Robert M. Worsley       President (Chief Executive Officer)  March 31, 1997

/s/  David A. Wirthlin                                                          
--------------------------   Vice President-Finance                             
     David A. Wirthlin       (Chief Financial and Principal       March 31, 1997
Accounting Officer)   
/s/ Alan C. Ashton                                                              
--------------------------   Director                             March 31, 1997
Alan C. Ashton                                                        

/s/  Lyle R. Knight                                                             
--------------------------   Director                             March 31, 1997
Lyle R. Knight                                                        

/s/ Thomas J. Litle IV                                                          
--------------------------   Director                             March 31, 1997
Thomas J. Litle IV                                                    

/s/ Randy Petersen                                                              
--------------------------                                                      
     Randy Petersen          Director                             March 31, 1997

S-1 

Dates Referenced Herein   and   Documents Incorporated by Reference

				Referenced-On Page
This ‘10-K’ Filing		Date		First		Last			Other Filings
		9/30/99		36					10-Q
		12/31/97		34					10-K,  10-K/A,  4
		5/15/97		2		40			10-Q,  DEF 14C
		4/1/97		7
Filed on:		3/31/97		42					10-Q
		3/19/97		14
		3/17/97		2
		3/1/97		11
		2/17/97		23
For Period End:		12/31/96		1		40			4
		12/11/96		14					S-1
		11/1/96		7
		10/22/96		30
		10/21/96		17		30			S-1
		10/11/96		14
		7/1/96		7
		3/1/96		13
		1/1/96		31
		12/31/95		14		40
		6/30/95		33
		3/11/95		33
		1/1/95		34		37
		12/31/94		14		40
		10/1/94		34
		3/17/94		33
		1/1/94		26		34
		12/31/93		14
		12/31/92		14
		5/1/92		41
		1/1/92		41
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